Note: Today’s post is part of our ‘Editor’s Picks’ series in which we highlight recent posts from our sponsors that provide supply chain insights and advice. Today’s article is from Emerge and looks at how to create full load budgets in a volatile market.
One of the most difficult activities logistics managers have to engage in is creating transportation budgets. Whether it is sea, air, rail or road freight, the basic problem with budgeting is that people are called upon to assign specific costs to the transportation services that will be provided in the future. And with most budgets spanning a twelve-month period, it’s no wonder that most of them not only start out bad, but get worse as the year progresses.
In the case of FTL shipping, there are many reasons why budgets are inaccurate, but the most obvious is that markets change during the year and as time passes, the likelihood of cost variances budgeted and actual increases. Although this is a true statement, this blog argues that there are other factors that can cause budgets to be inaccurate. From now on, we will highlight these factors and then offer solutions to mitigate them.
The underlying reasons for FTL budget inaccuracies
While it’s important to recognize that shippers bring different levels of sophistication to the FTL budgeting process, for many companies it comes down to a simple two-part exercise. First, the budget teams are doing their best to estimate what the load volume will be in the coming period. From there, the company issues a tender, with the lane-specific results multiplied by the projected loads to determine what the “end result” budget figure will be.
There are many problems with this process, but the main challenge is that most of the factors that make a budget inaccurate are beyond the control of the preparer. First, anyone who has budgeted FTL knows how difficult it is to access a shipper’s forecasted buy and/or sell data that is needed to generate volume estimates. In the absence of this data, logisticians resort to increasing last year’s load volumes by a random percentage and then hope for the best.
Even in scenarios where budget planners have access to purchase and/or sales forecast data which is in turn used to estimate load volumes, the unreliability of the forecast sets the budget up for problems from the start. . Knowing that the sales forecast is essentially a prediction of future results and that every company knows that the forecast will be wrong, it is difficult for logisticians to create a reliable FTL budget because the underlying forecasts are wrong.
In addition to unavailable or inaccurate forecasts for product sales, the second factor beyond a planner’s control is the actual behavior of FTL rates throughout the year. Already said, over time conditions change and costs can go up or down. Particularly relevant in volatile markets, there is no way for a shipper to conduct a tender once a year and then expect a budget to stand the test of rate fluctuations.
To read the full article, click here.
