How to effectively manage transport in a small manufacturing company?
In a small manufacturing company the logistics expert is mostly a freight forwarder whose task is to find vehicles for a few or several shipments per week, usually on the spot market. The main criterion of choice is the price – it must be as low as possible. However, this solution has some disadvantages as neither the logistics specialist nor the company owner is able to determine the exact cost of transport, but its average amount per year. As a result, in some months and for some locations the transport costs may even exceed the margin that this manufacturer has included in the cost of goods sent to customers. Read this article and find out how to prevent it.
In practice, the forwarder’s work looks as follows: the chief asks for organizing two vehicles for tomorrow. The forwarder calls the trusted carrier or posts loads on the freight exchange. Consequently, the forwarder finds subcontractors and notifies the chief of finding transport at the lowest possible price. This action has its advantages, but, when acting in this way – without an additional tool – the forwarder cannot tell the chief what margin should be accepted for the product, including transport costs.
Seasonal price fluctuations in transport and the manufacturer’s margin
Transport is an extremely seasonal industry. It is cheaper to find a carrier in June than in November or during the holiday season. The absence of a tool allowing the logistics specialist to compare market prices in different periods of the year means that the company cannot say whether it is profitable to deliver the goods to the customer at all, e.g., between Christmas and the New Year. In short, variable and seasonal cost of transport may exceed the product margin.
Excel is not enough
Logistics experts in small manufacturing companies usually use Excel for making calculations. However, if shipments are organized on various routes, for various recipients, at various distances and sometimes with a few unloading places, calculating all the actual costs of transport in the spreadsheet in relation to the margin is extremely difficult and tedious.
The whole process takes a lot of time, the calculation is done manually and each time a map must be used. In practice, even if the logistics expert does the calculations, they may be useless, as all the routes are specific throughout the country, where the cost of transport is always higher than on other routes, since it is not always possible to find a return freight. Carriers know this very well and will set an adequately higher rate to cover the cost of an empty run.
Carrier charges for a kilometer, manufacturer for a unit of goods
There is another factor that makes the practical calculation of transport costs in relation to margin more difficult. The carrier is interested in the price per 1 kilometer because the whole vehicle must be used for transport. On the other hand, the manufacturer counts profitability of transport per unit of goods, e.g., a ton or pallet. A common TKM unit could be applied here but, in fact, each party uses their own conversion rate.
Therefore, if you order the shipment of, e.g., 33, 30 or 27 pallets on the same route, then the price given by the carriers from the spot market will be the same since the whole vehicle will need to be used to carry out the transport. This leads to the fact that the calculations in the manufacturing company become more complicated again. So how to reconcile these differences and mutual expectations?
Effective transport planning hardly possible without modern tools
Such a complicated issue can be solved in a simple way, with the help of modern tools such as the new Trans.eu platform, which allows for generating special reports that within a few seconds accurately calculate the cost of delivery, for example, one pallet or ton of goods, to the specific delivery locations.
During the calculation special algorithms in the Trans.eu platform include all the orders from the given manufacturer, combine many elements such as a vehicle capacity, distance between all the distribution points, amount of unloaded goods at many destinations, and include the method of calculating the carrier’s cost of transport, i.e. rate per kilometer.
