Executive Briefings

Transportation Budgets: How to Talk About Them with Non-Transportation Professionals

Transportation professionals may talk to their peers in marketing and finance, but often there is little real understanding of how decisions impact customer service and, ultimately, the bottom line. Steven Raetz and Kevin McCarthy, executives at C.H. Robinson, discuss a paper they co-authored on bridging this communications gap.

To demonstrate how conversations between transportation and non-transportation managers can miss the mark, McCarthy, director of consulting services at C.H. Robinson, tells a story from early in his career. Shortly after joining a food company, he learned that cost projections for a new product had been based on the assumption that transportation would be in full truckloads. “Actually this was a product that was going to move in pallet quantities and it also needed refrigeration, so transportation costs were 20 to 30 times what had been anticipated,” he says.

Raetz, director of research and market intelligence at C.H. Robinson, offers a similar example from a previous job. “Sales wanted to skim a layer of cases off every pallet for one customer to fit that customer’s pallet racking,” he says. “This may sound benign, but it would have required the use of more trucks for the same amount of freight and changed the cost and profitability equation for that customer,” he says.

Because these types of communication are so common, McCarthy and Raetz co-wrote a paper highlighting the problem and ways to address it. The paper is available on the CSCMP web site under “CSCMP Explores.”

“One problem is that people, including transportation professionals, get too caught up in their own operations and don’t think about the upstream and downstream impacts,” says McCarthy. Another is that most companies measure transportation by cost per hundredweight or cost per container, he says. “Those measurements are very good on a macro scale but they don’t necessarily take into account what you are trying to accomplish tactically.”

“The key message of our paper is that spending more on transportation may not be a negative thing,” says Raetz. “Higher costs associated with service improvements may actually deliver more volume and more profitability to the organization,” he says. “Spending more than you budgeted may be very healthy in terms of the broader organization.

Another communications issue that comes up when talking with procurement or finance professionals is around economies of scale, says McCarthy. “In transportation, more is not necessarily better – costs don’t necessarily go down with higher volume. What matters is the size of your shipment and the quantity you are shipping in a specific lane. If you are buying hundreds of thousands of truckloads, but they are going to scattered locations, there are no economies of scale. On the other hand, if you are buying thousands of shipments in the same lane over and over, that is something a carrier can build on.”

“We advocate that transportation be involved in the sales process, the planning process, and the distribution and network design processes,” says Raetz. “The relationships between volume, types of freight and freight mix all contribute to how well transportation performs and how budgets are impacted. Collaboration is essential and transportation professionals need to be bilingual to bring that message to others who are not transportation fluent.”

To view the video in its entirety, click here

To demonstrate how conversations between transportation and non-transportation managers can miss the mark, McCarthy, director of consulting services at C.H. Robinson, tells a story from early in his career. Shortly after joining a food company, he learned that cost projections for a new product had been based on the assumption that transportation would be in full truckloads. “Actually this was a product that was going to move in pallet quantities and it also needed refrigeration, so transportation costs were 20 to 30 times what had been anticipated,” he says.

Raetz, director of research and market intelligence at C.H. Robinson, offers a similar example from a previous job. “Sales wanted to skim a layer of cases off every pallet for one customer to fit that customer’s pallet racking,” he says. “This may sound benign, but it would have required the use of more trucks for the same amount of freight and changed the cost and profitability equation for that customer,” he says.

Because these types of communication are so common, McCarthy and Raetz co-wrote a paper highlighting the problem and ways to address it. The paper is available on the CSCMP web site under “CSCMP Explores.”

“One problem is that people, including transportation professionals, get too caught up in their own operations and don’t think about the upstream and downstream impacts,” says McCarthy. Another is that most companies measure transportation by cost per hundredweight or cost per container, he says. “Those measurements are very good on a macro scale but they don’t necessarily take into account what you are trying to accomplish tactically.”

“The key message of our paper is that spending more on transportation may not be a negative thing,” says Raetz. “Higher costs associated with service improvements may actually deliver more volume and more profitability to the organization,” he says. “Spending more than you budgeted may be very healthy in terms of the broader organization.

Another communications issue that comes up when talking with procurement or finance professionals is around economies of scale, says McCarthy. “In transportation, more is not necessarily better – costs don’t necessarily go down with higher volume. What matters is the size of your shipment and the quantity you are shipping in a specific lane. If you are buying hundreds of thousands of truckloads, but they are going to scattered locations, there are no economies of scale. On the other hand, if you are buying thousands of shipments in the same lane over and over, that is something a carrier can build on.”

“We advocate that transportation be involved in the sales process, the planning process, and the distribution and network design processes,” says Raetz. “The relationships between volume, types of freight and freight mix all contribute to how well transportation performs and how budgets are impacted. Collaboration is essential and transportation professionals need to be bilingual to bring that message to others who are not transportation fluent.”

To view the video in its entirety, click here