When freight cost is not everything

22.01.2018

 

Over the last few years, I’ve been involved in a number of transport tenders. Most of which had one thing in common – an initial ambition to evaluate a number of different factors. And a final decision to sign with the cheapest possible provider. As soon as analysis is started and a total cost appears, concern for the environment tends to take a back seat, so to say.
 

There is, obviously factors that cannot be ignored. For example, if a shipment needs to reach a factory by a certain time in order for production to proceed, then the right delivery time is obviously a must have service. But many of the non must-have´s are lost along the way.
 
“So what – isn’t cost reduction the end goal of freight tendering?”
Well yes, largely so. But what about the cost of arriving a day later than possible? What about the cost of insufficient information flow?
A neat and often useful way of looking at it is to assign a monetary value to a discrepancy in service level for the services you deem most important.
 
Let’s use lead time as an example, since it’s probably the most commonly used service aspect. What would it cost to arrive later than necessarily possible?
Perhaps it means that a perishable good would lose a day on the store shelf, thus increasing waste. Or maybe it means that more overtime is needed for goods reception. Another way of looking at it is that an earlier planned arrival might mitigate the impact of a delayed delivery. Etc, etc. When weighing all of these factors, you might arrive at the conclusion that an improved lead time is worth EUR 15 per shipment, for example.
 
After that conclusion, it’s easy to produce a total cost analysis where an extra EUR 15 per shipment are added to offers with a longer lead time. Of course, it works both ways. Perhaps you can accept a day’s longer lead time than first considered if that means a cost reduction that outweighs the cost of the delay. By doing this, you will arrive at a total cost analysis for your freight tender, that doesn’t just give you the lowest possible direct freight cost, but one that gives you a simple numerical value as to which provider can offer the best (and cheapest) solution from a combined cost/service perspective. Easy piecy!

 

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