This is our first installment of our multi-part series on Freight Metrics. Many of these metrics are available in reports generated by LampreyTMS but regardless of your Transportation Management System, these are metrics which your business should track and understand. For this first week we focus on Financial Metrics.
Freight Costs as a Percent of Net Sales
Total Freight Costs to Net Sales (total freight cost/net sales) is the starting point when tracking and analyzing your Freight performance from a financial standpoint. This ratio is the key metric senior leadership should know off the cuff. Tracking this metric overtime tells you how much of your revenue goes towards your freight shipping and changes in this metric should be closely monitored. Rises and falls in this percentage can be caused by outside factors such as fuels, but changes in the % can also be driven by a number of controllable reasons such as your proximity to your suppliers and customers, your product mix and your warehouse efficiencies to name a few. This metric is also especially useful when you can compare it to your industry average and trends within your industry.
If your accounting software or TMS can let you go further and separate inbound vs. outbound freight costs you can then dive deeper and pinpoint exactly where there may be room to improve.
The Outbound Freight Cost to Net Sales Ratio (outbound freight cost/net sales) will give you a trackable metric for monitoring the portion of your overall costs that come from shipping to your clients. This is an important metric to track and a rise in it could indicate that you client base is moving farther away from your facilities.
On the other side, the Inbound Freight to Net Sales Ratio (inbound freight cost/net sales) can be used to track the costs of shipping from your suppliers. If your business has a long period of time from purchasing raw materials to selling the goods made from them, you may want to use the Inbound Freight/Direct Material Ratio for a given period (inbound freight cost/direct material cost same period). While tracking the Inbound Freight/Direct Materials Ratio month to month won’t tell you how inbound freight costs are impacting the bottom line of your business, it will tell you if freight is making up a larger or smaller portion of your cost of goods sold.
Freight Cost per Unit Shipped
Once you understand how your freight costs relate to your sales dollars, it is important to examine how your freight costs related to your sales units. This metric is especially useful in businesses where your units shipped are uniform. The formula is simple, total units shipped for a given period/freight costs for a given period. You can also repeat the steps above to get both the Inbound and Outbound Freight Cost per Unit.
Accessorial Charges as a Percentage
Looking at freight spend itself, Accessorial Charges to Total Freight Spend (accessorial expense/total freight cost) is an important ratio to take a look at because many accessorial charges are either avoidable or too often are not fully budgeted. Accessorial charges make up on average approximately 10% of the freight charges with Fuel Surcharges being the most common accessorial charge we see. While some accessorial charges may be unavoidable, charges such as residential adjustments, extra pick-up fees, and weight adjustments, can often be avoided. Monitoring your percent of freight costs that are accessorial charges will at a minimum allow you to better budget for future accessorial charges and diving deeper may allow you to find areas where you can improve your business processes and avoid future surcharges.
Freight Bill Accuracy
In conjunction with tracking your accessorial charge percentage, you may want to track your Freight Bill Accuracy Rate which is calculated by dividing the number of variance-free freight bills by the total number of freight bills in the period (# variance free invoices/total # invoices). Causes of variances can include incorrect pricing, incorrect weights, incomplete information, etc. You can look at this number as a total for all of your carriers but you may want to look deeper and measure the accuracy by carrier. This again is an important metric for budgeting and it is important to investigate if the reasons for variances in your freight bills are due to your own processes or those of your carriers.
Claims to Total Freight Costs
An additional indicator of your supply chain health is the Cost of Claims to Total Freight Costs (claim cost/total freight cost). A high rate of claims, or increases in your % of claims, can point to either process or packaging problems. It is important then to understand if and when your packaging has changed when you measuring this metric overtime. If you are seeing changes in this rate while your packaging is staying the same, the causes may be due to process or handling, of your freight. Conversely, if you make a sudden change to your packaging and notice an increase in the percent of claims, you then know that it is very likely that your new packaging is to blame.
Making sense out of your shipping data starts with a good Transportation Management System. Our own system, LampreyTMS not only can help you create and manage shipments but also has a comprehensive suite of reports and analytical tools. Regardless of your shipping habits, or your TMS, Lamprey Systems is here to help with any logistics related questions. Simply call 800-675-6598 to speak to one of our experts.