Putting Freight Costs in their Place
Written by Iqubal Pannu, Senior Solutions Consultant, AEB (International) Ltd
In today’s globalised world, many companies are active in different countries and across continents with comprehensive procurement, distribution and fulfilment networks and working with a variety of logistics service providers. Yet few of them have implemented an efficient logistics controlling process that tracks the exact cost allocation of freight expenses. What costs were incurred for transfers of products between locations? And what were the specific costs per product group or location?
Traditional accounting methods and spreadsheets are insufficient for breaking down logistics costs to the product or item level. It seems the formula most commonly used is (Pi x guesstimate)2 = freight costs for product A. The result is an imprecise allocation of freight costs, the impact of which is widely underestimated. For example, if production and logistics costs are used to set product sales prices, inaccurate freight cost allocation can lead to distortions: If prices are set too high, it can lower demand; if prices are set too low, it can squeeze the margin.
So what options exist for allocating freight costs precisely to their original cost drivers – for making freight cost reallocation more exact? How can freight and logistics costs be allocated to cost centres and accounts in a way that reflects their true cost drivers and also makes this information available for further analysis?
The first step is to define cost centres and accounts that freight costs are to be allocated to. The next step is to define the reallocation model - the reallocation key used to break down the freight costs, e.g. by weight, volume or value of the goods. How exactly the reallocation takes place depends on the purpose for which the information is gathered. Knowing how much is spent on freight and logistics is a precondition for making decisions on a whole range of issues, from basic strategy, to products, to internal logistics processes. Freight cost reallocation can serve the following objectives:
- Market price calculation
- Success evaluation
- Landed costs determination
- Make-or-buy decisions
- Accrual-based cost allocation
- Cash flow management
- Comparison and evaluation of logistics performance of departments and locations
Once the actual objective of freight cost reallocation has been confirmed, the structures best suited to achieve these goals need to be determined. This is usually the job of the department that needs the cost reallocation information – typically controlling or financial accounting. Not every company requires a detailed reallocation down to the article level, for example. The objective is always to find the optimal balance between the expense of reallocation and the benefit it will bring to a particular business.
Benefits of automated freight cost reallocation
The key benefits of automated freight cost reallocation are threefold. First of all, there is no room for interpretation when it comes to cost centres, such as separate departments or locations. Costs are allocated uniformly based on defined criteria, overall logistics controlling becomes more precise, and it is easier to compare data.
Secondly, costs are reallocated quickly and without reliance on the actions of any one person. In practice, manual reallocation often leads to potentially massive delays – when the person in charge is on vacation, for example.
And thirdly, analyses follow a strict process and can be accessed by anyone, anytime. Results no longer include approximations (“pi x guesstimate”) but are based on actual freight costs.
Selecting the right software
Many companies use smart software solutions to establish automated processes, i.e. freight management software that automatically reallocates freight costs to cost centres or cost units. It’s important that companies choose a solution that allows them to create cost centres based on various criteria: material or item, package or package type, delivery note or delivery note type, client, shipment, consignee, etc. The software should also make it possible to manually edit an automatic reallocation or add additional cost centres.
But freight cost reallocation and logistics cost accounting are just one step on the road to comprehensive logistics controlling. Ultimately, freight costs should be compared against the invoiced freight charges, so that only the actual costs are paid and reallocated to the cost centres and cost units. IT-supported freight cost management helps to optimise logistics controlling and maximise efficiency – both vital prerequisites for staying competitive.
About the author
Iqubal Pannu is a Senior Solutions Consultant at AEB (International) Ltd, having joined the company in 2006 as a Project Manager. He has considerable consultancy and project management experience within carrier management solutions, advising companies ranging from SMEs to major multi-national corporations on how to optimise their supply chain performance within global trade and logistics. His international experience includes work in North America, Belgium, Netherlands, Germany and Spain. Iqubal holds a BA (Hons) in Office Systems Management from the University of Hull.
AEB has released a number of white papers of freight reallocation. The white papers can be downloaded free of charge and at no obligation from www.aeb-international.co.uk/freight. Each paper in the series can be read independently of the others, though some cross-referencing is possible.
DHL Claim Multi-Sector Collaboration Key to Fighting COVID
Since January, global logistics leader DHL has distributed more than 200 million doses of the COVID vaccine to 120+ countries around the globe. While the US and UK recently rolled out immunisation plans to most citizens, countries with less developed infrastructure still desperately need more doses. In the United Arab Emirates (UAE), which currently has one of the highest per-capita immunisation rates, the government set up storage facilities to cover domestic and international demand. But storage, as we’ve learned, is little help if you can’t transport the goods.
This is where logistics leaders such as DHL make their impact. The company built over 50 new partnerships, bilateral and multilateral, to collaborate with pharmaceutical and private sector firms. With more than 350 DHL centres pressed into service, the group operated 9,000+ flights to ship the vaccine where it needed to go.
With new pandemic knowledge, DHL just released its “Revisiting Pandemic Resilience” white paper, which examined the role of logistics and supply chain companies in handling COVID-19. As Thomas Ellman, Head of Clinical Trials Logistics at DHL, said: “The past one year has highlighted the importance of logistics and supply chain management to manage the pandemic, ensure business continuity and protect public health. It has also shown us that together we are stronger”.
Multisector partnerships, DHL said, enabled rapid, effective vaccine distribution. While international scientists developed a vaccine in record time—five times faster than any other vaccine in history—manufacturers ramped up production and logistics teams rolled out distribution three times faster than expected. When commercial routes faced backups, logistics operators worked with military officers to transport vaccines via helicopters and boats.
In the UAE, the public-private HOPE Consortium distributed billions of COVID-19 doses to its civilians as well as other countries in need by partnering with commercial organisations such as DHL. For the first time, apropo for an unprecedented pandemic, logistics companies made strong connections with public health and government.
“While the race against the virus continues, leveraging the power of such collaborations and data analytics will be key”, said Katja Busch, Chief Commercial Officer DHL and Head of DHL Customer Solutions & Innovation. “We need to remain prepared for high patient and vaccine volumes, maintain logistics infrastructure and capacity, while planning for seasonal fluctuations by providing a stable and well-equipped platform for the years to come”.
How Do We Sustain Immunisation?
By the end of 2021, experts estimate that we need approximately 10 billion doses of vaccines—many of which will be shipped to areas of the world, such as India, South Africa, and Brazil, that lack significant infrastructure. This is perhaps the greatest divide between countries that have rolled out successful immunisation programmes and those that have not. As Busch noted, “the UAE’s significant investments in creating robust air, sea, and land infrastructure facilitated logistics and vaccine distribution, helping us keep supply chains resilient”.
Neither is the novel coronavirus a one-time affair. If predictions hold, COVID will be similar to seasonal colds or the flu: here to stay. When fall comes around each year, governments will need to vaccinate the world as quickly as possible to ensure long-term immunisation against the virus. This time, logistics companies must be better prepared.
Yet global immunisation, year after year, is no small order. To keep reinfection rates low and slow the spread of COVID, governments will likely need 7-9 billion annual doses of the vaccine to meet that mark. And if DHL’s white paper is any judge of success, multi-sector supply chain partnerships will set the gold standard.