A Brief guide to Transportation Cost Analysis

Introduction

In the waves of hype around Advanced analytics, we may sometimes lose the focus on the fact that there will always be some form of basic analytics that forms the foundation for Advanced analytics.

Consider Transportation as an example. If you need to leverage Advanced analytics methods like Linear programming or Predictive models, a key input factor is unit costs, which are an output /result of an extensive cost analysis process. Considering that both functional Logistics managers as well as Analytics professionals need a solid grounding in analyzing Transportation costs, I decided to create a brief overview of how to perform a Transportation cost analysis, leveraging my experience working on several such analysis in the past.

Major Steps in the Analysis

The steps below, in my perspective, are the major steps in a comprehensive Transportation cost analysis:

Step 1: Identify and document the drivers for Fixed and Variable cost

In subsequent sections, I will use example of analyzing transportation cost in a logistics system.

  • Step 1: Identify and document the drivers for Fixed and Variable cost
  • Step 2: Drill the variables further to identify factors that will impact them
  • Step 3: Define relevant fixed and variable costs
  • Step 4: Calculate the relevant fixed and variable costs
  • Step 5: Assess unit costs and total costs
  • Step 6: Analyze Decisions

In this very first step, you need to determine what resources are involved in carrying out the logistics function you are assesing- which in this case is Transportation.

You first start at a high level. Then for each high level driver, you can drill down further.

If you think about Transportation, the major cost drivers are:

  1. Capacity : i.e the total capacity for distribution in the system
  2. Distance, which obviously is the total distance to be traveled in the system

Then, as mentioned above, we will drill down into these drivers to define the variables that impact these drivers. Some examples are below :

Variables that influence Capacity cost driver

  • Types of vehicles or transport mechanism and the real carrying capacity of a vehicle type (ex: cubic meters that can be loaded in each type, adjusting for percentage of vehicle volume that can be used, allowing for loading and unloading space)
  • Number of vehicles
  • Number of days vehicle is available for operations, AFTER allowing time for vehicle maintenance, expected breakdowns and holidays
  • Number of hours drivers can operate the vehicle in a given day (like the 11 hours limit in US)
  • Number of available drivers
  • Percentage of time the vehicle is used for making deliveries or for distribution functions (on average); this percentage can be used to attribute the total number of available vehicle days to distribution related functions

Variables that influence distance cost driver

  • Location of delivery points
  • Distance to and between the points on the route network
  • Frequency of trips that need to be made based on the design of the logistics system (e.g reorder frequency) and the carrying capacity of the vehicle making the delivery
  • Other consideration for district/regional boundaries
  • Vehicle speed
  • Time required for essential logistics or delivery functions to be performed while the goods are in transit (ex: loading, unloading, inspection etc.)

Step 2: Drill the variables further to identify factors that will impact them

The major task in this step is to assess the variables defined in the previous step. This involved developing a deeper understanding of how the distribution system works and how the products move through the system. In other words, this is conducting an assessment/survey/information collection activity.

An example of the output from this process, for some of the variables identified in the previous step is shown below.

Order level or volume

  • Type of product ordered/delivered
  • Number of units of a product ordered/delivered
  • Dimensions of packaging form if a unit of product

Frequency

  • Type of inventory control system (ex: general pull vs push, forced ordering, min-max etc.)
  • Number of deliveries (ex: in a year)

Delivery route

  • Relative location of delivery points
  • Type of link between delivery points (ex: highways, streets, roads etc.)
  • Type of delivery mechanism used (ex: car, rail, boat, bicycle etc.)

Pro Tips for executing this step successfully:

  1. Stratify survey sites and survey all major site types
  2. Sample in a way that facilitates a reasonable mechanism for projecting results

Step 3: Define relevant fixed and variable costs

In this step, we define fixed and variable costs associated with the factors that influence the cost of a logistics system, as identified in the example in the previous step. Below are some examples:

Number of vehicle days

  • Vehicle depreciation cost – fixed
  • Cost of inputs required for placing and maintaining the vehicle on the road – Fixed
  • Salary costs for drivers and packers- Fixed
  • Costs associated with pooling or parking the vehicles- Fixed
  • Vehicle leasing or contracting costs – Fixed

Total Days

  • Travel allowance costs for drivers and packers – Variable
  • Night allowance costs for drivers and packers – Variable

Total Kilometers

  • Fuel costs – Variable
  • Maintenance costs like tire change, oil change etc. Variable

Step 4: Calculate the relevant fixed and variable costs

Until this step, our focus has been on identification of drivers, factors and cost elements. The focus now is to to actually calculate these costs.

Pro tip : You will figure out that this is the most challenging and time consuming step primarily due to lack of clear data availability pertaining to the costs and different teams having different perspectives about costs.

An example of how you can get data for calculating these costs is below:

Cost of placing and maintaining a vehicle on the road

  • Record or calculate insurance costs. This refers to the annual premium that cover liability and/or collision on the vehicles, and damage or theft of goods in transit
  • Record licensing and related fees (ex: taxes, registration), as applicable. Estimates are generally acceptable for this line item.

Step 5: Assess unit costs and total costs

Unit costs can be used to assess the effect of changing an aspect of the system and measuring its impact on costs, e.g., the effect of changing an aspect of a cost driver. Until this step of the guide, unit costs have been expressed for both fixed and variable cost types and for transport systems have been expressed on a:

• per vehicle-day,

• per kilometer, or

• per day basis.

Therefore, unit costs provide a link between the cost of a logistics system and the design (and performance) of that system. The design of the logistics system becomes a major driver of the level of resource utilization.

Step 6: Analyze Decisions

Several approaches are available for analyzing costs and making decisions. The table in the attached Word document file below (Screenshot from the table is below as well) presents some examples of the types of transport problems that an analyst might come across; a preliminary outline details the possible approaches to addressing them.

The level of effort (LOE) required to analyze a particular problem clearly depends on several factors, including the degree of rigor required in the analysis, the level of decision making required (strategic versus operational), and the access to information for analysis. LOE typically assumes a two-person team.

Capture.JPG

CostAnalysisApproaches_Kumar

Pro Tips for executing this step successfully:

  1. For Linking unit costs to total costs One approach is to systematically map this link for each of the cost drivers.
  2. Implicit in the above, keeping track of assumptions made when conducting cost analysis increases the value of the analysis. Assumptions
    are made about various aspects of cost analysis.
  3.  Where possible, perform a sensitivity analysis to build a better understanding of major factors or assumptions that drive the results of a cost analysis.

 

Based on my professional experience

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