…. in transport and distribution. In this post I want to discuss about the cost in transport and distribution. It is the most important thing to control this cost, otherwise you can loose a lot of money.
The basic parameter that you must calculate is cost per km (mile) or cost per hour (for some machinery or vehicle). I am from Europe and i refer to cost per km because we use km here, but all this principle can be easy transfer to cost per mile.
When you calculate the cost per km you must can take in consideration as many parameter as you have at the time because when you use more parameter the value become more accurate. I made a web application (http://www.logistic-specialist.com/costpekm/index.php) who may help you to calculate cost per km (unfortunately it is in Romanian language, but i hope to have time to translate it, in the meantime you may use Google translate) and this application take in consideration more than 20 parameters. Also here the rule 20-80 may be apply because only 3 parameter influence 70% of the cost, and this parameter is: fuel cost, drivers salary and maintenance. In this order, fuel may influence between 35 to 65% of the cost per km (depends on the car type and also of the transport activities that you have), driver salary may influence between 20 to 35 % (can be more in certain country and less in other country) and maintenance between 8 to 17% (can be more or less depends on the conditions).
In my consultancy project i have case where fuel cost is 25% of this cost, but that car is used in small area distribution.
Cost per km is a (let’s say) technical value and it cannot be correlate easy with the other business parameter. In most of the case the management want to transfer this value into other value which can be connected with the products and profitability. They want to have a cost per products or cost per kg (ton) etc.
Cost per kg or cost per ton is easy to calculate if you have cost per km. For example: if you cost per km is 0.4 euro and the car made 400 km with 2,5 ton result a cost per ton: (0.4X400)/2.5 = 65 euro/ton. It is easy, but you must take care because in most of the time the number of km must be the total km of the route.
In some cases cost per ton is not relevant for the business. Cost per ton it is use for products who is sell in ton or kilo (food for example), but if you have computers or television the cost per ton is not relevant, but it is relevant cost per products or per pallet, box etc.
Cost per product it is more complicate to calculate than cost per kg in case of distribution, if you have only one products in the car the calculation is simple, also if you have 2 products the calculation can be simple (if you have products with similar dimension) because you can assimilate percentage of the cost related with the percentage that each products represent from total number of the products. Even if you have 2 products, but with different dimension (for example laptop with washing machine) the calculation become more difficult. Laptop it is small and easy, with similar value like washing machine witch is heavy and larger than laptop and it is very difficult to have some clear criteria how you associate the percentage with the products.
This calculation become more complicate if you have 20 products with different dimension and weight. In this case is easy to calculate an average and consider this value for further calculation.
If you distribute your products to clients the same product do not have the same cost for different client because each client is in other geographical location. In this case it is necessary to calculate cost/product/client or cost/ton/client witch become more complicate to calculate. I will made an example of this calculation in the future posts.
Also it is possible to use average in this case, but in this case (when you use average) you consider that all the client from a route have the same costs and all it is profitable witch is not real all the time: for example a client witch is close by the distribution center will have a smaller cost that a client witch is far from distribution center (close or far means the distance considering the way that you made the route, not the geographical distance). In most of the case the client witch s far from distribution center order small value and in this case that client it is very possible to be unprofitable. If you use average you cannot see unprofitable client and this unprofitable client “eat” profit from profitable client. For my point of view it is very important to identify the unprofitable clients and find war to made them profitable (in most of the case this will involve the sales department). We will discuss in the future posts about the way to made clients profitable.