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Okay, so our key KPI for Inbound Freight is Freight as a percentage of Cost of Goods Sold (COGS), right? So, our KEY Freight Expense KPI for Outbound Freight is Freight as a percentage of Sales, right? Well, let’s think about that Outbound Freight Expense KPI for a moment. Freight expense should be something that is readily quantifiable, assuming that freight expense tracking is a byproduct of your Freight Audit and Payment Process. (You are capturing all that data detail to use for Management Reporting and Analysis, right?) Let’s ponder this KPI for a moment.
Here is my problem with this KPI. Who decides what is included in the cost number for “SALES”? This seems like a funky number, kind of like how Accounts comes up with “Retained Earnings.” (What flavor of FUDGE do you prefer?) While Freight Expense is a real “Operating Expense,” sometimes it becomes the default answer to the question of why the numbers are up since last year. Remember, Freight Expense is both quantifiable and controllable. It is also influenced by uncontrollable variables such as weather, unexpected carrier capacity constraints, and other factors that may lie beyond our control when we attempt to contain budgeted freight expense.
Okay, let’s think about Freight Expense. How do you define the parameters for what is included in this number? Is it as simple as the line-item detail of the carrier’s invoice = freight expense? Or does it include “other costs,” such as the Transportation Department's share of Overhead? Or maybe the accountants are trying to bury some other expenses that need to be “allocated” to make the income statement look better? Since this KPI tends to focus on “expense” only, the simpler the definition, the easier it is to truly understand if there is a problem that needs to be addressed.
“Sales” can be a funky number if it includes “allocations” for advertising, marketing, customer services, corporate overhead, and such. “Sales” can be a fungible number depending upon the desired outcome. Right? Having experienced this in a number of corporations in a variety of industries in my lifetime, I can tell you: don’t be so naive to believe that such machinations aren’t going on behind the curtain!
Okay, here is our Outbound KPI: Freight as a percentage of Sales. Now Upper Management is “concerned,” since this KPI is up since last year. Hokie Pokie. What could be the reason for the increase in Freight Expense as a percentage of Sales?
The obvious answer is that carriers are charging us more, right? Maybe — and maybe not!
Let’s assume that Freight Expense stays exactly the same as last year. (Probably not the case, since carriers have good reasons to increase their charges — diesel prices are up, maybe we had an annual GRI, or government regulations have required us to pay more to retain qualified drivers to ensure regulatory compliance with CSA 2010 mandates).
So, what else could cause this increase (other than the obvious: Carrier is Charging Us More Than Last Year Syndrome)? Let’s look at this from the other side of the coin.
Is there anything from a "non-freight expense” perspective that might cause this to be the case? Hmm.
⦁ Sales have decreased from last year. Freight as a percentage of Sales increases, right?
⦁ Peak season pressure resulted in “discounting” to move inventory. Freight as percentage of Sales (even if it remained the same) increases, right?
⦁ Selling season (a quantified period of time for the KPI measurement) was shorter by a day or two than last year, so Freight as a percentage of Sales increases, right?
⦁ Seasonal Allocation by Sales and Marketing of DC inventory created a situation in which the DC's “pick capacity” exceeded the DC’s “ship capacity”; hence a shortfall in desired store deliveries led to “decreased” sales.
⦁ Seasonal Allocation by Sales and Marketing of DC inventory resulted in DC shipments to Stores that exceeded the store’s “back room receiving capacity,” which ultimately resulted in “decreased sales.”
⦁ The Sales GM dictates when the stores will receive and how much,” in direct conflict with the “allocations” placed volume the DC was required to ship to the stores, resulting in a seasonal backlog of merchandise for stores piling up on the DC dock — merchandise that could not be delivered because of the Sales GM's Dictates, resulting in “decreased sales.”
⦁ The Sales and Marketing “allocations” placed on the DC for seasonal merchandise “push” to the stores far exceed the planned carrier capacity available to ship to the stores (even if they had the back room capacity to receive the “push”), which ultimately results in “decreased sales.”
What is the point? Anything that results in an increase in the key KPI – Freight as a percentage of Sales, may or may not be tied directly to an increase in charges from the carrier. Savvy transportation managers should be aware of the “big picture,” and should be prepared to help figure out the real reason why freight as a percentage of sales might be related to something other the traditional default assumption.