Transportation Analysis and Cost Calculation: How It Works

March 13, 2020

Today we're going to cover transportation and logistics analysis. You're going to learn what that means and how you can calculate the accompanying costs. Your ability to measure these numbers will be imperative to the success of your business.

Naturally you may find this difficult at first. However, this guide should help make the journey easier. You'll come away from this post with a better understanding of how to analyze and calculate these costs.

First, you need to know what transportation analysis means.

What Is Transportation Analysis?

In logistics, the costs of operations match up against the costs of doing what essentially boils down to good business. You need to match up your sales revenue against various types of costs. These costs include, but are not limited to, the service level, the transportation level, and inventory. You want to use transportation analysis to measure your costs and performance. When you do this, you can reduce those costs and improve your performance.

So, again, what exactly is transportation analysis? It means examining the various costs of doing business against your revenue. In simplest terms, that means how much money is going out versus how much is coming in. These costs often fluctuate in logistics. You know that the cost of inventory and service varies month to month, and sometimes even day to day.

Let's start by examining how to calculate revenue. Then we'll look at the different types of costs and figure out why they vary.

Calculating Revenue

Before you can analyze your costs, you must calculate your total revenue. However you're generating sales or revenue, you'll need to figure out your total amount. From there, you may begin to analyze your transportation costs by subtracting total costs. For example, you'll need to factor in the costs of labor and utilities. Perhaps you also have material or production costs. The type of commodity you deal in will dictate the costs you need to account for.

Once you've figured out these costs, add up the amounts. Subtract these amounts from your sales revenue. Now you'll have your total generated net revenue. This number tells you whether you're profitable.

It's imperative that you calculate your transportation costs correctly to get an accurate number. We'll take a look at these shortly.

Service-Level Costs

You need to understand what service level costs are and how to find them. In logistics, "meeting the service level" refers to fulfilling the expectations of your customer. For example, let's say your customer requires a three-day turnaround between order date and delivery date. It's your job to determine the costs of meeting that demand.

How does this tie into transportation analysis? You need to determine if the cost of meeting the customer's service expectation is profitable compared to the revenue the customer generates. You're calculating whether it makes financial sense for your organization to provide the level of service this customer demands.

When determining service level costs, there are a few elements you'll want to keep in mind.

  • How much time will it take to process the order?
  • Could there be delays with the order?
  • Are there potential costs for malfunctioning or damaged product?
  • How much time will this take to deliver?

You need to find the financial answer to each of these questions and put all of them together. This will determine your total service-level cost.

Next, let's look at another type of cost.

Transportation-Level Costs

It may not surprise you that in logistics analysis, transportation-level costs are often the most important and the most widely varied. Many elements make up these costs. Most importantly, most of these costs are dynamic. You need to consider the distance of the trip. You need to consider the varying cost of fuel. Also, you must account for any potential maintenance costs to the equipment.

Some transportation-level costs may be more static—for instance, insurance on your drivers and equipment. Your payroll for transportation-level employees will likely also be static. However, if your drivers are paid by the mile, then this cost reverts to being dynamic. Before committing to the service level you're willing to provide for a customer, you absolutely must determine your transportation-level costs.

You can simplify how you view these costs. One good method is to calculate by percentage. You can take the total amount of your transportation-level costs and divide them by your sales revenue. This gives you a look at how much you're spending on transportation by percentage.

For example, let's say you're spending $10,000 monthly on transportation. Next, let's say you're generating $100,000 monthly in sales revenue. Divide $10,000 by $100,000. You discover that 10 percent of your revenue is going to transportation-level costs.

Next, you have yet another type of cost to consider.

Inventory Costs

It's time to determine inventory costs. How much this field entails depends greatly on the commodity your business deals in. The most common cost associated with inventory is storage. You may be paying for your own facility to store inventory. Or maybe you're renting a storage space. Either way, this is a cost you must account for.

If you have your own facility, you likely also need to account for utilities. You likely also have payroll and labor costs for facility employees.

There may be other costs depending on the type of product you're offering. For example, I have experience with a company that stored and shipped produce. The produce itself was not the only cost. Nor was the storage facility. We also needed to pay for equipment to refrigerate the produce. If you deal with inventory needing special accommodations, you must account for those costs.

It's worth noting, then, that these special accommodations can affect transportation-level costs as well. You'll need special equipment on the trucks, trailers, or both, depending on your commodity.

Finally, inventory costs must include any amount you spend if you're also producing your own product. The production and sales of your commodity, or even the lack thereof, are all elements you need to account for.

Other Types of Costs

We just covered the three major types of costs you need to account for. However, your business may have additional costs as well. Here are some examples.

  • You may have a separate warehouse for your products.
  • Perhaps you have your own mechanic for your trucks.
  • You may have an entire office just for administrative purposes.

What I've covered today isn't comprehensive to all businesses. This is because all businesses are different and have different needs. This is especially important in logistics.

How Do I Use This Information?

So what do you do with all of this? Transportation analysis is about putting of these numbers together. Add together your service-level, transportation-level, inventory, and miscellaneous costs. Next, take this final number and subtract it from your total sales revenue. You'll see if you're profitable or not.

Piecing together this information will help you grow your business. You're taking the time to analyze how much you're spending. Maybe you're spending 50% of your revenue just on meeting service goals. It's up to you to determine if this amount of spending makes sense. If it doesn't, you can start to break down where you're spending and why.

Analyzing all of this data allows you to make wise decisions. You'll improve the health of your company just by being aware of the numbers. I also can't stress enough how much being proactive is paramount to success.

Finally, I want to bring this back to a theme I've discussed before: Invest in your future. The more you can subtract extra and unnecessary costs from your books, the healthier your company will be. Mobile capture and paperless offerings will inevitably cut down your transportation costs. Just as important, they'll help you improve your service-level capabilities.

Your business will flourish with care. Strong transportation analysis is the first proactive step in showing that care.

This post was written by Matthew Zandstra. Matt has been working in transportation and logistics dispatch for the past six years, both as a broker and direct to drivers. He’s familiar with various facets of relationships, technical systems, pricing mechanics, and commodities.

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