How to Best Understand Expedited Shipping Freight Rates and Freight Costs

Executive Summary

• The Costs of Forecast Inaccuracy Paid to the Trucking Company in Freight Rates or Freight Cost
• Safety Stock and Inventory Management Expedited Shipping or Expedited Delivery
• Finding the Reason for Expedited Shipping
• Expedited Shipping or Expedited Delivery Freight Rates and Freight Cost Calculation
• The Trade-Offs Related to Freight Rates or Freight Cost

Introduction

There is a clear delineation between freight rates and freight costs, and transport speed in the trucking business. Unforeseen events often drive expedited shipping freight rates. This often comes down to forecasting accuracy and or inventory management shortcomings within the shipper.

Forecast Accuracy in Shippers

Nearly all shippers, except those that work based on make to stock (which is quite rare), produce a forecast. Companies pay the price for prediction inaccuracy, but they do not get a “bill” where forecast error is outlined — unfortunately.

Few companies employ anywhere close to the number of necessary techniques for attaining a reasonable level of forecasting accuracy. However, how would a company know the appropriate level of money to invest in forecasting?

Finding the Reason for Expedited Shipping

Yet when you try to determine how much money was spent in different areas for the cost of forecast inaccuracy, it becomes quite difficult to do. If we look at the increased cost attribute to freight cost of freight rates paid to the trucking company, one often hits a dead end as shippers rarely code their expedited delivery freight cost or freight rate paid with a reason code. Without a reason code, it is impossible to determine the actual reason for the extra freight cost or freight rate paid.

A trucking company will offer an expedited shipping rate that the shipper may use. But this does not tell us the reason this freight cost was incurred. What can be determined more readily is when a shipment switches modes. That is when a shipment that normally goes by a slower mode switches to a faster mode. To capture this information, the company must invest the effort to analyze this history, and it must at some point add its own reason code. It can then present the aggregated cost to management which can then potentially do something about the forecast issues through some investment type.

My Observation from previous clients:

• Costs: Companies are willing to accept quite high costs, which are directly traceable to forecast inaccuracy, to keep from investing in improving the forecast.
• Cost Transparency: If companies knew the real costs of their forecast inaccuracy, they would invest in improving it.
• Definable Better Approaches: Companies often trick themselves by saying that changes will come with new software – or when something else changes – when there are typically things that can be done immediately to improve forecast accuracy.

Safety Stock and Inventory Management

Expedited shipping or expedited delivery is not only related to forecasting error but also inventory management. Inventory management’s tool for accounting for variability is called safety stock. See more about safety stock and see our safety stock calculator at this link.

Expedited Shipping or Expedited Delivery Freight Rates and Freight Cost Calculation

Transportation costs are not commonplace where companies look for savings from forecasting. If you spend time talking to transportation directors, one of their number one complaints is that they are asked to deliver materials quickly but are not given enough time to do so. This is because the shipping patterns are far less stable than they could be — and a big part of the reason for this is forecast inaccuracy. It should be understood that any prediction accuracy will lead to things like expedited shipments, production inefficiencies, and extra stock — but it is a matter of degree.

Companies pay more for transportation due to forecast errors as they have to expedite both inbound and outbound traffic. However, unless a different mode of transportation is used, it is often difficult to attribute a percentage of all expedite costs related to transportation which can be traced back to forecasting.

The Calculators for This Cost Category

Our transportation-related expenses due to forecast inaccuracy calculator are available at this link.

Conclusion

Expedited shipping or expedited delivery has a reason for existing and a correspondingly high freight cost or freight rates. The trucking company benefits (at least when the mode is not switched to air transport), but it is wasteful.

It normally is based upon forecast inaccuracy at the shipper or the customer of the product, combined with an error in safety stock. Safety stock is designed to account for variability on both the demand and the supply side.