Mastering the Challenge of Developing a Parcel Budget

In my experience working with shippers, especially large complex shippers, the parcel budgeting process is one of the most challenging tasks for transportation managers. As e-commerce and parcel growth rates soar, it has become increasingly important to master the challenge. The challenges are many, including designing an accurate budget, allocating to appropriate cost centers, managing monthly accruals, explaining budget variances, and re-forecasting. According to a recent Aberdeen Group report entitled "What Steps Are You Taking To Manage Your Growing Parcel Freight Costs?", most parcel shippers are struggling to get a clear view of their true costs due to the lack of segmentation capabilities and inability to allocate costs as B2B and B2C business models converge. According to Aberdeen, only a portion of the best-in-class firms, which represent 20% of all firms, have the capabilities to segment, allocate, and track total landed costs in order to effectively manage their spend. In their view, this amounts to a competitive disadvantage for the 80 plus percent of laggards.

The budget development process is the first hurdle transportation managers must overcome in the spend management process. There are a variety of techniques to creating an annual parcel budget and they range from simple to complex. The level of complexity typically arises from two main areas. The first relates to how spend is forecasted. Some firms utilize a simple run rate process and create a budget using historical spend accompanied with assumed growth and carrier rate increase assumptions. Alternatively, other firms choose a more complex route to project future spend that involves utilizing historical data to model modifications to their network, including changes in carriers, services, zone, weight, and rates. Furthermore, firms may segment budgeted costs to align results to their brands, customer type, and/or product types. They may also further develop drill down capability by various carrier, service, base freight, surcharge, and fuel parameters. While complex and time consuming to develop, this level of budget detail allows managers to effectively track and understand parcel spend for their business unit stakeholders, as well as explain budget variances.

A second hurdle for managers is gaining visibility to actual spend and aligning it to the segments of a budget for "apples-to-apples" comparisons. This is very important for understanding root causes for gaps between budgeted and actual cost. A budget with very little sophistication in segmentation makes apples-to-apples comparison easy, but explaining variances becomes a challenge. Alternatively, firms with detailed segmentation as described above encounter extreme complexity when coding parcel carrier invoice data to align the spend to their budget segmentation. However, once this process is designed, explaining root causes for variances becomes a much easier and efficient task.

As one can see budgeting and managing parcel spend can be extremely difficult. Thus, only a handful of firms are considered best-in-class in this regard. For readers who are interested in learning more about the key methodologies to developing a sound parcel budget and best practices for bridging actual results to expectations, I encourage you to attend Green Mountain Technology's session at the PARCEL Forum, "Best Practices to Monitor Parcel Budget Performance," on Wednesday, Sept. 14, from 12:40 - 1:30 p.m. Hope to see you there!