Why Your Supply Chain Needs a Dynamic Cost Model

Alex Hersham
Alex Hersham

The last 18 months have seen the freight market at its most turbulent in living memory. Rates and schedules, capacity and conditions have all been changing on a seemingly daily basis, forcing shippers to become more flexible and agile. However, for many teams, the way that they plan and track costs hasn’t kept pace.

While most shippers are aware that they’re paying more, monitoring exactly how much more and how it affects profitability remains a challenge. However, by moving to a dynamic cost model, logistics managers can adapt to market changes both quickly and strategically. 

But that’s not the only reason to build a dynamic cost model. Let’s explore how else it might help you: from navigating disruption, to building cost clarity that drives a long-term competitive advantage. 

(N.B. If you want to understand how to get started, our complete Cost Visibility handbook outlines the steps you need to create and implement a model that can adapt to your business goals.)

Costs are more unpredictable than ever

In a time of constantly shifting schedules, rates and availability, knowing your costs is no longer a nice-to-have; it’s a business-critical issue. The steady-state models of cost planning that businesses have relied on for years are now unable to keep up with the volatility in the market. 

In addition, supply chain teams are under increasing pressure to understand and communicate their costs within the business and to management: what they are, when they’ll hit and how much they’ll be when they do. However, in a fluid freight market, total landed costs can vary from shipment to shipment, week to week or even day to day. 

Additional sources of unplanned-for costs include:

  • Rebooking in case of cancellation
  • Addition surcharges (PSS, GRI, Equipment Fees, Congestion Fees)
  • Mode switching for expedited shipments
  • D&D charges from congested ports and delays with collection
  • Fluctuating haulage and trucking rates

A dynamic cost model is one that can capture and account for changing inputs, including additional charges, changing rates and fluctuating equipment costs. Without the ability to track and quantify market changes, supply chain teams can’t accurately quantify financial risks. This prevents effective collaboration with other internal stakeholders and risks losing money.

Shippers need to manage profitability in real time

Decisions over what cargo to move, what to hold and what to expedite now need to be taken on an SKU by SKU basis. Cost variability means a profitable shipment in one month may become a loss-maker in the next, even with the same goods, in the same sized container, on the same route and carriers. 

Especially in recent months, freight, storage, D&D and transport surcharges have varied significantly. Without visibility over these elements, logistics teams lack the right information to see when an item becomes overall unprofitable, risking losses that won’t be apparent for months.

Monitoring these developments and making the right decisions requires coordination between sales, merchandising, supply chain and finance teams to balance margins and inventories across catalogues. By creating a cost model that is connected to all parties and their datasets (e.g. shipment data), you can collate your end-to-end supply chain costs and understand any changing profitability as it happens.

Different problems require different models

The particular inputs and calculations involved in tracking your landed cost from end to end will depend on your target success metric. For example, if consolidation is part of your strategy to manage costs, validating your product dimensions is crucial for creating accurate loading plans, which will inform how many containers you expect to procure. If your model needs to provide intelligence to your buying team, being able to break down total freight costs by each individual SKU will be your most important input.

But the decisions your model needs to inform can vary. Sometimes, product profitability is under review; sometimes, when you’re trying to service huge demand, capturing all the extra fees and charges as they try to get stock in is the priority. Plus, your focus may change depending on the stakeholders you are dealing with at the time.

Building a flexible model can help you to manage a lot of problems with one set of numbers. To do so, list out your current challenges (plus your roadmap for the future, to capture future needs). From there,  identify what data points you need to get hold of, which stakeholders you need to include, and the speed at which you need to produce analyses. 

Once you have identified and captured all the relevant inputs for your model, you’ll be set up to measure progress across multiple areas, and identify your best path forward.

Building good data foundations gives you a long-term advantage 

The data foundations of your cost model will help you achieve plenty of other goals as well. For example, the ability to track, attribute and compare landed costs at an SKU level in real-time enables businesses to pinpoint key areas to reduce costs and improve performance. 

Other opportunities include:

  • Holding suppliers accountable for hitting cargo ready dates
  • Reducing dwell times at node points to control extra charges 
  • Streamlining consolidation across suppliers and routes
  • Prioritising suppliers who deliver volumes in full to maximise SKU margin
  • Keeping all the players across your supply chain informed

Additionally, the process of implementing a dynamic cost model also allows shippers to match demand more closely, see the state of their suppliers, and gain a near real-time picture of what is happening in transport hubs and in-transit. 

Download our Cost Visibility handbook to start building your own dynamic cost model. Want to see how it could work for you? Get in touch with Zencargo to find out how Europe’s fastest-growing businesses are using our real-time logistics services to grow through disruption.

Author Bio:

Headshot of Alex Hersham

Alex Hersham is Co-founder and CEO of Zencargo, the digital freight forwarder enabling organisations, from FTSE 100 businesses to fast-growing startups, to make smarter decisions through a real-time overview of their supply chain. Based in London, Zencargo is relied upon by companies like Vivienne Westwood, Swoon Furniture, Farfetch, and Soho Home.

After graduating in 2008 from the London School of Economics with a degree in Economics, Alex spent four years as an Associate at Goldman Sachs and three years as Vice President of Cerberus Capital Management, the global leader in alternative investing.

In May 2021, Zencargo raised £30M in Series B financing, enabling the company to significantly grow its team and further expand internationally. Zencargo has to date, raised a total of £42M and is targeting revenues of £100m for 2021 and over £200m for 2022.

This blogpost is sponsored by Zencargo

Header image by Ishant Mishra on Unsplash

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