7 Do's And Don'ts For "Clothes-To-Perfect" Logistics Budgets

The business world is full of many potentially challenging statements.  But few are less popular in logistics circles than some variation of:  "Your annual budgets are due."

Creating these forecasts and commitments has never been easy.  But it has become especially difficult in recent years because the typical supply chain is now more global, complex and full of moving parts — not to mention fraught with potential twists and turns along the way. 

As third-party logistics professionals, my team members and I have been active participants in many companies' budgeting exercises, including those of numerous businesses in apparel and retail.  In the process, we've discovered that while preparing balanced budgets may never be enjoyable, there are several helpful do's and don'ts that at the very least can make them achievable.

Do:  Take time to update your numbers.
Everything in a supply chain — from the cost of full-time and temporary labor to the price of a specific shipment in a particular lane — has a price tag attached.  And few, if any of them, are written in stone. 

Always take the time to research and confirm what every cost per unit or transaction is likely to be in the year ahead, even if you've been paying the same amounts for years.  And never assume you have the correct rates plugged in just because you checked them a while back; in this industry a great deal can change in a very short period of time.

Just as important, make sure you're casting a wide net in terms of the costs you're trying to capture.  For example, besides looking at obvious costs such as fuel prices, distribution center leasing rates and industrial equipment expenses, you may wish to examine other potentially volatile line items such as your property tax rate because with real estate prices fluctuating, new valuations are always possible.

Each little thing you anticipate and get right now is one less surprise that could come back to haunt you later.

Don't:  Try to guess supply chain costs for things that are new and different.
If your company's supply chain expands (due to new global sourcing patterns) or contracts (due to the current nearshoring and reshoring trends), your next fiscal year may find you using some modes, carriers, lanes, services and vendors you've never worked with before — and encountering duties, taxes and local fees you've previously only heard about.

Avoid simply guesstimating what these new elements will cost because often there are nuances involved that only someone who's familiar with the territory can fully factor in.  Instead, take advantage of all the industry connections, experts, systems and engineering tools you have at your disposal.

Many freight forwarders, customs house brokers, international transportation providers and global 3PLs have firsthand knowledge of prevailing rates that they'll be happy to share.  Additionally there are several optimization and simulation programs that can help deliver highly accurate cost projections.

Do:  Be practical enough to request the improvements and upgrades you need.
After more than five years of challenging economic conditions, many businesses have become used to "making do" with existing equipment and systems — and are just as reluctant to make requests for upgrades at budget time.

Although this conservative approach is frequently merited, there are times when it can be counterproductive.  For example, if your company is working with an outdated warehouse management system that's no longer a match for your operations, you may be spending more money manually working around that WMS than you would for an upgrade. Plus there are investments that ultimately offer such significant cost savings that they quickly will pay for themselves with their resulting improved efficiencies.  Examples include labor management systems, energy-efficient lighting, forklift impact switches and fast-charge technologies.

For best budget results, be thrifty but visionary, remembering that sometimes, you have to spend more money in order to save more money.

Don't:  Forget to address insurance coverage and costs.
It's sad but true that one of the most enduring constants of any supply chain is the possibility of contingency — be it cargo theft, an Act of God or an injury to a warehouse employee.  

Smart companies acknowledge rather than ignore this reality during budgeting because they understand that gaps in coverage can seriously undermine even the best-designed balance sheets.

Assess your current liability as you would any other line item, asking yourself several important questions such as:  Is your company's current liability insurance adequate to  protect you from financial catastrophe should Murphy's Law occur? If it's not, how much would it cost to get it up to par?  And do you have enough funds in cash reserves to satisfy the deductibles you'll need to pay before that insurance coverage kicks in? Even if they're small, these unexpected costs really can add up.

Do:  Manage expectations and clarify assumptions.
Budgets may seem like fairly black-and-white documents.  However even hard-and-fast figures can be misinterpreted if they're not couched accurately or served with a healthy dose of perspective.

For this reason, be as definitive as possible about the assumptions you used to arrive at your final calculations. (Were your freight costs based on shipping certain minimum volumes with certain carriers who were giving you a better rate?  Specify those volumes and rates on your budget document, and state the price difference your company will have to pay if those volumes aren't reached.  Are the numbers you've plugged in based on moving goods between a certain Point A or Point B?  Let stakeholders know where that begins and ends — and what would change if those locations shifted.  Have you calculated your labor costs based on a certain ratio of full-time vs. temporary employees?  Spell that ratio and cost differential out.)

The more specific you can be, the more likely it is that you and all of the people approving and overseeing your budget will be able to stay on the same page. 

Don't:  Forget to account for maintenance.
The cost of replacing or repairing aging logistics assets can be substantial — and potentially detrimental to your budget's fiscal fitness if you didn't see it coming.

In fact, some surprisingly major logistics costs can come out of this seemingly minor aspect of many supply chains, and even if your company leases rather than owns most of its equipment or facilities, it may not be immune.  For example some DC contracts may allow your landlord to pass along a certain percentage of costs — such as replacing a facility's heating and cooling systems — directly along to you. 

Arm yourself against sticker shock by using the early part of your budget cycle to take stock of the condition of your various facilities, systems and equipment (and the fine print in your leasing agreements and other key contracts about who will foot the bill if improvements or repairs are needed). Then allot funds accordingly.

Do:  Set the stage as appropriate for higher requests.
On a final note, it's important to mention that even though the concept of supply chain management is now commonplace in the industry vernacular everyone in your company may not be fully conversant with all of the transportation trends and factors that can drive costs up.       

Should you expect to submit a logistics budget that's significantly higher than what your key executives have been used to seeing, use the months leading up to the budget cycle to update and educate them about any potential cost-increasing developments in your company's own supply chain or the industry at large. 

It may not guarantee that all of your requests for increases will sail through the review process without a few nips and tucks.  But it will go a long way toward managing expectations and ensuring a lot of the hard work you put into number-crunching doesn't wind up on the cutting room floor.

David Frentzel is vice president of global contract logistics for APL Logistics.
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