Cut Your Company’s Transportation Costs: Learn how to calculate freight cost per mile for lowering carrier contracts
Freight cost per mile (FCPM) is a powerful cost analysis tool to help your business significantly reduce freight costs. How significant? One of our clients realized a 45% reduction. Read on!
If you know the actual FCPM you paid for a specific time period per carrier/transportation provider, you can start making relevant comparisons to identify the carriers that provide your business with the best value at the lowest cost. Then, you can use this information to negotiate lower transportation costs with all your transportation services vendors.
How is FCPM calculated?
Analyze invoices, miles, penalties and delays
Data on a number of relevant components for each carrier or transportation vendor for a given time period are required to calculate FCPM, including:
- Invoiced costs for freight.
- Total miles that goods were transported.
- Any penalties or other costs charged (e.g., a surcharge for having to repack goods or wait time for delays loading or unloading at a company facility charged by the carrier).
- Imputed cost for delays or late service delivery. For example, if your carrier missed an expected customer delivery date, you should determine a reasonable cost to the business for the missed delivery; some companies will use a “cost of a lost sales” estimate).
Do the math to compare and gain leverage
Once this information is gathered, add all the costs together for a given period and divide by the total miles the carrier or transportation vendor incurred for the services provided during this period. In other words, find the sum of all the distances for the various freight legs the carrier transported goods for which you were invoiced and incurred any additional costs.
By doing the math you can then compare carriers/transportation providers to determine who provides the best FCPM. This information also can be used in annual contract negotiations to help leverage additional savings. For example, use an average of all carriers’ FCPM to determine if a vendor is high; then offer the evidence to use as leverage for reducing each vendor’s prices during contract negotiations.
One of our clients, a large milk processing cooperative, was able to reduce its annual freight costs by 45% with Pragmatek’s supply chain help in computing FCPM and negotiating subsequent contracts with its preferred carriers.
Need help with this analysis including cost determination, collection of data, and computation of FCPM and vendor negotiation?