How to Combat Overruns by Rethinking Your Approach to Freight Budgeting

In the world of full truckload shipping, managing budgets has long been a tricky endeavor. Shippers consistently grapple with budget overruns, which can range from a manageable 6% to a staggering 180%. As the industry continues to evolve, it's becoming increasingly clear that traditional budgeting methods are falling short. The reliance on annual RFPs and routing guides often fails to account for the unpredictable nature of freight transport, leading to significant discrepancies between forecasted and actual expenditures.

Thankfully, a new budgeting framework, based on MIT's recent research sponsored by C.H. Robinson, may provide shippers with a more reliable and accurate approach for budgeting.

Key Findings from Recent Research

A recent MIT Center for Transportation and Logistics study¹ centered around truckload budgeting practices highlights a troubling trend: the persistent challenge of budget overruns. The results reveal a significant amount of unplanned and volatile spot market spending, particularly within small-to-medium sized shippers, combined with inadequate forecasts from traditional budgeting methods are driving the overruns.

While large shippers with substantial budgets often see more stable overruns, smaller shippers frequently face severe budget discrepancies. Notably, smaller-sized shippers, with annual budgets under $24 million, experienced budget overruns averaging 87%, compared to the more moderate but significant 6%-38% overruns seen by the largest shippers.

The results also emphasize the importance of lane consistency, beyond just sheer volume, finding that lanes active for more than 12 weeks have a significantly higher probability of shipping again the following year. This insight can help shippers better anticipate volume and cost changes, leading to more accurate financial planning.

Introducing a New Budgeting Framework

To address these challenges, the research team created a new budgeting framework, designed to improve accuracy and reliability. It incorporates a dual focus on high-consistency and low-consistency lanes, leveraging historical data to predict future costs more effectively.

The framework proposes an 80/20 split approach: 80% of the budget should be allocated based on high-consistency lanes-those with over 100 loads and active for more than 12 weeks annually-while the remaining 20% accounts for low-consistency lanes. This method allows shippers to create more precise truckload budget forecasts by factoring in both planned and unplanned expenditures.

This framework also includes budgeting for inevitable unplanned expenditures from new loads. The amount of unplanned freight is a substantial portion of transportation spend, meaning it should be a critical focus for budgets.

TMC, a division of C.H. Robinson, utilizes this budget framework to provide enhanced planning. The general high-level guidelines of this process include these steps:

"RFP results spend amount" is defined as the primary carrier rate identified in the annual RFP multiplied by lane volume. Once that is determined, the remaining fields cascade as seen below:

The average spend percentage for high-consistency volume is 80%, with the low-consistency volume being 20%. The average standard deviation is 4%. While these and the unplanned figures in the table above provide average guidance, specific numbers for a shipper would provide more accurate results.

Why the Framework Works

The benefits of adopting this new budgeting framework are substantial. By shifting to a more data-driven approach, shippers can achieve several key improvements:

1. Enhanced Predictability: The new model provides a more reliable basis for forecasting by incorporating spending patterns with historical lane activity. This leads to better anticipation of both planned and unplanned costs.
2. Reduced Overruns: Shippers can significantly decrease the frequency and severity of budget overruns by delineating between high-consistency and low-consistency lanes, as well as factoring in the inevitability of unplanned freight.
3. Improved Financial Planning: With a clearer understanding of lane behaviors and spending trends, shippers can make more informed decisions, optimize procurement strategies, and adjust budgets dynamically in response to market conditions.
4. Greater Accuracy: The framework's predictive strength, demonstrated by its success in forecasting budgetary outcomes within a 3% margin for 69% of cases, highlights its effectiveness in real-world applications.

By embracing this new approach, shippers can move away from outdated methods and adopt a more sophisticated, accurate budgeting strategy. This shift is not only crucial for mitigating financial risks, but also for staying competitive in a rapidly evolving freight landscape. Adopting the new budgeting framework offers a path toward more stable and predictable financial management in the truckload sector.

For more information or details surrounding the enhanced budgeting process, reach out to a C.H. Robinson or TMC representative.

1. Dataset provided by TMC, a division of C.H. Robinson