How to Conduct a Transportation Cost Analysis: FTL, LTL, and a Framework for Effective Analysis

Transportation Cost Modeling: Insights from My Network Design Projects

In this blog, I’ll share insights into transportation cost modeling, particularly how I’ve approached it in previous network design projects. Whether you’re managing shipping for a large organization or working on optimizing a supply chain network, understanding transportation costs is critical. Let’s dive into some key considerations and an example calculation to illustrate the process.

Shipping Cost Measurement and Ranges for FTL, LTL, and Rail

Shipping costs are typically calculated using specific units of measurement based on the mode of transport and shipment size. These include dollars per mile ($/mile), dollars per ton-mile ($/ton-mile), or dollars per hundredweight ($/CWT). Below is a summary table of the typical cost ranges for Full Truckload (FTL), Less-than-Truckload (LTL), and rail shipping:

Sources:

• Freight Industry Reports: Insights from sources like DAT Freight & Analytics or the American Transportation Research Institute (ATRI).

• Online Freight Calculators: Tools provided by logistics companies like FedEx Freight, UPS, or freight brokers.

• Government Data: Reports from agencies such as the U.S. Department of Transportation or the Bureau of Transportation Statistics.

Challenges and Strategies in Transportation Cost Modeling

Transportation cost modeling is both essential and complex. Your approach should align with the specific problem you’re solving:

1. For Network Design Problems:
   When optimizing the location and number of distribution centers, you’ll typically analyze past data to determine costs per lane, distances, shipment volumes, and other operational variables. It’s essential to factor in variables like fuel price fluctuations, carrier performance, and inventory holding costs to estimate a total cost of ownership accurately.

2. For Carrier Rate Negotiations:
   When negotiating rates, the focus shifts to analyzing shipment volumes, frequency, and service-level requirements. You may run a cost-benefit analysis comparing different carriers’ pricing models, factoring in contractual terms, fuel surcharges, and discounts for volume or multi-lane commitments.

A Closer Look: Modeling Costs for Network Design

Let me share an example of how I’ve approached cost modeling in network design problems. Typically, this starts with obtaining location data—latitude and longitude—from the client or the company. The process involves:

1. Identifying the origin, destination, and intermediate points.

2. Gathering cost data and calculating a cost-per-mile ratio by dividing total costs by total distance.

3. Handling missing data, which can be challenging. Tools like Logility Starboard can help by providing historical lane cost data for various routes.

Another approach involves regressing cost against distance to establish a relationship. Grouping data by regions (e.g., North, South, East, West) can help account for regional cost variations. A high adjusted R-squared value indicates a reliable model, but this approach can be data-intensive.

Example: Calculating Shipping Costs Using Historical Data

Here’s a real-world example of calculating costs per mile for Full Truckload (FTL) shipments:

Inputs:

• Origin: Los Angeles, CA (34.0522, -118.2437)

• Destination: New York, NY (40.7128, -74.0060)

• Past Costs: $6,100, $6,250, $6,000

Step 1: Calculate Distance Using the Haversine Formula

d=2r⋅arcsin⁡(sin⁡2(Δϕ2)+cos⁡(ϕ1)⋅cos⁡(ϕ2)⋅sin⁡2(Δλ2))d=2r⋅arcsin(sin2(2Δϕ)+cos(ϕ1)⋅cos(ϕ2)⋅sin2(2Δλ))

Where r=3,959r=3,959 miles (Earth’s radius). After calculations:

• Distance = ~2,500 miles

Step 2: Calculate Average Total Cost

Average Total Cost=6,100+6,250+6,0003=6,116.67Average Total Cost=36,100+6,250+6,000=6,116.67

Step 3: Calculate Average Cost per Mile

text{Cost per Mile} = frac{text{Average Total Cost}}{text{Distance}} = frac{6,116.67}{2,500} approx 2.45 , text{($/mile)}

Output:

• Distance: ~2,500 miles

• Average Total Cost: $6,116.67

• Average Cost per Mile: $2.45/mile

Conclusion

Transportation cost modeling is an essential tool for network design and logistics optimization. By combining historical data, geospatial calculations, and advanced modeling tools, you can make informed decisions that balance cost and efficiency. Whether you’re working with data you have or extrapolating for lanes you don’t, a structured approach ensures robust and actionable insights.

Let me know your thoughts or if you’d like to explore more examples in this area!