Get a Handle on Freight Cost Distribution

By Shiyu Tan-10/30/2015
picture_alt

 

[Importance of Freight Cost]

Freight cost refers to costs incurred in delivering products to customers has become one of the biggest operational cost components for many businesses. The ability to maintain and increase profitability reflects in how businesses transport, store, and deliver products in the supply chain. Out of all the operational costs, freight cost is usually the most important component, and it  can take from 0.27%  to 12.57% of revenue. Therefore, as important as maintaining a high level performance, having a clear visibility of freight costs is  vital to operations. A thorough analysis on the logistics cost would be the beginning of understanding the structure and lead to better control and optimization. Often, a transportation management system is capable of optimizing your supply chain to save and control cost by providing details of where you have spent the money, so does SAP TM.

 

[Charge Management Capabilities of SAP TM]

In SAP TM, the cost calculations are carried out by the Transportation Charge Management module. The transportation cost of shipments is reflected using charge items by different categories, such as charge per mile, charge per stop, fuel surcharge, service charge as agreed on your carrier contracts. The system calculates each cost element separately and then provides a summed up value for the overall move. However, the breakdown displayed in charge management is based on the charge types defined in the charge calculation sheets defined for specific agreements. What if we want to associate the charge to  the delivery elements in the shipment? Say, you want to allocate the transportation cost to more granular level, e.g. products or product groups or individual consignees and see how the freight cost is consumed by these individual entities.  SAP TM provides a functionality known as Cost Distribution to address such requirements.

 

[How Cost Distribution Works]

As explained earlier, cost distribution allows us to allocate costs amongst different entities based on business rules.  To perform cost distribution, we need to know 2 criteria: the level of distribution of costs and attributes on which costs will be distributed.

The attributes on which costs can be distributed are gross weight, net weight, gross volume, and distance times gross weight and the level of cost distribution can be at the sales order or forwarding order line items.

 

In SAP TM, the actual distribution takes place in Freight Order (FO) Freight Booking (FB) and Freight Settlement Document (FSD), and the cost distribution will be transferred to ERP with Freight Settlement Document (FSD).

 

 

 

Cost Distribution can be enabled in two ways with SAP TM, direct-item level or hierarchy-based freight cost distribution. In a direct distribution, the system will not refer to the item hierarchy of your package, instead, consider the attributes specified in the distribution rule and distribution level. In a hierarchical distribution, the system will take each level of the packaging hierarchy step-by-step into account to distribute the cost.

 

Here, I will illustrate a scenario in the perspective from Shippers with Cost Distribution on ERP Items:

 

[Cost Distribution for Shippers]

As a shipper, you create target documents such as sales orders, purchasing orders, stock transfer orders in ERP and would like to know how your freight costs are distributed amongst your individual SKUs. An integrated SAP TM system will create execution documents such as freight orders or freight bookings through planning. The freight settlement documents are then  generated on top of execution documents, and  the transportation costs using the FSD to SAP ERP for invoice verification.

 

Depending the customizing settings in SAP ERP of the type of posting you want to do with the cost distribution from TM, the agency business document can post it to these cost objects, such as material accounts or general ledger and CO-PA posting.

 

 

 

For example, you have a freight document with two products: A and B. The net amount of the document is $1000, and the cost distribution for product A is $600, and $400 for product B. When you create and transfer the settlement document, there are a few steps will be performance in ERP: Creation of a service entry sheet for $1000 creates an agency business document with these two products as items. Each item has the amount of the distributed cost, in our case, product A has $600 and product B has $400.

 

Having the ability to do cost distributions on the sales order line item levels, builds up the connection with relevant SAP TM & ERP documents with full freight cost visibility and accurate freight cost allocation for materials valuation and order profitability. Leveraging the benefit of cost distribution, adding to the charge management of SAP TM, will lend vision in different angles and actual control on freight cost. On one hand, financially your cost and profitability analysis could be performance at material/product level with taking transportation cost into account, on the other hand, the breakdown of your freight cost will be structured by various criteria to element level of your shipment, so you can trace the spending to the roots. This new power will advance the management of supply chain to another level.

Back