The CFO Needs to Understand Transportation Operations Volatility and Anticipate Impact on Financial Performance

by Mike Starling

Ensuring that the CFO understands the impact of transportation on financial performance is a critical and often overlooked issue. The CFO tends to evaluate business strategies based on their impact on profitability, asset utilization, ROI, and a host of other key metrics. However, when it comes to the transportation budget line, typical measurements default to such generic measurements as A) freight as percent of sales, or B) freight as percent of cost of goods. Is there a better alternative?

These are good traditional benchmarks, but what is often lacking is an appreciation on the part of the CFO for the details and dynamics of how the transportation market changes (i.e., tightening of available carrier capacity, mode segment increase in rate increase frequency, impact of seasonality demand surges on for-hire transportation by mode, etc.) can quickly affect not only your ability to service your end customers, but the company’s expected financial projections as well. Being able to anticipate and plan for such things up front would seem more prudent than reacting to the impact of something afterward. Hmmm?

At issue here are several things:

1. Company financial/budgetary projections tend to be based on a rearview mirror approach, a pinch of anticipated inflation rate, and key sales/production targets for the coming fiscal year.

All too often, the transportation numbers used are rule-of-thumb estimates based on historical precedent, and they fail to reflect the reality of the current and anticipated transportation market. WHY? It is too time-consuming to break out a detailed analysis of the components by mode, by tactical execution center(s), and crank in a realistic estimate based on projected trends at the carrier level by mode type, industry segment, seasonality factors, etc. This is especially true because the CFO is not conversant with (and may have no interest in learning) transportation vernacular, tactics, and understanding the financial impact of applying tactic A vs. applying tactic B. In the big picture, it all just averages out to the historical percentage. And if not, the CFO just DIRECTS the transportation manager to take whatever action is needed to get the numbers back in line. How do I know? I was a transportation manager in two global corporations for a good portion of my career, and reported directly to the CFO. This is how it went down, year after year, at budget prep time.

2. Transportation budgetary projections tend to be based on the current market situation, a pinch of anticipated inflation rate, and a sprinkling of wild speculation based on news media and trade magazine hype.

The typical transportation manager may or may not be directly involved in the annual budget prep drill. Viewed as an EXPENSE center by most CFOs, all that is asked of the transportation manager is that they perform a cursory review of line-item expenses and indicate any area requiring adjustment other than the company-allowed inflation rate, and to provide some justification (verbal or written) for any proposed change to the number. In these times of wildly fluctuating fuel prices, the manager may be asked to gaze into a crystal ball and provide a best guess as to where fuel prices are going in the next fiscal year. Unless the manager has a degree in economics and subscribes to an economic forecasting service, however, these inputs generally reflect whatever the transportation trade magazines are saying, which often proves to be incorrect anyway. Few have the ability to forecast or factor in pricing volatility resulting from unpredictable geo-political and global financial market shifts.

3. But, I digress. What is missing in this process at the departmental manager level?

First: True collaboration between the CFO and the Transportation manager.

Second: An appreciation on the part of the CFO of the actual potential for transportation to be used as a strategic alternative in helping to improve operating cash flow.

Third: A business team work ethic that allows the CFO to mentor and lead the line managers toward the company’s financial goals and objectives, rather than operate at arm’s length from the line managers, with little interest in how what they do might contribute to improving company operating cash flow.

Fourth: A lack of clear alignment between what the CFO deems important for company success (upward view) and what the transportation manager views as necessary for personal and professional job success (downward view). These viewpoints should be exactly opposite to ensure effective and efficient communication, collaboration, and operational execution.

So, how does your company handle transportation budget preparation? Does it view transportation as an EXPENSE center? Or as a Strategic Function to help improve operating cash flow? Is your CFO an aloof dictator who looks down his nose at transportation management as a necessary evil? Or is your CFO a leader and mentor who is interested in ensuring communication and collaboration with transportation management in alignment of goals and objectives for company success?

The Need for CFOs to Frequently Assess the Financial Impact of the Supply Chain on Financial Performance

What’s the key? It is frequent communication about management and measurement of transportation financial expense and the anticipated near-term transportation expense of the end-to-end supply chain. If you have multiple supply chains (i.e., inbound, outbound, international, domestic, regional, etc.) then you need to understand the macro impact of these combined supply chains and how the ups and downs of each could affect the other(s).

So, how do you improve the collaboration and communications between Finance and Transportation?

Start with the Company Strategic Goals and Objectives. Examine how transportation can contribute directly or indirectly to helping achieve any or all of these. Do so by bringing in the Manager responsible for that functional area (who may not be the Transportation Manager) for a sit-down discussion with the CFO. Educate the Manager about why these goals have been established and about the importance of ensuring alignment of the departmental level manager’s goals and objectives with corporate goals and objectives. The test of the effectiveness of the education process is to task the manager to develop no more than three departmental-level goals that are measurable and achievable, and that align vertically with the company’s goals and objectives.

The CFO doesn’t have to understand transportation lingo to assess the adequacy of the departmental goals. Rather, the CFO and the Manager need to assess the financial impact (positive and negative) of the potential results outcome.

If all this CFO-Transportation Manager communication enhancement sounds like a daunting task, seriously consider use of an outside resource — a Supply Chain Coach — to conduct an unbiased, end-to-end, supply-chain financial strategic assessment (Get it? This includes both the CFO’s and Transportation Manager’s areas of responsibility) that clearly identifies and analyzes the company financials from a supply-chain operational execution perspective, and then, with the baseline established, allows both parties to conduct “what if” analyses to identify the correct tactics to apply at the departmental level to optimize company operating cash flow.

While Finance and Transportation departments may not speak the same language, CFOs can and should learn to understand the different business levers to push and pull in order to develop, implement, and execute a comprehensive Transportation Strategy AND the ROI and impact on OCF of application of the correct Transportation Tactics that contribute to achieving corporate strategic goals and objectives.

What Does It Mean?

Hindsight is always 20/20. When you look back in the future, what do you want to see? What coulda happened?

The question now is will you make the right decision when it really matters? Are you ready to move on to bigger and better things? Or, are you updating your resume? So what does it mean ?

What does it mean to achieve a personal goal? What does it mean to have grown professionally in both education and experience? What does it mean to have achieved departmental goals and objectives via you own Transportation Team? What does it mean to have directly contributed to achieving specific corporate goals that ensure the continued success of your company?

It means to have documented proof that you did all of the above in the execution of the Transportation Tactical and/or Strategic Plan, that put you in the Best-of- breed category. How about them apples?

To paraphrase management guru Peter Drucker, managers typically do the first thing that comes into their heads (i.e., they are reactionary, rather than deliberate planners). Successful managers develop a relevant strategy that reflects the goals they wish to achieve and then demonstrate their professional capabilities by executing to plan and delivering the goods. That’s an appropriate description, especially for the Transportation Manager, don’t you think?

Your ability to do this will be noted by both your superiors and your subordinates. This is leadership by example at its very best. To be humble enough to recognize where you require help is the sign of a true manager, one deserving of added responsibility and authority. Many seek to do this. Few actually succeed.

It doesn’t matter if it was just a small freight cost reduction project or a major overhaul of your entire Transportation Network, TS&T job satisfaction comes from looking back on a successful project or engagement.

How May We Help You? Would Now Be A Good Time?

What Are We Going To Do?

OK, so you have finally come to grips with “How are we doing?” and everything just ain’t coming up roses. The boss is looking for you to “do more with less,” RIGHT? A couple of key customers keep complaining about the carrier you are using for their deliveries. Purchasing just added some new vendors for a new key product line but forgot to include transportation in the planning and implementation phase of this process. You just got a call from the global forwarder wanting to know what to do with the 50 container loads of product sitting on the dock. Accounting just called, and they want you justify the invoice they just got from a key customer charging the company $500 for a non-compliance delivery issue with one of your best carriers. Inventory has just informed you that they are trying to keep the numbers down for month end, and they want you to put all inbound shipments on hold until after month-end closing. Well, don’t just sit there. Do something!

If you had developed a well-thought-out strategic transportation plan, and you were truly in alignment with corporate strategy, perhaps some of the problems above would not have reared their ugly heads. If you have not done a thorough strategic assessment of your current transportation network and service level requirements, now is the time to act. Remember to segment your operational review into smaller pieces to facilitate examination of the various tactics you have in place to deal with the day-to-day reality of the situation, and also to have contingency plans for when Murphy drops in for an unexpected visit. Also consider engaging experienced professional outside help to save you time and money.

At the tactical level, “shoot the carrier and get another one” was once a common solution, before companies started to realize the value of developing business relationships with their carriers to address root causes of problems.

The answer is not always the cheapest transportation alternative, but it clearly was not the most expensive alternative either. Likewise, the answer is not to succumb to pressure from sales or whiny customers. Rather, it lies in finding the BEST transportation alternative given the service-level requirements, time available, and budgetary constraints.

So if you have flawed transportation tactical execution problems it would be wise to ensure an unbiased assessment of both the operational requirements (do they make sense in light of what we are being asked to accomplish?) and the asset(s) selected to carry out the operation or provide the service (Right mode? Right carrier? Right cost?).

Often utilizing an outside resource as a fresh pair of eyes can pay dividends and save time and expense if you are perceptive enough to take action to make it happen.

OK, what are you going to do?

How Much Can We Improve?

Gut-check time.

OK, here is where the rubber meets the road. In the Transportation Plan Design phase you have identified your Transportation Operational and Financial weaknesses and evaluated how addressing these weaknesses will pay true dividends if you stick to the plan. You have an overarching Transportation Strategy in place, and you understand why you need to align your transportation goals and objectives with the company’s strategic goals and objectives. You know what Transportation must accomplish in order to achieve success. So how much can you actually improve?

How much you actually improve is totally dependent upon your commitment to making it happen within the time frame allotted.

If your objective is only TACTICAL improvement, then our focus should be 110% on making the change or implementing the new program or process. Whether it is conducting a mode-focused competitive bid to reduce freight expense while improving service performance capability or upgrading from spreadsheet tracking and analysis by installing that new transportation software system, you must understand that FAILURE IS NOT AN OPTION!

If your objective is more STRATEGIC in nature, then you must delegate to subordinates while focusing on oversight, assessment, measurement, direction, and guidance. Micro-management is not an option. Proactive Management is better than Reactive Management. Coaching motivates subordinates better than blunt direction without explanations. Quantitative measurement and open, effective communication drive motivation toward clearly identified and prominently posted goals.

Caution: do not underestimate the importance of accomplishing improvement within a targeted timeframe!

Be brutally honest with yourself! Do you have the right resources, assets, education, and experience to accomplish the improvements you are setting out to achieve?

If you are even a little unsure, then take action to bring in outside help.

Using a force multiplier is a viable option that can help you improve to whatever level of service performance you wish to achieve.

Add VALUE and Gain ALIGNMENT Using PROCESS MAPPING

Alignment of Corporate Strategy with Transportation Strategy & Tactics is a key component in helping to ensure maximum return on investment, both operationally and financially. Assuming you have a Transportation Strategy, the question becomes, is it aligned with corporate strategic goals and objectives?

One way alignment can be achieved and confirmed is by using Process Mapping. Process mapping makes a process visible, illustrating how that process happens so it can be viewed, analyzed, and improved. With such an understanding, those who touch the process, inside or outside the organization, can align their activities to achieve better execution and communication, and enhanced relationships. This all helps to make the process more productive and cost-effective than it was before. It will also validate that your current Transportation Strategy (assuming you have one) and tactics will provide for optimized operational execution and minimize operating expense.

As it relates to Transportation Strategy & Tactics, participating in a Supply Chain mapping exercise allows a company to identify bottlenecks, delays, and redundancy in your current operations AND identify Tactics that create excessive or unnecessary operating expense. Process Mapping helps provide visibility into WHY and HOW processes are currently carried out. It also makes it possible to identify where the processes are executed, the WHO and WHY of where decisions are made within the process flow, and provides valuable insight, often gleaned from people or functions you might not think are involved with or able to affect the process or activity. It also reveals clearly how the various processes affect other processes, upstream and downstream in the Supply Chain, and ultimately provides a definitive answer to the question WHY a process is necessary and why it is being executed at this point, within the larger context of the end-to-end Supply Chain.

Mapping also makes it easier to identify activities within a process that are not adding value; these can then be targeted for elimination or modification.

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