Cost Per Unit vs. Straight Line Analysis: Pro’s and Cons

Aerospace, Automotive, Industrial Manufacturing
October 13, 2014

Manufacturers need to stay flexible and adapt to global production variability while making sound decisions on transportation costs.  We’re often asked how to measure transportation savings against varying builds (seasonality, increasing/decreasing demand, shift in consumer consumption, etc. Experience has taught us Transportation Cost Comparisonthat Cost Per Unit (CPU) analysis is an effective way to figure out if you’re making proactive, cost efficient improvements to your transportation plan while taking into account volume fluctuations.

About straight line transportation

Typically, the straight line method compares transportation cost in a baseline period against the cost at the time of implementation. Moreover, the straight line method assumes that cost will carry through unchanged for the term of the project (typically measured over 12 months). The difference is then annualized and reported as projected savings.

However, this approach doesn’t address how the project is expected to perform against production variability and can often lead to suboptimal or delayed decision making.  As the manufacturing environment continues to rebound, more material is required to support production, and transportation spend will need to increase.  Without taking into account the cost per unit, relying on a comparison between baseline and optimized costs can be misleading.

Here are the top three reasons we caution against relying on straight line transportation:

  1. Assumes no variability in total build.
  2. Assumes no variability in build by line/model.
  3. Assumes no variability in cost over the span of the project and the savings ‘results’ fail to take into account varying levels of production.

Why it’s better to use CPU

The CPU method compares transportation cost in a baseline period with the associated units produced – and the result is a baseline CPU. When paired with a production forecast, transportation volume and spend is projected using varying build rates. This is then compared against the baseline to identify CPU savings.

Top 5 benefits of CPU

  1. Easily validated.
  2. Implemented spend and production can be compared against the baseline cost per unit.
  3. Accounts for overall variability in build at the line level.
  4. Accounts for increasing or decreasing transportation needs as build rates change.
  5. When dealing with varying build, CPU can ensure you’re making a proactive, cost efficient decision.

How is your 3PL measuring transportation? Are you able to make proactive, informed decisions? For more information on how Ryder can help implements transportation savings for you click here.

Mark Zimmerman, Logistics Project Manager, Ryder System, Inc. Mark Zimmerman is a logistics engineering professional with more than 10 years of experience. Throughout his career, Mark has implemented numerous network optimization solutions for customers throughout industrial and automotive industries.

X

Enjoyed This Post? You might also like...

How Supply Chains Are Exceeding the...

Exponential growth in online sales is forcing retailers and their suppliers to employ strategies tha

Delivering on the Customer Promise:...

Many of the top supply chain executives gathered in Orlando, Florida the last week of September for

Overcoming Supply Chain Challenges ...

Automotive, Cross Border, Supply Chain September 29, 2016

“The auto industry will change more in the next five years than it has in the last 50.” James Bo