The cheapest rate per kilogram is the most expensive option
Ridgeline Equipment builds pump assemblies in Chicago and ships 25,000 kg per month to a Dallas distribution centre. Each kilogram of finished product carries $60 of value, and finance applies a 22% annual holding cost. Current practice is LTL: $0.28/kg plus about $450 a month in accessorials (redelivery, detention), 4-day transit, 92% on-time. Three alternatives are on the table: (a) full truckload, two 12,500 kg shipments a month at $3,900 each, 2-day transit, 99% on-time; (b) intermodal, three 8,334 kg lots at $0.14/kg plus $600 drayage per lot, 5-day transit, 84% on-time; (c) a 3PL pool-distribution contract at $0.31/kg, 3-day transit, 97% on-time. Dallas holds one week of inbound safety stock today and could cut it to three days at 99% inbound reliability, or would need two weeks at 84%. Dallas also charges back $750 per inbound-late delivery, and about 10 a month are charged back today.
1. Build a monthly total-cost comparison of the four options and make a recommendation.
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Four cost lines: freight, pipeline inventory, DC safety stock, and late-delivery chargebacks. Monthly holding rate = 22%/12 = 1.833%. Pipeline inventory = 25,000 kg x (transit days / 30) x $60.
| Line | LTL | FTL | Intermodal | 3PL pool |
|---|---|---|---|---|
| Freight | $7,450 | $7,800 | $5,300 | $7,750 |
| Pipeline inventory | 3,333 kg = $200,000 -> $3,667 | 1,667 kg = $100,000 -> $1,833 | 4,167 kg = $250,000 -> $4,583 | 2,500 kg = $150,000 -> $2,750 |
| DC safety stock | 1 wk = $346,154 -> $6,346 | 3 d = $150,000 -> $2,750 | 2 wk = $692,308 -> $12,692 | 5 d = $250,000 -> $4,583 |
| Chargebacks | $7,500 | $750 | $15,000 | $3,000 |
| Total / month | $24,963 | $13,133 | $37,575 | $18,083 |
Recommendation: full truckload, at roughly $11,800 a month less than the status quo - about $142k a year. Note what the table shows: intermodal has the lowest rate per kilogram by a wide margin ($0.14 vs $0.28) and is the worst option on total cost, because 84% reliability has to be paid for twice, once in inventory and once in chargebacks. Reliability, not rate, is the driver.
State the assumptions in your answer: 12,500 kg is a full truck for this product, the safety-stock estimates are proportional approximations, and the chargeback frequency scales with on-time performance. Validate all three with three months of actual data before committing.
2. What would change the recommendation, and how would you de-risk the switch?
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What would change it:
- Volume. Below roughly 7,000 kg a month, FTL becomes one truck every three-plus weeks, which stretches the order cycle and forces more DC inventory - at that point LTL or the 3PL pool wins. Build the break-even volume explicitly.
- Rate durability. Two loads a month is a thin relationship; the $3,900 rate may not survive a tight capacity market, and a carrier can deprioritise a small shipper. Contract the lane with a fuel surcharge formula and a capacity commitment, or run a mini-bid with a primary and a backup carrier.
- Concentration. Two shipments a month means one accident or one missed pick-up removes half a month of supply. That is why the answer is not 'FTL only'.
- Service expectation change. If Dallas customers move to smaller, more frequent orders, the whole analysis shifts.
De-risking:
- Run a three-month pilot of FTL on the lane while keeping LTL active as a fallback, and measure actual on-time and chargeback rates rather than trusting the quoted 99%.
- Contract a backup carrier at a spot rate for surge weeks, and keep a small expedite budget rather than a large buffer.
- Cut the Dallas safety stock only after the new transit performance is demonstrated for eight to ten weeks - releasing stock on a promise is how the switch fails.
- Do not let the intermodal option disappear entirely; keep a quarterly rate check, because if rail reliability improves or a customer imposes a hard carbon requirement, the analysis moves.
3. The largest customer now demands a 25% carbon cut in the inbound supply chain. Does that change the modal choice?
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Quantify before you switch modes, because the instinct to move freight to rail is often right in principle and trivial in magnitude here.
Rough numbers: 25,000 kg x about 1,450 km = roughly 36,000 tonne-km a month. Truck freight at about 60-65 g CO2 per tonne-km gives roughly 2.2 t CO2 a month; rail at about 20-25 g gives roughly 0.8 t. The modal difference is about 1.4 t a month, under 20 t a year - small next to the embodied carbon of the product itself.
Weigh three things:
- Mode is one lever; utilisation is another. Two full truckloads a month already run at good utilisation, so there is little empty-mile waste to remove on this lane - which is itself a carbon argument for FTL over LTL, where partial loads and rehandling add emissions per tonne shipped.
- Inventory is a carbon cost too. Intermodal would require 11,500 kg of extra safety stock versus 2,500 kg under FTL; that is production, packaging and warehousing emissions incurred to protect against a slow mode. Counting only tailpipe emissions would flatter intermodal.
- Disruption emissions dominate. A single air-freight expedite of pump assemblies can exceed a year of regular inbound trucking. Reliability is a decarbonisation strategy, not just a service one.
Recommendation: keep FTL, and answer the customer with a Scope 3 methodology - tonne-km, carrier-specific emission factors, a data-quality statement - plus the bigger levers: carrier emissions reporting as a contract clause, backhaul and consolidation opportunities, and packaging cube reduction. Set the 25% target against a measured baseline rather than promising a modal shift you cannot substantiate.