SAP S/4HANA Supply Chain for Transportation Management (TM) provides a new generation of functionalities that allows users to manage all their transportation requirements on a single global platform from end to end. The last two blogs (Integrated MM subcontracting and integrated SD consignment process) focused mostly on integrated transportation scenarios. However, this blog focuses on core transportation process during charge calculation which plays a major role in freight settlement process.
A short overview of freight settlement process is detailed in Blog 3 (https://community.sap.com/t5/supply-chain-management-blogs-by-members/blog-series-sap-s-4-hana-suppl...) which focused on freight settlement and event driven charge calculation. The accuracy of charges calculated is important in freight settlement process and a good TMS should be able to handle most of the calculation techniques used by various carriers. One such calculation method the use dimensional weight of the product that is transported.
Introduction: Dimensional weight
In scenarios where the entire truck/equipment is not hired to ship the products, shipping/freight costs have historically been calculated based on gross weight in kilograms or pounds. (LTL/Parcel scenarios). By charging only by weight, lightweight/low-density packages become unprofitable for freight carriers due to the amount of space they take up in the truck/aircraft/shipping container in proportion to their actual weight.
Dimensional weight, also known as volumetric weight or DIM weight, is a measure of the space that a package occupies in relation to its actual weight. The dimensional weight is determined by multiplying the length, width, and height of the package, and then dividing by a dimensional factor that varies depending on the company and the unit of measurement. The shipping cost is based on the greater of the dimensional weight or the actual weight of the package. So, a carton of books will likely be charged by gross weight whereas a box of tissue paper will probably be charged by its dimensional weight. This is because the large box of tissue paper takes up a lot of space but does not fill up a vehicle's capacity in terms of weight, making it an inefficient use of space. The concept of dimensional weight has been adopted by the transportation industry worldwide as a uniform means of establishing the charge for the cubic space a package occupies. This is predominantly used in road mode (LTL/Parcel). However, ocean (LCL) and air carriers also utilize dimensional weight based charge calculation.
For example, FedEx multiplies length, width, and height in inches. Round each measurement to the nearest whole inch. The resulting total is the cubic size of the package. Since FedEx uses 139 as the dimensional wight factor for U.S., Puerto Rico, and international shipments, they divide the above cubic size by 139 and arrive the dimensional weight in pounds. Please note that the DIM factor value is dependent on the unit of measure. In the above example, 139 is used when the length, height and width are in inches and resulting dimensional weight is in pounds (LB).
Carriers and LSPs arrive at this dimensional weight factor after a detailed study and thorough analysis of results. These can be changed or updated by the carrier. From June 2019, the new USPS divisor (DIM Factor) for DIM pricing is 166, a reduction from the old divisor of 194. The lower the divisor, the higher the dimensional weight and thus the shipping cost (for low density materials). Also, in the case of non-rectangular packages, other calculation techniques and adjustments factors may be used by some carriers to arrive at the dimensional weight.
Shippers avoid dimensional weight charges by using smaller boxes, by compressing their goods, and by reducing the use of packing materials. Dimensional weight is also used for invoicing by air freight forwarders, and commercial airlines worldwide. Dim weight pricing may reduce shipping costs for customers who pack more efficiently. Reducing packaging can make shipments more environmentally friendly by helping lower fuel emissions and reduce the carbon footprint. Additionally, this cuts the costs of overpacking and thereby reduce in waste generation.
Some references are provided below to learn more about news in the transportation industry related to dimensional weight.
- June 13, 2019: USPS DIM Changes Set to Go into Effect on June - 23
https://multichannelmerchant.com/operations/usps-dim-changes-set-go-effect-june-23/ - July 01, 2022: Old Dominion testing simplified LTL pricing program
https://www.freightwaves.com/news/old-dominion-testing-simplified-ltl-pricing-program - Jul 1, 2023: FedEx improving LTL shipping efficiency, increasing sustainability with space and pace pilot
https://www.ccjdigital.com/ccj-innovators/article/15541417/fedex-improving-ltl-shipping-efficiency-i... - Oct 1, 2023: Averitt's new LTL quote system offers more 'surgical' approach to pricing
https://www.ccjdigital.com/ccj-innovators/article/15634893/averitts-surgical-approach-to-ltl-pricing
SAP Solution:
SAP S/4 HANA Supply Chain for Transportation Management has a comprehensive charge calculation engine to calculate accurate charges for transportation process. SAP TM charge calculation relies on Freight Agreement master data to calculate charges and support various scenarios including dimensional weight pricing. Freight agreements along with calculation sheets, rates, and scales are used to efficiently manage long-term contracts with the carriers. Freight Agreement structure in SAP TM is illustrated below.
For more details, please refer SAP Help: https://help.sap.com/docs/SAP_S4HANA_ON-PREMISE/e3dc5400c1cc41d1bc0ae0e7fd9aa5a2/a1d8bc8e5bbe474c846...
Dimensional weight set up and Master Data:
In SAP TM, we can define the DIM factor as configuration. Config Path: SPRO - TM - Basic Functions - Charge Calculation - Data Source Binding - Define Dimensional Weight Profiles
For example, in the above screenshot the DIM weight profile is created for a DIM factor 139 for the Gross Volume (Length X Height X Width) in inch^3 and the weight arrived after the calculation is in Pounds (LB). So, if a carrier changes the DIM Factor or uses a different unit of measure (non-US carriers such as DHL etc....), the above configuration can be updated to cater to the changes.
We can assign this DIM weight profile to the header of freight agreement master data. If required, there is also the option to maintain the DIM weight profile at the freight agreement item level. (specific to a charge calculation sheet (TCCS).
Fiori App – Edit Freight Agreement
In addition to this, in the rate table of the base freight, we can update the calculation rule with calculation base as chargeable weight.
Example/Demo:
To demonstrate how SAP TM calculates dimensional weight and arrive at the freight cost, I have assumed following factors:
- DIM weight factor is 139 inch3/LB
- Weight in LB and volume in inch^3
- Package is cuboid in shape
- For moving from Houston, TX to Ontario, CA carrier charges 100 USD per chargeable weight (Dimensional weight or actual weight whichever is higher)
- Fuel Surcharge = 10% of Base Freight
Scenario1: High Density Material
- Gross Weight = 15 LB,
- Gross volume (LxWxH) = 1390 inch3
- Base UoM = EA & 1 EA = 15 LB
- Sales Order/FU/FO quantity = 10 EA
- Dimensional weight for 10 EA = 100 LB (1390 inc^3/139 *10)
- Actual weight = 150 LB
- Chargeable weight = Higher of Dim weight/Actual weight = 150 LB
- Base Freight = 150*100 = 1500 USD
- Total Freight including Fuel = 1650 USD
Item details of Freight Order:
Calculation details of Freight Order:
Scenario 2: Low Density Material:
- Gross Weight = 5 LB,
- Gross volume (LxWxH) = 1390 inch3
- Base UoM = EA & 1 EA = 10 LB
- Sales Order/FU/FO quantity = 10 EA
- Actual weight = 50 LB
- Dimensional weight for 10 EA = 100 LB (1390 inc^3/139 *10)
- Chargeable weight = Higher of Dim weight/Actual weight = 100 LB
- Base Freight = 100*10= 1000 USD
- Total Freight Cost including fuel= 1100 USD
Item details of Freight Order:
Calculation details of Freight Order:
Please note that the final charge calculation structure may not be as simple as I shared above. To showcase the dimensional weight functionality of SAP TM charge calculation process, I have simplified freight agreement and the charge structure.
To arrive at the accurate freight cost in a freight order, there may be multiple factors in addition to dimensional weight. For example, for an LTL shipment, some of the important factors are:
- Weight & Volume
- Density
- Distance
- Minimum freight cost per lane
- Negotiated rate tariffs / discounts.
- Classification of Freight or NMFC freight Class (North America specific)
- Freight All Kinds (FAK): Multiple products billed at the same freight class.
- Fuel Surcharges
- Other Accessorials (Lift gate service, Inside Delivery etc…)
SAP TM can handle most of the requirements in the transportation industry and it can even connect to an external system via interfaces to calculate the charges. For example, SAP TM has an out of the box integration with SMC3/Czarlite to get the base freight for LTL moves in North America. Additionally, there are standard enhancements spots available to cater to unique requirements of specific shippers/carriers in the charge calculation area.
Conclusion:
Dimensional weight-based pricing is a well-established practice of calculating freight cost and SAP TM has the capability to calculate freight cost based on dimensional weight pricing. In SAP TM, we can configure the DIM factor as per the requirements of the carriers across regions with different UoMs (Unit of Measure) and assign it to the Freight Agreements. Additionally, if there are any changes in the DIM factor or other parameters, SAP TM can cater to these requirements by updating the DIM factor configuration. Moreover, enhancement spots are available to cater to complex/unique requirements of specific shippers/carriers.
Estimating accurate freight charges is critical as it helps in charging customers and accruing the freight cost correctly. It also reduces the dispute when carriers send invoices and helps in the ‘Cost and Profitability Analysis’ of sales process. With SAP S/4 HANA TM advanced shipping, complex requirements in charge calculation can be fulfilled to estimate accurate freight charges and reduce the disputes. Hence advanced shipping in S/4 HANA Supply Chain for TM can be a compelling business case and is critical to achieve efficient transportation process for many shippers/manufacturers.
Link to other blog posts: https://community.sap.com/t5/user/viewprofilepage/user-id/179579
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