Expert Insight: Transportunities
  By: Gary Girotti  
     
  April 6, 2008  
 

Transportunities: Getting Freight Rate Reductions is Easy - Keeping them is Tougher

 
     
 

Follow These Steps to Ensure You Don’t Encounter Too Much Leakage Between Bids and Reality; Chasing Pennies Instead of Customer Service?

 
     
 
Girotti Says:
Just like on-time delivery and tender accept rates, market testing should be a stated rule, whether that be every year or every other year or, my favorite, every 18 months.

There is no question that we are in one of the softest carrier pricing markets in recent history.  The Chainalytics’ clients we have been assisting with freight bids have seen huge price reductions across all modes in the last 12 months. The reality is carriers are unwinding the margin gains they got during the capacity crunch of 2004-2006, and are now waging price wars to retain or gain revenue.  Getting rate reduction in this market is a given.  The big accomplishment is realizing the savings and maintaining the level of service required to meet your internal and external customer expectations. 

The difference between the projected and actual savings is what we call savings “leakage."  This leakage can result from a number of operational and implementation failures, such as:

  • The winning carrier failing to accept the tenders
  • Carriers not providing the expected service levels
  • Internal communication issues between procurement and operations
  • Systems issues when trying to execute the new rate contracts

The following are a few things that shippers can do to ensure they realize the maximum amount of savings possible and reduce the leakage:

1. Be Painfully Clear On The Service Requirements

In the bid process, the old adage of tell them what you are going to tell them, tell them, and tell them yet again is paramount.  You cannot provide too much detail on the operations you expect from carriers.  That being said, you must think long and hard about how to most efficiently and clearly package and communicate this information to the carrier community. 

We have found the best success with providing multiple points of communication: webinars, downloadable videos, meetings (if logistically feasible), etc. Many carriers are notorious for not reading or following directions in a bid.  Part of this is because the message does not get to the right person in the carrier organization, so multiple contact points can help.  As for the type of material provided, there is too long a list to provide in this article, but the general rule is you have to disclose the bad as well as the good.  Hiding an onerous internal process that your carriers will need to follow after the award will only lead to greater savings leakage.

2. Putting Out Too Many Lanes Across Too Little Freight

Shippers tend to forget that even if you are a large shipper, your freight is a small part of most carriers’ overall network.  The largest carriers are responding to thousands of bid requests ever year.  You have to make your bid package meaningful and attractive to get carriers to respond effectively.  While Chainalytics’ research does show that the more specific the lane definition (5 digit zip to 5 digit zip), the lower the rate; the same research also shows that the lower the volume on a lane, the higher the rate. So what is the right answer? Every shipper’s network is unique and a detailed lane definition based on volume analyses should be performed for every bid.  Our rough rule of thumb is that TL minimum volume on a lane should be 12 loads per year to be called out in a bid as a unique lane.  If you can’t meet these minimums, the lane should be consolidated to a higher level of aggregation.

3.
Do Not Chase The Pennies

In reviewing a number of past bid results, we have found that, on all but a handful of lanes, the rates of the lowest three or four carriers were within a few pennies per mile of each other.  Especially in large bids, shippers tended to look only at the low carrier.  Optimization technology can assist in this area by allowing you to run scenarios that look at the cost trade offs of “incumbent only” results or favoring core carriers over others. Changing carriers on a lane or segment of the network can result in rate savings, but it can also wreak havoc on your operations and service levels.  Going into a bid, we find it helpful for shippers to quantify the cost of adding a new carrier on a lane or into the network and then review the results of the bid in that light.

4. Have A Regular Procurement Process

Many shippers say to me that they do not want to go to market on a regular basis because they do not want their carriers to feel they are not being a good partner.  I personally believe this is misguided and breeds an unhealthy environment with carriers. 

To be a good partner, you must establish what the rules of partnership are.  Just like on-time delivery and tender accept rates, market testing should be a stated rule, whether that be every year or every other year or, my favorite, every 18 months.   Do not confuse market testing with changing out or churning your carrier base every period.  The point of the bid event is to establish new lane rates with your carriers, hopefully maintaining the incumbents on the lanes where they are performing and truly want to maintain the business.  This can be very good for the carrier as well, as often there are lanes that no longer work for a carrier and there are other lanes that they would like to participate in that will allow them to shed some of the “dogs."  As long as you keep number 3 above in mind, this is a healthy process.

The Bottom Line is that shippers need to consistently source carrier bids.

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