Bids Processes Leading to Too Much Turnover can Cause Havoc
The speakers all agreed that shippers had to carefully watch the level of carrier turnover that could occur as the result of a new bid process.
Nestle, in fact, ran into some problems in a 2002 freight “auction” process that opened up its whole network to many carrier bidders, and from which carriers were selected primarily based on price. The result – way too much turnover among its existing carrier base at the time. That lead to problems with service from carriers unused to Nestle’s business, and winning bids by some carriers that were really not able to meet their capacity and service commitments.
“I got my supposed “savings” from that bid process, but it came at a pretty heavy price in the end,’ Lombardo says.
A more recent bid process in 2006 was more constrained in terms of carriers Nestle invited to bid, and the carriers ultimately selected.
“You have to decide how much turnover is acceptable,” Lombardo added, suggesting that you normally wouldn’t want to see more than 10% turnover in each procurement cycle. He also observed that you have to think about turnover at different levels. For example, turning over a lane to an existing carrier to another is generally less of an issue that turning over a lane to a brand new carrier.
The other panelists generally agreed, but McCarthy noted that a shipper’s own current performance also impacts how much turnover you might expect or tolerate.
“If you benchmark your rates and see that you are fairly high in what you’re spending, more churn may be good,” he said. “If you are already getting good rates, churn for a small improvement is probably a bad idea.”
Do Incumbents have a Disadvantage?
There is a belief by some that incumbent carriers can have a disadvantage in a bid process – because they understand the real cost of hauling a given shipper’s freight, where a new prospective carrier may not.
“The incumbent is disadvantaged if you don’t share all the information about what is bad about your freight,” McCarthy observed. “Current carriers know your facilities, and where the bodies are buried.”
The key point again is that what may look like an attractive bid by a carrier that doesn’t know the details may result in greater costs in the end as the new carrier finds it can use its capacity more profitably elsewhere.
But Calcagni says you also have to understand a carrier’s own network and how that may impact the aggressiveness of its bid for a given lane or region.
“If a lane well fits your network, that’s the business you really want to go after,” as a carrier he said. He later added that Hunt will look at “combinatorial biding,” packaging a total price across two or more lanes.
“If your pain is here, and out need is there, we’ll look to package that any time we can on a lane by lane basis,” he said.
How Many Carriers is Enough?
When conducting a transportation bid, how do you know when you should stop adding carriers?
Session moderator Gary Girotti of Chainalytics offered a basic formula: “You stop adding carriers when the internal cost of adding another carrier exceeds the freight cost savings expected from adding that carrier,” he said.