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Immediate Transportation Savings with a Long-Term View PDF Print E-mail
Written by Jeff Ryan   
Apr 23, 2009 at 10:12 PM

Use Collaborative Sourcing to Quickly Achieve Sustainable Savings and Strengthen Shipper-Carrier Relationships

A group of carriers presenting in early 2009 to a logistics trade conference audience hinted that their pricing behavior with their customers in 2004 and 2005 was emboldened by the tight capacity and driver shortage that marked those times. 

Their admission was by no means bragging, but instead contrite.  They recognized that they must now face those same customers in a marketplace where volumes have reached a low that many Carriers have not seen before.   As one Carrier put it, “Carriers are scrapping for every last piece of freight”.

 

BravoSolution, who works with companies buying all manner of transportation services in a wide range of industries, recently conducted a study with companies that provide transportation services in order to help identify a solution that will obtain the best value for both shippers and carriers, rather than getting results strictly at the expense of the other party.  The outcome of this research drove the conclusions and recommendations expressed herein.

 

When the market hits peaks and troughs, there are opportunities for Carriers and Shippers to take advantage at the expense of one another.  And it is reasonable for both parties to expect some additional benefit when the market swings their way.  Over time however, the inefficiency of operating as adversaries in a turbulent market negatively affects everyone involved.  When Shippers discard or weaken important relationships, they put their service levels at risk.  When either party neglects agreed upon contract terms, credibility is lost, making it increasingly difficult to negotiate effectively in the future.  When shippers drive carriers toward unsustainably low rates, they will find themselves unable to cover loads when capacity tightens back up, as carriers begin to prune the business with the weakest operating ratios.  As one carrier warned, “If shippers aren't careful, they'll end up when there's an upswing with carriers locked into very low rates they can't afford, and get hurt in the long run.”  Shippers that sacrifice their carrier relationships will be the ones in the next conference explaining the damage their short-sighted behavior caused.

 

The solution is not to avoid sourcing transportation and RFPs altogether.  In fact, the opportunity to gain new business couldn’t be more welcome to carriers when volumes are down.  As one carrier explained, “We love to get business from RFP's.  It’s typically high spend and it requires less amendments to contracts because it is more stable, more predictable, and comes from more reliable shippers.” What carriers do fear is when a large incumbent reverts to a simplistic, solely-priced-focused approach that ignores collaborative cost reduction, causes immediate financial damage to the carrier, and almost guarantees a capacity shortage in the shipper’s medium term future.  Unfortunately, based on our research, we found that there are very few shipper/carrier relationships that can be objectively declared collaborative.  One carrier described the price beating he was taking in one particular RFP, WHILE having 60 day payment terms dictated to him, WHILE being told he had to pay spotting charges from the same customer in 15 days AND WHILE being asked to submit his current policy on eco-friendliness.  All he could do was laugh!

 

Stop the Madness

 

At the risk of sounding cliché, the solution is better collaboration between shippers and carriers.  Recent research on supply chain best practices declares collaboration to be universally in its infancy.

 

It is almost laughable how overused the word “collaboration” is by many consultants, practitioners and software companies given how little strategic collaboration actually is in practice between trading partners.  One shipper wouldn’t talk about the approach until the concept was renamed, but once passed that hurdle (changing the name to “sexy sourcing” for him) the advantages were intriguing.

 

But what does collaboration mean in this context of transportation sourcing?  It doesn’t mean shippers paying exorbitant rates while carriers run business inefficiently.  It also doesn’t mean carriers capitulating to price pressure from their customers and accepting any business at any price to keep their trucks on the road. 

 

It does mean shippers and carriers working together continually to achieve greater network efficiency: higher equipment utilization, reduced waste (fuel and dwell), and fewer empty miles, all amounting to sustainable reduced costs. 

 

It does mean carriers honor their volume and load acceptance commitments and preserve their customer relationships even if it means not taking advantage of some opportunistic volume elsewhere.

 

It does mean shippers honoring the principals of their contracts and preserving the relationships even if some volume re-optimization is required to correct for the dynamism of the collective market.  When the market has excess capacity, that is the easiest time for shippers and carriers to realign their relationships to gain efficiencies, and that is collaborative sourcing.



 

What It Takes

It is one thing for shippers and carriers to talk about collaboration.  It is another thing to make it happen.  Gleaned from our research into the perspectives of both shippers and carriers, these six points are critical to ensure collaborative sourcing efforts are effective:

 

1.  Make it simple for both parties to speak in their own terms:  Geographies, pricing structures, and representation of business should not require a Rosetta Stone for carriers and shippers to understand each other.  Carriers are busier than ever with RFPs as shippers take advantage of market conditions, and many are trying to respond despite reductions in staff.  One carrier indicated that he saw twice as many requests in January 2009 compared to January 2008.  With constrained resources, the RFPs that are difficult to understand, have unclear expectations, or are excessively time-consuming and prone to mistakes will not receive as much as attention and aggressive pricing as those that are designed to take advantage of technology in order to minimize response effort.  An up-front investment in designing an RFP that is both user- friendly to carriers and offers shippers the rich data they need for analysis will improve savings opportunities and reduce unpleasant surprises down the road.

 

2.  Allow shippers to clearly communicate their requirements and priorities:  Uncertainty from either side leads to hedging, which translates into inefficient pricing.  When requirements are vague, carriers hedge on price to protect themselves. Understanding that new carriers are less familiar with their business, shippers are necessarily more reluctant to consider new carriers.  While incumbents are always going to have that advantage, the more shippers can be confident that potentially new carriers truly understand their business, the more confidently they can consider those non-incumbents.  Providing the right level of information ensures shippers will get the services they require at the level they expect, and carriers will avoid hedging.  This requires understanding what data is important to share, at what level of detail to share it, and how best to communicate it to keep it straightforward to access and understand while not diminishing its value. One LTL Carrier, describing the need for detailed information about Shippers’ freight, put it simply, “I sell space on a truck, and I need to know what is going in that space.”  He cited access to data such as actual class and volume density as critical to providing his most competitive proposal.  He described going out to the shippers’ facilities and taking a tape measure to a pallet to get otherwise unavailable information.

 

3.  Allow carriers to clearly communicate their requirements and priorities:  Carriers unanimously report having a difficult time proposing their best rates when they are uncertain what volumes and what lanes they might be awarded.  Carriers can only put their best foot forward if they have a platform to communicate those sets of business that are most important to them and the volumes that are necessary for them to achieve the efficiencies required for their best rates.  A cookie-cutter approach to volume and other discounts virtually ensures that some carriers will not be able to submit their most attractive pricing.

 

Carriers say they are eager to work with shippers to find deeper efficiencies, but a top priority is protecting themselves from further cuts to their operating margins.  To this end, shippers should be careful about how much they hammer carriers on accessorials such as fuel surcharges.  Shippers really have two options in this area: they can allow the surcharge to be a realistic reflection of the cost of fuel over time, or they can drive surcharges so low that, as one carrier put it, “We are forced to build the cost into our rates.”  Shippers who chose the latter approach ended up only hurting themselves when the cost of fuel fell last year—they were still paying a high price because it was baked into their linehaul rates that didn’t come down with the fuel indices.  Also, when the cost of fuel is far enough out of sync, those shippers who drove surcharges down the hardest will be first to see their service affected adversely.

 

4.      Ask the right questions:  Shippers are quick to point out the importance of evaluating factors that go beyond cost when selecting carriers.  In this market, carriers want their evaluation to consider these non-cost factors just as much as the shippers, if not more so.  One carrier emphasized, “We want shippers to ask us about things like transit time, on-time percentage, additional services provided, account management, and financial security.”  Carriers see this as an opportunity to differentiate themselves from their competition while maintaining margins they can live with.  In order to be most effective, shippers must:

A.    Understand their own business requirements, including differentiating between must-haves and nice-to-haves

B.     Ask the questions that are truly relevant to these requirements and preferences

C.     Know how they plan to use the information they collect and eliminate questions that won’t be used in evaluation

D.    Be able to accurately incorporate the answers along with their costs in the decision making process

 

5.      Have an effective, efficient way to analyze the answers:  Once shippers have gathered carriers’ responses to all their questions, shippers must have a systematic way to balance both cost and non-cost factors.  It is no good to ask all the right questions if there is no way to compare the answers, or if doing so takes months of tedious data manipulation.  In a very real way, better analysis tools, particularly those based on optimization technology, allow shippers to ask questions more meaningfully, and that allows for better decision making.

 

6.      Build consensus within the shippers’ organization.  Collaborative sourcing does not just mean collaboration between the shipper and the carrier; it also requires collaboration between internal stakeholders.  In a large organization, it is important to be able to build consensus.  Doing this means listening to varied sets of needs and wishes, incorporating them into analysis, and objectively evaluating the costs and benefits of all decisions.  Accomplishing buy-in through thoughtful consideration of all key stakeholders, and having a clear-cut, unbiased way to evaluate alternatives is critical to the ultimate success of any collaborative sourcing effort.

 

Collaborative Sourcing technology identifies cost reduction opportunities through proper shipper and carrier alignment.  Critical elements of the technology are 1) a more flexible and sophisticated proposal collection platform and 2) powerful scenario analysis capability to evaluation a broad spectrum of alternatives and varied proposals.

 

The proposal collection must not only efficiently collect lane level bids but expressive proposals offering alternate services, alternate equipment, bundles of continuous move or round trip business and network balancing solutions.  Additionally, the proposal collection approach needs to focus as much on capacity as it does on price.

 

The scenario analysis technology must be able to thoroughly evaluate all of the expressive proposals simultaneously, while allowing the shipper to introspectively evaluate some of their own historical behaviors.  Scenario analysis is used to shape an award profile that best aligns the business being offered to the interests expressed by the carriers, factoring in capacity and non-price criteria at the same time.

 

This same technology works equally well in markets that favor shippers and ones that favor carriers, as the best solution is always a function of communicating needs and interest for mutual gain.  And mutual gain is the reward of true collaboration.

Jeff Ryan is a consultant who specializes in transportation sourcing for BravoSolution.

Thank you
valentine_mariner and M2 Digital Photography for the images.


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Last Updated ( Mar 09, 2010 at 10:49 AM )

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