By Mike Regan / www.supplychain247.com / March 16th, 2015
Practically speaking, since everyone is “time challenged,” it can be tempting to use short cuts when conducting bids.
Shippers keep telling me they are absolutely shocked by the rate increases their LTL carriers are proposing. Here’s an example from just last week.
A dismayed shipper called me when one of the big LTL carriers “demanded” - his words - a 25% increase. When the shipper balked and complained, the carrier basically said: “Take it or leave it.”
So the shipper is now looking to replace a core carrier that handles a sizeable amount of their freight.
This isn’t an aberration.
In this seller’s market we’ve warned you about, here are the facts of life: If a carrier’s operating ratio for handling your freight exceeds 100, you can expect sizeable - think double digit - rate increases from your carriers. It’s nothing personal. It’s just that your carriers think they should be making money for hauling your freight.
Having negotiated billions of dollars in freight on behalf of our customers over the years, we are experts on things shippers should be doing when they conduct their LTL and Truckload sourcing events. So, if you want some practical tips on how you can avoid drastic increases in your freight costs, here are four things to consider.
Step One: Stop Flying Blind
Before starting your negotiations, see if you can answer this basic question: How much does it cost your carrier to service your business?
Your carriers use Operating Ratio Worksheets that detail all the costs they incur to haul your freight, but few shippers ask to see this data. For example, at a recent large industry conference, when I asked the audience if they reviewed their carriers’ cost to serve their business, only three hands went up!
If you don’t know anything about your carriers’ costs, you can’t have an intelligent, fact-based discussion about how you can work together to reduce or mitigate those costs to offset a portion of the rate increase. So if a carrier has asked for a sizeable increase, use Step One: Ask for your operating ratio worksheets, so you can see the facts about your book of business.
Step Two: Know where your Rates are at Relative to the Marketplace
Most shippers want to believe they have the best possible rates. But the only way to validate that is to conduct a benchmark analysis.
Years ago we conducted an LTL sourcing event for one of America’s largest shippers who had (in their words) “the best possible rates in the world.” The carriers told them this, and if any of their carriers lied, they risked losing the business. Instead of arguing with the shipper, we proposed that they let us benchmark their rates. The analysis showed a sizable savings opportunity and four months later they had new rates that saved millions of dollars, and the payback for our fees was approximately 19 days!
So Step Two is: Benchmark your rates before you conduct your transportation sourcing events, so you know where your rates and accessorial charges are at relative to the marketplace.
One additional note: Sometimes a benchmark analysis will confirm that you have great rates and that you should avoid “upsetting the apple cart.” For example, when we advised one shipper to postpone their bid, they listened to a consultant who boasted that they could get lower rates. After the bid, we were asked to validate the consultant’s claim. Our analysis showed that they actually took a seven percent (7%) increase based on the new rates.
Step Three: Analyze the Marketplace and your Current Shipping Lanes before Selecting Carriers to Include in the Bid
Over the past five years, there have been substantial changes in carrier networks, or “footprints”, and a push for density-based pricing. As the national as well as the “super regional” LTL carriers add or close terminals, the carrier’s lane densities are constantly changing.
So instead of looking at your sourcing event as an opportunity to include incumbent carriers and a couple of niche carriers, use Step Three: Analyze the freight marketplace to determine which carriers have the most attractive networks to match up with your freight lanes. All freight and all lanes are not created equal. Some of your lanes are extremely attractive and valuable to the right carrier. Your challenge is to find that carrier and get the best possible pricing.
Step 4: Understand the Book of Business you are Presenting to your Carriers
As noted above, with the emphasis on density-based pricing and the use of dimensionalizers at the carrier’s terminal, LTL carriers now have the ability to determine the density of every shipment they put in their trailers.
This means that your FAK or multi-tiered FAK rate structures are going to be more scrutinized. The carriers don’t need the National Motor Freight Classification (NMFC) to determine what you are putting on their trucks, because they know the size and weight of each shipment and they know how they need to price your freight. According to one carrier, shippers are making their products lighter without necessarily shrinking their packaging sizes, so dimensional issues are extremely important.
So before you go to bid, follow Step 4: Thoroughly analyze the products that are being tendered to the carriers, so that you are not surprised or penalized by dimensional freight rules.
Practically speaking, since everyone is “time challenged,” it can be tempting to use short cuts when conducting bids. Some shippers may focus on being expedient instead of being focused on what the most effective process is for their companies. Instead benchmarking their rates, taking the time to understand the marketplace, or looking at which is the best base tariff, shippers focus on saving time. Consequently, they get higher rates and lose a lot of money!
Fortunately, there are effective alternatives for shippers to consider. First, take advantage of the information that is in the public domain. Second, utilize the resources of professional industry associations such as CSCMP, NASSTRAC, NIT League, TIA, TCPC, or ATA to decipher facts and data to understand the transportation marketplace. Third, don’t be afraid to ask for help.
Using the right outside resources can prove to be beneficial and valuable - especially if they can help you get the best possible rates.
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