In last Thursday’s piece, I proclaimed that transportation procurement is ‘hot’ right now. It’s been the most read posting over the past few days, and it prompted the following great viewpoint from Logisticsexpert, a logistics executive like many of you:
“I have debated this topic with many providers over the last year. My question comes down to this: What evidence do I have that no matter what I do now, when the “worm turns” I will not be forced to pay market rates anyway? The implied scenario by many is that if I do not “take advantage” of the market today, somehow the carriers will “take care of me” in some special way when the carriers have an advantage. I have no evidence of that. I believe when (if) the carriers obtain pricing power they will use it on everyone equally. No one will be spared. There is no way a company will accept a lower profit margin than what they could otherwise get just because I “took care of them” during the bad times. Ask them to put it in writing and see how far you get.”
He goes on to say:
“Further, I have been in this industry for over 20 years. During that time span, the carriers have had massive pricing power for 4 of them. The other 16 were defined by excess capacity and “commodity” type pricing. Why do we think that those 4 special years will become the rule at some point? Not saying it will not happen again but I am saying those years seem to be the rare exception and not the rule.”
“A key problem / characteristic of trucking is [that] it has [an] incredibly low barrier to entry. Therefore, as soon as profits become above average, capacity swoops in and fixes the problem.”
“Now, I am not a big fan of predatory pricing (i.e. taking advantage of a bad situation) but how do I ensure I am not at a COMPETITIVE DISADVANTAGE to my competitors? What if I take the “take care of them” approach and my competitor does not? If this were to occur, it could add $5 or more as a cost per unit into my product vs. theirs. I will lose in the market place. That type of price differential in a part of the COGS will cause me to lose business long before the “worm turns.”
“For all these reasons, I cannot figure out this approach to purchasing transportation services. As much as we hate to say it, transportation services are “commodity like.” They are not full commodities, and certainly the closer you get to your customer (i.e. last mile) they are NOT a commodity, but they are commodity like.”
He ends by soliciting the thoughts of others. Well, here is my quick response to some of the points he raised:
Shippers should absolutely take advantage of current pricing conditions to obtain lower rates. And yes, when the pendulum swings in the other direction, carriers will raise rates and seek to maximize their revenue and profit potential. This is the nature of any marketplace. But it’s important to remember that unlike other business areas, transportation contracts are non-binding. A carrier can promise you ten trucks per week, but he’s not obligated to give them to you (and the same is true with commitments shippers make to carriers). So, I think it’s important for shippers to think beyond rates. Thinking “strategically” and being “carrier friendly” does not necessarily imply accepting higher-than-market rates today. What it means (to me at least) is paying attention to the other things that carriers value, such as paying them quickly and keeping their trucks moving. If you simply chase the lowest rate today, the moment a carrier finds another shipper that’s willing to pay him a cent or two more per mile, you’ll find yourself without capacity in a heartbeat. And capacity will get extremely tight again. In a year or two, when a carrier has one truck and three different shippers want it, what can you do today to make sure you get that capacity? Will the shipper who’s willing to pay the highest rate get it? Perhaps, but I believe that smart carriers will also look beyond rates and weigh the value of “carrier friendly” practices when deciding who to work with.
What do the rest of you think? Do you agree with Logisticsexpert’s viewpoint? Do you have a different perspective to share? Let us know by posting a comment (if you haven’t already, just register at Logistics Viewpoints (where you’ll choose a generic userid), then log in when you visit the site, click on the posting that you’d like to comment on, and enter your comment in the “Leave a Comment” field).
Great points!! There is a lot more about the relationship than price and there are a lot of things shippers can and should do to enhance the relationship. Here is a short list:
1) Pay on time (As you stated). This is a MUST DO
2) Due to volatility (not necessarily actual price but the incredible volatility) of fuel prices, adjust fuel surcharge weekly. Don’t have the carrier have to wait for a 13 week adjustment to get their money.
3) COMMIT to primary carriers when you award a bid and put systems in place to ENSURE every lane that is awarded is actually TENDERED to the carrier who won the award.
4. DO NOT “spot price” every day. If you committed in the bid to tender freight to a particular carrier, follow through on that commitment.
5. Have awards programs and scorecards which are very objective. Keep the “I like ….. ” out of it.
6. Be driver friendly at the point freight is picked up and delivered – things such as driver lounges, easy access, pre-loaded trailers ready with paperwork ready to ensure quick turnaround etc. are all vital.
Those are just a few things. You have now got me thinking and I am going to put a complete list together. Perhaps your readers will help. Thanks Adrian!!!
I agree with logisticsexpert that when capacity tightens up, carriers will not charge lower prices to a shipper that “took care of them” when capacity was plentiful. I hear that all the time, but just don’t believe it. That does not mean shippers should award freight to carriers strictly based on price, and certainly not based on spot prices. Transportation should be procured professionally, like other goods and services, and that means a formal bid process that awards freight based on the combination of price, service, and capacity commitments for a period of 12 to 18 months. Both sides should live with that agreement. Shippers should be wary of desperate carriers that price far under the market. It won’t last. There is nothing wrong with taking a slice of the total freight pie and taking advantage of spot market pricing for some piece of the business, as long as on daily basis carriers are offered the freight they won in the bid. I also agree with Adrian that transportation volume and capacity commitments are often ignored by both sides. When the tide turns, carriers will not haul for shippers just based on price either. Many other factors including dock waiting time, seasonality, payment terms, drop trailers, volume commitments etc. are balanced against price and a rational economic decision is made (usually). While carriers won’t charge below market prices for a shipper that “stuck by them”, they will charge a lower price and provide more capacity for shippers that implement best practices. That holds in good times and bad. Right now carriers can’t be too choosy, so they will put up with bad practices in order to meet payroll and make truck payments. That will end when the economy recovers.
I think we are all in violent agreement.
Almost all shippers I work with tell me that they consider more than just price when procuring transportation. There is, however, always disagreement around the edges on how much it counts, how to make trade-offs, etc. A major limiting factor here is the data the shipper has to actually make decisions. One key reason why a shipper might select only on price and compare to the amount paid in the past is that that is often the only information they keep. Very very few shippers capture (and even fewer archive or mine) the operational data such as: waiting time, time to load/unload, etc. Getting level of service data is even harder – tracking on time, within window, etc. might be recorded at time of the incident, but it is rarely rolled up and matched to the other transactional data elements.
Interestingly, in some recent studies that I have run with a shipper that actually collects very detailed on-time and temperature performance (all reefer) I found that there is next to no relationship between price and level of service. No matter how you define it or measure it, we found little correlation between service and cost. In fact, when we did find any relationship, it was negative – implying that better service costs less!
While this appears to be counter-intuitive, I think it is explained by the gap between the carrier’s pricing team and their operational execution team. This also could explain why the “carrier friendly” actions a shipper undertakes (that may help the operational folks) does not translate into different behavior by the pricing team on the next bid. And this gap, of course, resides in many shipper’s organization when the central procurement team runs the bid rather than the transportation organization.
While the negative relationship between service and cost seems counter-intuitive, it really isn’t. It speaks directly to the goal of ‘Network Alignment’. Conventional wisdom has us believing that we must pay more for better service. In transportation, that is not always true. Especially when optimizing transportation services, such as a transportation procurement event.
Simply put, a carrier that has empty trucks in the vicinity of a shippers pickups will not only be able to offer better pricing (less deadhead and a better network fit), they will, in practice, give better service (better on-time percentage, and better accept/reject ratio). This is the whole idea behind ‘Network Alignment’. If a carrier understands their network, they can offer more realistic pricing. Where their network is a good fit to the Shipper’s network, their pricing should reflect that.
Some of the recent articles I’ve seen about Transportaton Procurement, in my opinion, miss the point. It is not a question of whether a shipper should or shouldn’t bid in this market. They should. It is a question of how that bid is conducted. Think long term, strategic gains, over short term ‘rate shopping’. A procurement event executed properly with the right objectives will benefit both shippers and carriers.
My prediction for 2010 is that the big story will be the ‘Inability to Execute’. This will be due to the excessive bidding occurring today simply to take advantage of market rates. Many carriers will not survive, and those shippers that switched carriers to get a better rate are really just buying themselves execution problems. Carriers that don’t understand the freight will undercut those that do understand the freight. Lower rates are often not really lower, they’re just not realistic.
A procurement event is the right thing to do, but carrier selection needs to focus on ALL objectives: Capacity, Price, long term Carrier Relationships, Ability to Execute, Service, etc…. If a shipper doesn’t go to bid now, and the market does turn around, they will not have secured the necessary capacity for the upturn. When things turn around, a carrier is more likely to raise rates on the shippers they currently haul for, rather than to switch shippers. So shippers do still need to secure that capacity.