With capacity tightening, the pendulum has swung in carriers’ direction. But there are still ways in which shippers can cut costs and assert control over transportation.

For shippers seeking transportation services, the good old days are gone. Two or three years ago, when capacity was plentiful, they had their pick of carriers. Contracts were mostly awarded on the basis of price. In short, shippers called the shots. Not anymore. All that excess capacity has dried up. Shippers today are lucky to find enough truck, air, rail and ship space to get their products to market.

Their options limited, shippers face rising freight expense and unhappy customers, who can’t get their shipments on time because of severe bottlenecks in the system. But the news isn’t all bad. There are still ways to manage cost while ensuring a steady pool of quality carriers. The answer lies in a fresh approach to transportation procurement.

Carriers might seem to be in the driver’s seat, but they have a host of problems with which to deal. They were already facing driver shortages, higher insurance costs, new emissions standards, and the rising cost of steel for trailer and container manufacturing. Throw in the new hours-of-service regulations for truckers, a huge upswing in demand caused by economic growth, and soaring fuel prices, and you have a situation that no shipper would envy. In the end, everyone suffers.

It’s only natural that carriers would demand rate increases to offset those problems. Some will go too far, seeking payback for years of getting beaten down on price, and anticipating an eventual swing of the pendulum in favor of shippers. But industry experts say both sides have a chance to break the cycle, in favor of a more cooperative, and mutually beneficial, approach.

New procurement strategies can help kick off a change in attitude. It begins with a fresh look at the process of bidding. The birth of electronic marketplaces, around the turn of the last decade, prompted shippers to embrace internet auctions for transportation services. Carriers and other vendors naturally balked at the use of a medium that they viewed as little more than a means of slashing rates.

At a time of tight capacity, shippers are keen to avoid stringent penalties imposed by their customers, especially in the retail industry, for late deliveries and other missed targets.

Carriers, meanwhile, are more willing to consider internet portals because they lead to efficiencies such as pre-rated bookings and a lower rate of error in freight rating and payment.

‘Win-Win’ Bidding

Smart shippers are even willing to relinquish the right to dictate how their business gets divied up among carriers, at least in the initial bidding process. Known as combinatorial bidding, the concept is “a good win-win tool.
Its origins hail from other industries, especially finance and telecommunications. In the case of the latter, the technique has been used for auctioning off broadcast frequencies.

In combinatorial bidding, a shipper puts its entire network, or a substantial portion, out for bid. Carriers then can select the specific lanes in which they are interested. Usually that means the ones in which they have the best or most cost-effective operations. The practice, or so goes the theory, yields the best carrier for any given route.

A related practice, known as conditional bidding, locks the carrier into a price and route subject to pre-determined conditions, such as the amount of freight actually tendered during the life of the contract. The common element between these techniques is flexibility on the part of the shipper, who cedes a measure of control in exchange for an optimized procurement process.

The use of combinatorial auctions helps ensure that the shipper will receive the service for which it has signed up.

Core Carrier Strategies

The shift in the shipper-carrier dynamic has altered the number of core carriers that might be considered for a job. In recent years, shippers have worked steadily to concentrate more business with fewer carriers, thus obtaining better volume rates. But, with a general tightening of capacity, that practice has become something of a luxury.

Shippers should supplement some of their national contracts with regional specialists, who might possess strengths that can’t be matched by larger rivals with greater geographic scope.
In addition, the dispersal of business among several carriers can help to guard against supply interruptions caused by natural disasters, labor unrest, surges in demand or even terrorist attacks on the transportation system.

Carriers & Culture

Transportation may have turned into a seller’s market, but the old rules of carrier selection still apply. Shippers shouldn’t be so desperate to book capacity that they abandon good judgment. Selecting the right provider is the most critical element in the success of a transportation program. And that means finding carriers with the right “culture fit”.  Not only must shippers’ and carriers’ needs dovetail; the two must share common business traits. A classic “SWOT” analysis is reccomended: examining strengths, weaknesses, opportunities and threats on both sides. In addition, shippers must decide at the outset whether they want to manage transportation in-house, or hand over the task to a 3PL.

A third-party can guide companies through the task of carrier selection. Elements considered for selection include the vendor’s financial performance and stability, to determine whether it can sustain a long-term relationship with the shipper. Other criteria include sophisticated IT capabilities for document transfer and shipment tracking, and a creative approach to problem solving.

Factors involved in picking the right carrier may differ according to mode. For truckers, shippers must assess the stability of a given carrier’s driver pool. It’s also useful to know whether the carrier is using its own employees or owner-operators to haul freight. And financial stability is a particular issue in the trucking industry, which has seen the failure of countless players over the last decade. Shippers making the wrong choice could find their freight locked up in the terminal of a bankrupt carrier.

A Look in the Mirror

Some of the biggest opportunities for improving a transportation procurement program exist within the shipper’s own organization. Years of having the upper hand in dealings with carriers have made many shippers inefficient and lax in their methods. They must become more honest about what freight they have and where. Carriers need to know exactly what business is available before they can intelligently bid on a shipper’s freight. The reliability issue cuts both ways.

Shipper inefficiencies often are the result of bad business practices. Many companies don’t have the requisite information stored in a central repository; it’s parceled out among various departments and might not even be consistent in form and content. On top of that, a shipper might deliberately misstate the amount of freight it has to offer, in order to ensure that it has enough options on hand.

Optimizing one’s own processes reduces carrier costs and makes freight more attractive to vendors.

Certain problems occur even earlier in the process, as far back as the planning of a supply-chain network. Shippers can boost asset utilization by reevaluating plant locations in line with actual freight flows.

3PLs play an important role in optimizing transportation networks. Because they tend to handle larger volumes of freight than individual shippers, and have contracts with a greater number of carriers, 3PLs can cut down on the movement of empty trucks. And they can find ways to satisfy service demands that might otherwise be too costly or unreasonable for carriers to fulfill.

Carriers, too, need to take a close look at their operations in order to provide shippers with the most efficient service possible. Now, carriers are becoming more forthcoming about capacity.

Turning to Inbound

Creative bidding techniques aside, less control isn’t always the answer for shippers looking to overhaul their transportation procurement. Experts urge them to get a grip on one of the most overlooked aspect of transportation: inbound movements. For many companies, that responsibility remains in the hands of suppliers, who choose the carriers, pay the freight, then “bake” the cost into the price of the product.

Managing inbound can yield big rewards because it generally accounts for a larger percentage of total costs than outbound.

No company can manage its transportation spend without closely monitoring vendor performance. Shippers must sit down with their chosen carriers and clearly lay out expectations for service, including the number of shipments in various lanes. Carriers must reveal all of the possible surcharges that could be added to a base rate. That’s a particular problem in the ocean-freight industry, where the final price of moving a container can double once all of the surcharges are factored in.

It takes a high level of preparation to ensure that the parties live up to their commitments, along with good information systems to track order fulfillment every step of the way. But the effort is worth it. What’s promised is what’s given - both sides are more accountable.