Four strategies for moving beyond “price” and finding “value”
In my recent blog regarding Truckload Procurement Exercises, we reviewed the seemingly counterintuitive idea that buying too low when it comes to carrier rates is a costly strategy. The idea is simple: if carriers are locked into what they perceive are unprofitable (or simply less profitable) rates, they are likely to accept tenders from other shippers with whom they have better rates. As a result, shippers end up dealing with the fallout from route guide leakage — the higher pricing and non-priority service levels they typically get from Tier 2 and 3 carriers.
So, what should shippers do to make sure they are getting both a fair price and the benefits of high-value, fully integrated relationships with their primary carriers?
We suggest a process that we call Strategic Truckload Procurement. It includes the following elements:
#1. One year cycles
One premise presented in our first blog on Truckload Procurement exercises is that attempting to “time the market” and buy low is analogous to a day trader attempting to time the stock market. It usually results in a net loss. So, if we accept that timing the market is a bad idea, when exactly should a shipper conduct a procurement exercise?
The answer we want to put forward is pretty simple: conduct an exercise annually.
Nearly every organization in the western hemisphere — including corporations, small businesses, government agencies, schools and hospitals — develops an annual business plan. Leaders of every organization review financial information and outcomes from the previous year and make adjustments in budgeting, headcount, capital equipment and other key areas. Then, they tend to, at least loosely, follow that plan for the following year.
Conducting an annual review achieves two important things. First, it gives carriers the comfort and knowledge they need to work a shipper into their annual plan they know that they will not be locked into a bad situation for en extended period of time. It can help influence what equipment they make available, how many drivers they hire and where they plan to commit their resources. If carriers can plan ahead for 12 months, shippers have a better chance of getting superior service.
Secondly, it gives shippers some of the same comfort levels and knowledge they need to develop their annual plan. Reviewing rates and carrier options every 12 months also lets shippers get a sense of what the real, long-term, sustained pricing levels are going to be. With a plan in hand, carriers are far more likely to “tough out” unfavorable market changes and continue to accept loads and provide quality service.
Committing to a 12-month procurement strategy also helps prevent against the temptation of “timing the market” and trying to capitalize on short-term fluctuations in market fluctuations.
Use a benchmarking tool, such as the one offered by CHAINalytics Model Based Benchmarking Consortium (MBBC). This helps set expectations for both service providers and shippers. Service providers are always going to want a higher rate and shippers are always going to want a lower rate. The idea here is to think in terms of what the market rate is. While neither shippers nor service providers will initially propose or want the market rate, it is a fair compromise for both parties. It is also a realistic guideline of success.
#3. Strategic quarterly reviews
Committing to an annual plan and working with carriers to review pricing on a 12-month cycle tends to deliver sustained, long-term value for both shippers and carriers. However, even freight networks that are considered highly stable fluctuate over the course of a year.
If these changes cause persistent deadheading problems for carriers, even the most solid and strategic relationships may experience route guide leakage.
So, in addition to the annual plan, a profitable, win-win relationship requires another step — quarterly strategic reviews.
Reviewing changes in the shipper’s annual plan (new suppliers, changes in distribution channels, new product introductions, expansion into new markets, etc.) gives carriers an opportunity to make decisions regarding equipment availability, driver hiring and retention and other key issues that affect their ability to serve the shipper.
Essentially, these reviews give the carrier exposure to the deeper supply chain within the shipper’s organization and may very well prompt business decisions (new equipment, new drivers, expanded coverage, etc.) that could greatly benefit the shipper. They also provide an opportunity to drive discussions that focus on quality measurements and real savings, instead of costs.
#4. Mining business intelligence gold
It is often estimated that half of all TMS systems sold are not being used and much of the software that has been deployed has delivered minimal ROI.
But in deployments where TMS tools are delivered as a service (i.e., web-based, pay only for what you need and use), the embedded business intelligence tools are empowering shippers and supply chain executives like never before.
TMS tools provide our clients with a variety of business intelligence reports, including carrier scorecards, client scorecards, carbon emissions, savings analysis, item and order level reporting, network and ship site performance and overall financial analysis.
Incorporating this kind of intelligence into annual and quarterly reviews with carriers leads to two important outcomes. First, it allows you to work with hard data, rather than anecdotal information or disconnected data. So, business decisions are better-informed. Shippers can compare real costs, to historical costs and planned costs in an effort to optimize their networks and track routing guide leakage.
Second, it gives carriers the insights they need to do a better job of serving the shipper. They can use business intelligence from the shipper’s network — as well as benchmark data from similar networks — to establish clear performance metrics.
In summary, we view an annual Strategic Procurement Process combined with benchmarking and a strong TMS as the ideal model. It gives both parties stability over a reasonable timeframe, yet is flexible enough to accommodate changes over time.