During tough economic times, long established practices tend to come under scrutiny as companies search for ways to gain a competitive edge. This is one reason why freight managers in Europe are reviewing a practice that has been part of their industry for many years: allocating all the cargo in a lane or other operational areas to a single carrier.
Another approach is to employ multiple carriers in each lane to mitigate risks such as an unexpected capacity shortfall. This alternative strategy appears to be gradually gaining ground in Europe.
The traditional rationale for the one-carrier strategy is that dealing with a single provider is more convenient and less cumbersome than managing many partners. Also, there is a common misconception that giving all freight to one provider will yield the lowest absolute spend. The argument is particularly relevant in Europe where there are numerous middlemen such as forwarders and agents. Another justification is that sole providers find it easier to deliver on performance metrics, because having full responsibility for all cargo movements gives them a holistic view of that part of the network.
The economic downturn in Europe and associated market volatility, coupled with the availability of advanced transportation management system (TMS) technology, has exposed weaknesses in these arguments.
Freight managers have become much more vigilant as margins are squeezed in sluggish economies. At the same time, TMS technology is highlighting service gaps that went unnoticed before. For example, previously a local carrier could add an excessive charge with relative impunity; now these practices are coming to light as European shippers increase their usage of TMS-based invoice audit controls and business intelligence tools.
As managers gain more visibility into their networks, they are realizing that having at least two carriers on a lane creates a more competitive – and less risky – environment. The availability of secondary carriers encourages incumbents to be more transparent about their own performance, and makes the price of failure less onerous, because back-up capacity offers other options in emergencies. Transportation managers are also coming to the conclusion that the price benefits of sticking with one provider are often illusory; even if they extract better terms from a main provider, hidden charges can quickly erode the cost advantage.
A strategy many managers are introducing – and one that we recommend – is to split their loads, say, 70/30, between a main and a back up partner. Dividing the business in this way spreads the risk and provides enough cargo to make the arrangement worthwhile for the secondary provider.
Timing is also important. As European shippers have discovered, it is difficult to transition to a multiple carrier model when capacity is tight and carriers are committed to moving loads for other customers. Yet there is a temptation to make the switch during these periods when the pressure to control costs and secure capacity is intense. In general, it is much better to make the change as part of a long-term freight management strategy, rather than a stop gap measure in response to short-term market demands.
In some cases, the single carrier model still makes sense. Examples are where specialized equipment is required, or where the shipper is relatively small, and is better advised to stay with one provider to get the best price (although it should be noted that while aggregating freight does yield benefits, the economies of scale can quickly erode).
Still, even when market conditions improve and there is less pressure to find alternatives to traditional practices, the chances are that those European transportation managers who have adopted multiple-carrier purchasing models will stick with the strategy.
Managers who adhere to the traditional approach should at least consider the alternative, or risk losing ground to competitors that are diversifying their strategies.