Is procuring truckload transportation any different from the procurement activities of other corporate functions or industries?
The answer is yes. Which begs the second question: why does it matter? There are at least two reasons why it is beneficial to be aware of these differences. First, understanding the nature of buying truckload transportation helps you to make more informed purchasing decisions. Second, the knowledge can be used to educate the procurement profession about the unique demands of the truckload industry.
The latter point is particularly relevant when a centralized procurement function that is responsible for streamlining all purchasing activities is involved. This has become more important over recent years as companies have widened the jurisdiction of procurement departments in an effort to cut costs in every corner of the enterprise.
The problem is that non-freight procurement professionals might not be sufficiently familiar with the demands of logistics management. In addition, some transportation managers are not adept at communicating the intricacies of their jobs. The result can be the imposition of cost savings that are actually counterproductive (for more on this see the blog Bridging the Transportation/Procurement Divide, October 2010).
A characteristic that truckload shares with other forms of procurement is the fundamental need to achieve the best total cost of ownership for services and/or goods that are delivered on time, at the right location, and in the right quantity. As we have argued a number of times in this blog, procuring truckload transportation this is not just about securing the lowest-priced capacity; it is about buying into a total service package from a provider that is aligned with your goals (see Are You Managing the Right Negotiations?, February, 2011).
So what makes truckload procurement unique? Here are four features that set it apart from the function in other departments or industries.
Unlikely though it may seem, it is almost perfect. The idea of a perfect market is largely theoretical, but truckload comes close to fitting the required textbook profile. For example, just like a perfect market truckload has numerous buyers that individually find it difficult to sway the market price, even when they are large players. Also, both entry and exit barriers are relatively low, and the participants – carriers and shippers – have access to the information they need to make purchasing decisions.
Buyers’ market muscle is weak. Truckload is very fragmented and is not amenable to economies of scale, making it difficult for buyers to strike a better deal by leveraging their size. This particular feature often puzzles outside procurement professionals who operate in more regular markets.
Maverick structure. There are many ways to describe the truckload market but “typical” is not one of them. There are for-hire and private carriers that offer distinctive types of services. Companies use various criteria to decide which service variant is the most appropriate for their business.
Unusual contracts. When a procurement manager enters into a contract with a supplier, he or she generally expects that vendor to stick to the agreed price and volume terms. Not so in the truckload space. There is often no mutual commitment on volumes for the duration of the contract, although prices are usually set on a lane-by-lane basis. And there is no guarantee that the carrier will continue to transport the loads if business conditions change, as they often do.
In many ways it’s nice to be different. But it is also important to understand why you are distinctive in order to avoid costly misunderstandings.