Are you surprised by how regularly you have to educate people on the dynamics of a truckload market? We often see many shippers spending time educating their internal constituents on the subject. This dynamic isn’t new, but it can still be more than frustrating; it can throw a transportation management strategy off track.
How many times have you seen or experienced this scenario: A senior manager walks into your office and wants to know why your transportation spend is 5% more than a year ago. You agree that year-on-year costs are indeed up by 5%, but relative to competitors and market performance expenditures have actually gone down slightly. The manager eyes you skeptically, so you proceed to explain how the truckload market has tightened over the last 12 months and rates have climbed. Thanks to some ingenious efficiency measures you cooked up in collaboration with a few core carriers, your overall costs are extremely competitive. The argument does not sit well with the manager, and he suggests a meeting to go over the figures.
Sound familiar? First, let me state that I know that many of you reading this blog are intimately familiar with the workings of the truckload market. I get that. My point is how frequently we still find ourselves educating people on the fact that truckload pricing is market-driven. No one can indemnify you from a market. Yet in my experience, people outside of logistics or transportation functions often assume that truckload transportation is a commodity; a widget that is picked off the shelf and priced according to some standard tariff schedule. These folks do not appreciate that truckload is a complex market where prices vary in response to a host of economic and industry factors. This is why simple year-over-year comparisons of costs can be so misleading.
A simple review of the Stephen’s index can help you educate non-transportation or logistics managers. The Stephens index is a price index measuring the average loaded rate per mile (RPM) charged to a group of publicly held truckload carriers in the US. It also does a nice job portraying the changes in this demand over time. See the chart below as an example:
The report clearly highlights the ebbs and flows in demand (the higher the demand, the higher the rates). Reports like the Stephen’s Index, or even truckload benchmark reports, can help non-logistics managers see the changes in the truckload market. Similarly, logistics managers can use these reports to highlight performance in a different way. For example, if the market is up 7% and your costs are only up 5%, then arguably your organization is outperforming the market.
Of course, there are other year-over-year freight characteristics managers should examine before celebrating savings or getting upset about increases. Specifically, managers must remind internal constituents that freight networks change. Metrics such as length of haul, average weight on a truck, or even total volume can point to other changes in your network that drive your total spend. Again, I know most folks reading this blog understand that. However, arming yourself with a good transportation management system (TMS) and business intelligence tools can really help you educate a broader audience.
This problem of changing market conditions can create significant issues when a new TMS or 3PL engagement is predicated on a specific ROI, and the promised returns do not seem to materialize after implementation. The real cause of the “failure” is not that the system is flawed or oversold, but a shift in the market that has altered the parameters of the deal. Perhaps the contract was signed when truckload capacity was loose, and a year later the situation is reversed. The underlying strategy remains sound, but appears to be failing because nobody bothered to explain to the shipper client how market conditions can change.
Such misunderstandings can also complicate efforts to cut costs. Many of the savings plans I see are process-driven. A good example is a mode optimization study that looks at basic inputs such as lead times, origins, and destinations, and identifies opportunities for switching from truck to intermodal.
Standard improvements like these can also be achieved in truckload procurement, by automating the tendering process, for example. But the market structure of truckload means that shippers can go further by capturing savings through market-driven cost reduction actions based on the interplay between supply and demand. An example might be changing the mix of carriers in a route guide because capacity is in short supply on certain lanes. However, if these market machinations are not well understood, it can be difficult for a logistics manager to explain how market-driven strategies can actually improve network efficiency when the year-on-year figures indicate otherwise.
How can this educational barrier be overcome? Better communication is a good starting point. Take every opportunity to educate outside constituencies about truckload markets. As mentioned above, indices such as the Stephens Index are useful educational tools.
Use smart business intelligence tools to generate detailed reports on how your network is performing. An advanced TMS should include metrics that relate how you are doing year-on-year as well as by lane relative to the marketplace. Perhaps you have set your own performance benchmarks, in which case the analytics can use these for comparisons. Distribute these reports – perhaps with explanations – when cycles change or you anticipate questions about an increase in costs.
The more your peers know about the truckload market the less likely they are to misjudge the way you are managing freight operations. And wouldn’t it be nice if non-logistics folks knew that although transportation bills are higher this year, in relative terms the company is outperforming the market thanks largely to your interventions.