A common sentiment shared by most transportation managers is that each claims to have the lowest carrier rates. Most shippers achieve some level of base discount and other concessions during carrier contract negotiations. However, they do not know how those discounts compare with other shippers. The reality is that three out of four shippers could improve their transportation discounts by 10% or more.
Imagine the advantage a shipper would gain if it learned that current carrier incentives were in the lower quartile of eligible discounts. What if the shipper also knew the maximum base incentive and specific accessorial discounts for which the company was eligible?
For many years, logistics managers have applied functional and process benchmarking to quantitative areas such as warehousing, inventory control, order processing and customer service. Since transportation accounts for approximately 50% of all logistics expenditures, logistics managers are increasingly directing benchmarking efforts to transportation rates.
Through rate benchmarking, you gain an understanding of best-in-class carrier rate programs, thereby increasing the likelihood of negotiating significant improvements to your carrier agreements.
Basics of Benchmarking
Benchmarking is a core component of business improvement programs. The concept is simple: Monitor your companys internal measurements, and compare this data with other leading organizations. Gaps between a companys actual performance and the performance of industry leaders become opportunities and are utilized to develop improvement plans.
Benchmarking not only includes measuring and improving performance, but also involves evaluating progress and trends over time to achieve target objectives. Effective use of benchmarking enables shippers to enjoy an advantage over competitors now and into the future. When beginning the benchmarking process, it is important to understand the two types of benchmarking: internal and external. While the two types differ, both require the same five steps in order to benchmark successfully.
Internal Benchmarking: Like the name connotes, internal benchmarking does not require cooperation from partner companies, but rather, it is achieved exclusively within the organization conducting the study. Data sources include precedents (current and historical carrier agreements/proposals), internal databases (shipment history and management reports) and employee experience from previous jobs.
External Benchmarking: The most traditional method of external benchmarking is to identify competitors and best-in-class companies with which you want to benchmark. The value for benchmarking partners, of course, is the same benchmarking information your organization seeks.
Step One: Planning
Strategic benchmarking should focus on what causes the organization the most trouble or has the greatest value impact on the customer. Define the area of study and state your objectives. Then, develop your project team, data collection methodologies and other critical success factors. For benchmarking of functional areas of the operation, the particular process to be studied should be documented and flowcharted. Finally, decide what and against whom you need to benchmark. Thus, youll also identify potential benchmark partners.
Step Two: Data Collection
Data is at the core of effective benchmarking. In order to measure performance, robust internal and external data collection is required.
Internal Data: Develop a database of your companys historical shipments to better understand the impact of rates and charges. The database can later be used to model the impact of benchmarks applied to your actual distribution. Collect proposals and final contracts for all incumbent carriers. Finally, gather carrier invoices, management reports and service audits.
External Data: Create a survey for benchmark partners that solicits rate, service usage and contract information. Use strategies such as ranges and yes or no questions to circumvent direct disclosure of rate information.
External resources for benchmarking also include industry associations, networking groups, research studies and white papers, consultants, universities, government data, industry periodicals, libraries and online databases.
Step Three: Analysis
You cant improve what you cant measure. Chart your organizations results against internal and external benchmarks. Like any other measurement, rate programs can be compared and mapped within upper, lower and middle quadrants.
Consider shortcomings as both opportunities for improvement as well as watermarks for which to continuously aim. Measurements in which you lead the benchmark group validate your position as best-in-class. The specific aspects of contract pricing that you should benchmark include rates, service usage and contract terms.
Transportation Rates. For a thorough evaluation, benchmark discounts by service level, zone and weight. Industry benchmarks should include your competition, especially if volumes and expenditures are similar. Moreover, benchmark accessorial and oversize charges, rebates, earned discounts, fuel surcharges, guaranteed service refunds, bonus weight and other carrier incentive programs.
Transportation Service Usage and Performance: Benchmark weight, delivery density, parcel dimensions, commercial/residential mix, air/ground percentages as well as inbound/outbound and third-party percentages. Benchmark companies that single source as well as those that multi-source. Benchmark on-time deliveries, damaged/lost shipments and other performance measurements.
Transportation Contract Terms: Areas to benchmark include revenue bands, rolling averages, minimum shipment charges, contract length and payment terms.
Step Four: Recommendations/Implementation
Once youve identified realistic opportunities for improvement, implement the action plans with the greatest impact. Your analysis may have identified a gap between the contract term (one year) and those of your benchmarks (an average of 2.5 years). Other gaps might include specific base incentives and accessorial concessions.
Armed with benchmarking information, you are now prepared to request similar discounts and terms from the carrier. It is the ability to target a carriers rate response that makes benchmarking so invaluable.
Step Five: Monitoring
Monitoring entails the ongoing evaluation of the benchmarking processes undertaken and the results of the improvements against objectives. It is important to document success criteria plus overall efficiency and effectiveness in order to accurately gauge whether your company is, indeed, obtaining its objectives. In the case of transportation rates, quantify the savings realized as well as the savings potential if a gap still exists with best-in-class programs.
Benchmarking can be a lengthy process. Involve senior management early on to ensure you have resources and the ongoing commitment required to execute strategic benchmarking programs. Be careful not to spend too much time on one part of the process at the expense of other key elements.
Moreover, do not expect to find benchmarking partners comparable in all respects to your organization. Utilize benchmarking results wisely by implementing the improvement programs that make the most sense to your company.
Shippers within all pricing quadrants benefit from solid transportation rate benchmarks. Shippers in the lower quadrants should significantly improve their carrier pricing, while shippers with best-in-class pricing programs can focus on other areas of their operations, knowing they have secured the best transportation rates available.
Now that You Have Your Benchmarking Information, Heres How to Use It
Do you feel that your carrier representatives have the upper hand when it comes time to negotiate a new freight contract? If so, you are not alone. Most transportation managers dont have the tools and information they need to effectively negotiate new contracts and reduce costs.
After the benchmarking process, in which you should gain a thorough understanding of your shipping expenditures, is complete, one of the most effective things you can do is initiate the renegotiation process. This will allow you to establish the goals of any new contract. We always recommend that shippers begin by telling the carrier that they want to lower transportation costs and improve the service they receive from the carriers. Too often, shippers spend time trying to minimize carrier increases instead of focusing on broader cost reduction.
If you take charge of the process and state your savings goals, you will more than likely influence the carrier pricing before it gets presented. You can tie these cost concerns into broader corporate cost savings goals and make the focus your companys bottom line and not the carriers margins.
Your agenda should also target many other important concessions that sometimes get overlooked, such as carrier provided packaging, modal optimization, automation, electronic invoicing, service guarantees and other value-added carrier solutions. By setting your own negotiation schedule, you will have the opportunity to implement any new contract at the peak of your shipping. This will allow you to start any new contract at the top incentive tier, which will maximize revenue incentives.
Getting the Most for Your Money
With accessorial charges accounting for up to 40% of total freight charges, it is now even more essential to know the slightest details of your expenditures. Currently, there are over 80 carrier add-on charges. Quantify which accessorial charges impact your company the most, and try to negotiate waivers or reductions. Regardless of what your carrier representatives tell you, ALL accessorial fees are negotiable.
To increase the leverage you have over your incumbent carrier, you should open up the negotiations to all carriers. Too often, shippers get locked into a proprietary relationship with a specific carrier, and they dont adequately explore alternatives with different carriers. While it is not always easy to switch carriers, today, all the major carriers offer a full range of services that should meet your requirements. It is important to establish service standards and be objective when comparing the carriers.
An effective way to compare carriers is to implement a shipping trial with a prospective carrier. This allows you to develop a service track record and puts your incumbent carrier on notice that you are actively negotiating with another carrier. It is important to notify your incumbent carrier ahead of time and explain the rationale of the trial. The trial should be representative of your volume and should run at least 30 days.
Dont Forget to Follow Up
Throughout the year, track and monitor your expenditures to determine whether or not you are hitting the revenue targets in your contract. If your revenue is trending upwards, make sure any new contract rewards you for the additional revenue you have given your carriers.
Since shipping rates and contracts are fluid and market-driven, it is also important that you follow industry trends. When carriers are introducing new services and trying to expand market share, their pricing tends to be more favorable. When the carriers are focused on earnings and margin improvement, pricing tends to go up. If you can take advantage of these cycles, you can really impact your bottom line by locking in long-term, lower rates.
We recommend that transportation professionals attend industry conferences, follow financial analysts reports and sign up for e-mail updates from all the carriers. There are also numerous industry publications that will give you significant industry changes.
Additionally, share information with the carriers. Typically, non-incumbent carriers dont have the same knowledge of your traffic as your existing carrier does. It is crucial to develop a representative shipping database that provides the carriers with shipment-level detail. This information allows the carriers to extend their deepest discounts and offer you a contract and rates that match your unique shipping characteristics.
The carriers have sophisticated pricing models that take into account factors such as pick-up and delivery density, weight, zone, commercial/residential destinations, etc. The carriers all try to extend pricing that reflects their cost to serve along with a profit margin.
A Constantly Changing Landscape
With UPS, FedEx and DHL all acquiring new services and capabilities, look to see if you cant offer your carrier new opportunities with additional shipping areas such as expedited mail services, LTL, or international freight forwarding. Sometimes, it isnt as much about the revenue, but the willingness to let the carriers handle new business.
To achieve the best results, negotiations should be collaborative. Make sure that you have ongoing dialogue with your carriers so that they always know what your requirements are, and you know what their capabilities are. We have also found that it pays dividends when shippers develop good carrier relationships and high level contacts before beginning any negotiations. Finally, remember that negotiations are not an event, but rather a process that requires your ongoing commitment.
Tim Sailor is the founder of Navigo Consulting Group, which specializes in contract benchmarking, distribution analysis and carrier negotiations. Since 1995, Navigo has reduced its clients shipping costs by more than 30%. Mr. Sailor was recently recognized as a Distinguished Logistics Professional by the American Society of Transportation and Logistics, Inc. and has been in the transportation industry for over 20 years. He can be reached at 562-432-2299 or tsailor@navigoInc.com