As e-commerce surged and parcel excess capacity dried up in mid-late 2021, the focus of many shippers shifted. For years, the primary goal (and, in many cases, the only goal), of carrier negotiations was hard-dollar cost savings. Shippers consolidated their spend to squeeze an extra 0.5% in savings in exchange for what the carriers described as “loyalty.” And it made sense. In that environment, carrier diversification wasn’t just a risk mitigation strategy; it was a survival tactic. I know of many shippers of all sizes whose capacity was throttled, or who had been forced to swallow double-digit cost increases. Or, in some cases, both. I know of one $300M shipper who was given 30 days’ notice that they would need to find a new home for 15% of their business. Imagine having to find a home for nearly $50M of volume with less than a month’s notice. While this shipper had other carriers in their stable, none were hungry for new business at that time, so not only were they faced with the disruption of making acute operational changes, but they had to do so at a hefty cost.
But by mid-2022, the desire to diversify seemed to cool somewhat. Capacity had come back. And as a result, pricing pressures had eased. The focus was back on savings, and shippers interested in discussing carrier diversification dropped to less than 50% again.
Then came the prospect of a Teamsters strike and the potential of a UPS service disruption or even work stoppage. FedEx made good use of this risk in a heavy marketing and sales push in early 2023. Suddenly everyone wanted to diversify, though sadly, some came to the realization far too late to mitigate risk in any meaningful way.
Do you see a pattern here? Shippers swing back and forth between savings and diversification as if it’s a binary choice. While that may have been true at one time, seeing savings and risk mitigation as mutually exclusive goals now is a false dichotomy. Today, you can have it all.
But there are some things you need first:
- Flexibility with your national carrier – Whether in the form of minimum commitments, early termination penalties, primary carrier clauses, or just plain old revenue-based discounts, carrier agreements have become more restrictive. Carriers have become quite skilled at corralling shippers and forcing them to stay “loyal.” Whether through an amendment to your existing agreements or a sourcing effort, you need to ensure that your agreement language aligns with your objectives.
- Density – As the customer, your needs are paramount in the customer/vendor relationship. However, if you expect a carrier to service a portion of your business out of kindness, you’re being unrealistic. To make a piece of your business viable, both the margin and the net revenue must be at least somewhat compelling. This means that each carrier must be able to secure a sizeable enough piece of business — and that business must be sufficiently profitable. Both must be worthwhile. Awarding a carrier 2% of your business does neither you nor the carrier any real benefit.
- Operational considerations – Having multiple carriers in a single facility requires the dock space to accommodate the necessary pickups and the ability to sort and segregate shipments or load pre-positioned trailers. Moreover, it requires the technical knowledge and staffing to perform this sort in a live environment without disrupting the line.
- Technology – Most shipment execution solutions today can accommodate multiple carriers. But the flexibility of carrier and service selection is important. Many solutions today allow for rate shopping, which is the starting point you need. But having the ability to dial in the selection based on geography, transit, and even manually will give you strategic optimization, not just tactical optimization.
What are some of the benefits you can expect from a carrier diversification strategy?
- The biggest is probably the most often overlooked: cost savings. Some carriers are stronger than others in specific geographical regions, in residential versus commercial, in returns versus outbound, ground versus air, etc., and their pricing proposals should reflect this. Over time improvements in TMS rate shopping, a greater number of regional and niche carriers, and shippers’ growing unwillingness to use suboptimal services in the interest of single sourcing, have forced carriers to accept carrier diversification as a fact of doing business. While the national carriers will undoubtedly object, choosing carriers and services that provide the highest value must be the deciding factor.
- Pricing isn’t the only area where carriers differentiate. Regional carriers often provide transit advantages for specific geographical areas. Evaluating both the transit and the cost and, more importantly, executing on that understanding often allows for improved average transit time and cost reduction.
- But the biggest reason to diversify your carrier mix is risk mitigation. Now that the UPS / Teamsters situation is behind us, many shippers will put diversification back on the shelf. But insurance isn’t there for the problems you see coming. Insurance, like diversification, is there for situations that come out of the blue. When capacity gets tight again, and it will, having safety valves through alternative and redundant carriers is the best strategy to weather the storm.
These are just some considerations that need to factor into your carrier strategy. Every shipper is different, so every situation brings various factors and optimal solutions into play.
Joe Wilkinson is VP, Professional Services (Transportation Consulting) at Intelligent Audit. He can be reached at email@example.com.