Executive Briefings

Customer Pickup Do's, Don'ts: Outsourcing the Transportation Department One Lane at a Time

Although it's not typically regarded as such, customer pickup is a form of outsourcing. It is neither inherently good nor bad. And, like other outsourcing discussions, customer pickup, or CPU, is a fairly polarizing topic that can generate much passionate, if not fact-based, hyperbole. While there is almost never an absolute right and wrong on the subject of CPU, for a given point in time every lane does have an optimal answer that positively impacts the bottom line. Keeping this theory in mind, here is a checklist of CPU do's and don'ts to help be certain that your organization is successfully utilizing CPU the right way and for the right reasons:

1. Think customer backhaul, not customer pickup. A CPU lane should make sense for both parties involved. If a customer is using a lane to get its private/dedicated fleet back home loaded, the total supply chain becomes more efficient. On the other hand, where backhaul rules apply, backhaul rates should also be in place. The goal of a good CPU rate would be to cover 100 percent of fixed and a portion of variable expenses; 70 percent to 80 percent of the average linehaul rate is fair.

Also, if a customer is using a broker to pick up the loads, you can count on three things: 1) the customer is making a profit on the load 2) the broker is making a profit on the load 3) your linehaul rates for that lane probably aren't as good as you think.

2. Not all equipment is created equal. A good deal of time, money and effort goes into creating a load. If that load is optimized based on a 53-foot-high cube dry van, there are costs associated with a carrier showing up with a 48-foot reefer (or, for that matter a 53-foot reefer) that extend beyond a few pallet positions. These range from additional labor for up-stacking, to incremental product damage, to lost sales and increased out-of-stocks. If a customer cannot commit to providing the appropriate equipment every time, the lane is probably not a good candidate for CPU.

3. Beware of the 100 percent solution. The best supply chains are flexible. If a customer wants to convert a lane to 100 percent backhaul, is everyone involved (sales, customer procurement, etc.) prepared to accept a service interruption if there isn't a fleet truck in the area on the appropriate day? Are you prepared to purchase a truck (or 10) at spot-market rates or have pop-up fleets on hand during peak season? Is your customer prepared to foot the bill? If the answer to even one of these questions is "no," consider capping the CPU percentage for a particular lane at 50 percent. While this may not be possible for low-volume lanes, this is the solution that keeps the transportation manager abreast of market conditions while maintaining purchasing leverage and providing the greatest number of alternatives when something goes awry.

4. Don't become a turtle just because carriers are slow. Late deliveries are a fact of life. Companies that espouse on-time performance considerably better than 95 percent are massaging the data, paying a rich premium, or both. When a particular lane is perceived to be experiencing excessive service failure, the outcry to convert to CPU can become deafening. However, the experienced transportation professional will take the time to get to the root cause:

a) Are the loads, in fact, late a significantly higher percentage of the time on this lane? Is this a performance issue or an expectation issue? If it's an expectation issue, CPU may be the way to go.

b) Is everyone working with the right information? Too frequently, standing instructions (e.g., receiving hours) that are outdated or just plain wrong are transmitted to carriers. When this happens, carriers have been set up to fail before they ever receive the load. A relatively simple system update may solve the problem to everyone's satisfaction.

c) Are the late deliveries isolated to one carrier or are multiple transporters having difficulty delivering on time? If late loads are a problem across multiple carriers, there may be an issue with the customer (e.g., remote geography, overly restrictive appointment schedules) that makes CPU a good alternative. If the problem is isolated to one trucking company, understand that there's a really good chance on-time performance is a problem for that carrier on other lanes, as well. Converting to CPU addresses the acute, but not the underlying, more chronic malady.

5. Adding fuel prevents fires. Wild swings in fuel prices are an unfortunate possibility in the modern business environment. Incorporating a scalable fuel-surcharge into the CPU program preserves goodwill and eliminates the potential need to make multiple rate revisions in a relatively short period of time.

6. Flat-rate structures, like flat tires, need to be changed right away. In an effort to minimize the administrative oversight required to offer a CPU service, some companies choose to have a flat-fee program. This is simply a waste of money and does nothing to optimize the supply chain. No matter where the fee is set, lanes that can be done for less will convert to CPU for a profit and everything else will remain "delivered." However, as previously noted, there are some legitimate reasons why CPU may be the best choice on a particular lane. A cost-prohibitive rate created solely for administrative ease has the potential to damage a customer's goodwill and unnecessarily inflate the expenses of both parties' supply chains.

7. Perform preventative maintenance to silence a squeaky wheel. CPU rates need to be kept current and generally reflective of market conditions. Every rate needs to be reviewed (not necessarily changed) on an annual basis, minimally. Anyone who has managed a CPU program for any period has dealt with the private fleet manager from Customer X who calls every 3 months to say that the market rate has changed and he needs his CPU allowance to go up accordingly. However, even if this ever-vigilant individual is correct, one must avoid the temptation to immediately adjust the rates for one lane or a customer-specific set of lanes.

Instead, commit to reviewing a manageable percentage of CPU lanes on a scheduled basis, then stick to it. Whether this is one-twelfth of the lanes monthly, or 25 percent quarterly based on mode, origin geography, or alphabetical order, a pre-set schedule that includes a census-review of CPU rates will ensure that the program remains consistent for all customers, that rates go down as well as up, and that the necessary maintenance (e.g. expiring old rates) is happening as needed. And if a major unforeseen event causes the entire market to shift dramatically, the steward for your CPU program should be empowered to make changes outside of the set schedule. Otherwise, you risk dramatically overpaying for freight or (more likely) getting an excessive amount of freight converted back to "delivered" when securing capacity is at its most difficult.

When CPU is done well, it delivers positive results to the bottom line and fosters a new level of collaboration between supplier and customer. When it is done poorly, it can cripple two organizations and undo years of goodwill. Whether or not CPU is the optimal choice for a particular lane depends on a number of situation- and industry-specific variables. However, like every outsourcing decision, it should only be embraced when it makes sense from a total landed cost perspective, once service risks have been mitigated, and after the short- and long-term consequences are fully understood.

Chris Ferrell is a principal with Tompkins Associates, a global supply chain solutions provider based in Raleigh, N.C. Visit www.tompkinsinc.com

Although it's not typically regarded as such, customer pickup is a form of outsourcing. It is neither inherently good nor bad. And, like other outsourcing discussions, customer pickup, or CPU, is a fairly polarizing topic that can generate much passionate, if not fact-based, hyperbole. While there is almost never an absolute right and wrong on the subject of CPU, for a given point in time every lane does have an optimal answer that positively impacts the bottom line. Keeping this theory in mind, here is a checklist of CPU do's and don'ts to help be certain that your organization is successfully utilizing CPU the right way and for the right reasons:

1. Think customer backhaul, not customer pickup. A CPU lane should make sense for both parties involved. If a customer is using a lane to get its private/dedicated fleet back home loaded, the total supply chain becomes more efficient. On the other hand, where backhaul rules apply, backhaul rates should also be in place. The goal of a good CPU rate would be to cover 100 percent of fixed and a portion of variable expenses; 70 percent to 80 percent of the average linehaul rate is fair.

Also, if a customer is using a broker to pick up the loads, you can count on three things: 1) the customer is making a profit on the load 2) the broker is making a profit on the load 3) your linehaul rates for that lane probably aren't as good as you think.

2. Not all equipment is created equal. A good deal of time, money and effort goes into creating a load. If that load is optimized based on a 53-foot-high cube dry van, there are costs associated with a carrier showing up with a 48-foot reefer (or, for that matter a 53-foot reefer) that extend beyond a few pallet positions. These range from additional labor for up-stacking, to incremental product damage, to lost sales and increased out-of-stocks. If a customer cannot commit to providing the appropriate equipment every time, the lane is probably not a good candidate for CPU.

3. Beware of the 100 percent solution. The best supply chains are flexible. If a customer wants to convert a lane to 100 percent backhaul, is everyone involved (sales, customer procurement, etc.) prepared to accept a service interruption if there isn't a fleet truck in the area on the appropriate day? Are you prepared to purchase a truck (or 10) at spot-market rates or have pop-up fleets on hand during peak season? Is your customer prepared to foot the bill? If the answer to even one of these questions is "no," consider capping the CPU percentage for a particular lane at 50 percent. While this may not be possible for low-volume lanes, this is the solution that keeps the transportation manager abreast of market conditions while maintaining purchasing leverage and providing the greatest number of alternatives when something goes awry.

4. Don't become a turtle just because carriers are slow. Late deliveries are a fact of life. Companies that espouse on-time performance considerably better than 95 percent are massaging the data, paying a rich premium, or both. When a particular lane is perceived to be experiencing excessive service failure, the outcry to convert to CPU can become deafening. However, the experienced transportation professional will take the time to get to the root cause:

a) Are the loads, in fact, late a significantly higher percentage of the time on this lane? Is this a performance issue or an expectation issue? If it's an expectation issue, CPU may be the way to go.

b) Is everyone working with the right information? Too frequently, standing instructions (e.g., receiving hours) that are outdated or just plain wrong are transmitted to carriers. When this happens, carriers have been set up to fail before they ever receive the load. A relatively simple system update may solve the problem to everyone's satisfaction.

c) Are the late deliveries isolated to one carrier or are multiple transporters having difficulty delivering on time? If late loads are a problem across multiple carriers, there may be an issue with the customer (e.g., remote geography, overly restrictive appointment schedules) that makes CPU a good alternative. If the problem is isolated to one trucking company, understand that there's a really good chance on-time performance is a problem for that carrier on other lanes, as well. Converting to CPU addresses the acute, but not the underlying, more chronic malady.

5. Adding fuel prevents fires. Wild swings in fuel prices are an unfortunate possibility in the modern business environment. Incorporating a scalable fuel-surcharge into the CPU program preserves goodwill and eliminates the potential need to make multiple rate revisions in a relatively short period of time.

6. Flat-rate structures, like flat tires, need to be changed right away. In an effort to minimize the administrative oversight required to offer a CPU service, some companies choose to have a flat-fee program. This is simply a waste of money and does nothing to optimize the supply chain. No matter where the fee is set, lanes that can be done for less will convert to CPU for a profit and everything else will remain "delivered." However, as previously noted, there are some legitimate reasons why CPU may be the best choice on a particular lane. A cost-prohibitive rate created solely for administrative ease has the potential to damage a customer's goodwill and unnecessarily inflate the expenses of both parties' supply chains.

7. Perform preventative maintenance to silence a squeaky wheel. CPU rates need to be kept current and generally reflective of market conditions. Every rate needs to be reviewed (not necessarily changed) on an annual basis, minimally. Anyone who has managed a CPU program for any period has dealt with the private fleet manager from Customer X who calls every 3 months to say that the market rate has changed and he needs his CPU allowance to go up accordingly. However, even if this ever-vigilant individual is correct, one must avoid the temptation to immediately adjust the rates for one lane or a customer-specific set of lanes.

Instead, commit to reviewing a manageable percentage of CPU lanes on a scheduled basis, then stick to it. Whether this is one-twelfth of the lanes monthly, or 25 percent quarterly based on mode, origin geography, or alphabetical order, a pre-set schedule that includes a census-review of CPU rates will ensure that the program remains consistent for all customers, that rates go down as well as up, and that the necessary maintenance (e.g. expiring old rates) is happening as needed. And if a major unforeseen event causes the entire market to shift dramatically, the steward for your CPU program should be empowered to make changes outside of the set schedule. Otherwise, you risk dramatically overpaying for freight or (more likely) getting an excessive amount of freight converted back to "delivered" when securing capacity is at its most difficult.

When CPU is done well, it delivers positive results to the bottom line and fosters a new level of collaboration between supplier and customer. When it is done poorly, it can cripple two organizations and undo years of goodwill. Whether or not CPU is the optimal choice for a particular lane depends on a number of situation- and industry-specific variables. However, like every outsourcing decision, it should only be embraced when it makes sense from a total landed cost perspective, once service risks have been mitigated, and after the short- and long-term consequences are fully understood.

Chris Ferrell is a principal with Tompkins Associates, a global supply chain solutions provider based in Raleigh, N.C. Visit www.tompkinsinc.com