Executive Briefings

Procurement to Transportation: We Are Here To Help You

Analyst Insight: Procurement has made steady progress in playing a more important role in the preparation and solicitation of transportation RFQs and carrier negotiations. This trend is good in those instances where transportation is viewed and managed as a commodity. However, in companies where transportation has a more strategic role and thus greater impact on the organization, procurement peers often do not have the depth of understanding needed to navigate the economics and operational distinctions found in transportation. - Karl B. Manrodt, Professor of Logistics and Supply Chain Management, Georgia College & State University

Procurement to Transportation: We Are Here To Help You

For the past 24 years, Dr. Mary Holcomb and I have studied trends and issues in the transportation sector. Over the past few years, the data have indicated that more procurement professionals are responsible for negotiating with carriers. In 2015, nearly 18 percent were involved in preparing solicitations, compared to 9.8 percent in 2014. Procurement was involved in carrier negotiations 14.6 percent of the time in 2015, compared to 7.4 percent in 2014. Yet, buying transportation services is unique. Your shipping needs will impact the carrier long after freight is left on your customer’s dock. To avoid some common pitfalls, procurement professionals need to be reminded of the unique differences found in this sector.

Not all locations are the same. Usually, pricing of services or products is not location-sensitive. A ream of paper in Chicago will be about the same price in Atlanta.& Not so for transportation assets; pricing (and value) are significantly impacted by where the truck, train or plane is at the completion of the shipment. A truck in Chicago has a different value than the truck in Atlanta, Albuquerque, or Amarillo depending on the day of the week, month and/or season. Just like real estate it’s all about location, location, location.

Not all lanes are the same. You may be shipping products to a market, and think that is the end of the transaction. A transportation firm has to reposition the asset to another market to earn money. If the freight destination is Albuquerque, what freight can be moved out of that area? If there are few opportunities, the cost of transportation has to go up to account for the imbalance of freight flows.

Direction matters. Pick two different origin–destination pairs, such as New Orleans to Chicago and Chicago to New Orleans. While they seem to be the same in terms of mileage – they are vastly different for a transportation provider. There is a lot of freight going into New Orleans, but not a whole lot coming out. Transportation rates will be different based on where the asset is headed both front- and backhaul. Empty miles impact everyone’s rates.

Know what you are buying. If procurement asks carriers for their lowest price – that is exactly what they will get. When a buyer asks for something that violates the four pages of assumptions used to derive the lowest cost, expect to pay for it.  This isn’t the carrier’s fault; carriers have been incentivized to quote the lowest price.

It’s all about risk. Every shipment moved by a carrier involves risk. Risks like not having a backhaul, or having a driver be idle for too long. Finding ways to help them reduce their risk will reduce your costs.

The Outlook

Procurement’s involvement in the transportation field is rapidly growing, and it is doubtful this will slow down. Transportation professionals should be proactive in communicating and educating their peers as to the discipline and all the variables that impact pricing. Getting ahead of the trend with solid education and communication will pay dividends. It pays to play nice, especially with your procurement team.

For the past 24 years, Dr. Mary Holcomb and I have studied trends and issues in the transportation sector. Over the past few years, the data have indicated that more procurement professionals are responsible for negotiating with carriers. In 2015, nearly 18 percent were involved in preparing solicitations, compared to 9.8 percent in 2014. Procurement was involved in carrier negotiations 14.6 percent of the time in 2015, compared to 7.4 percent in 2014. Yet, buying transportation services is unique. Your shipping needs will impact the carrier long after freight is left on your customer’s dock. To avoid some common pitfalls, procurement professionals need to be reminded of the unique differences found in this sector.

Not all locations are the same. Usually, pricing of services or products is not location-sensitive. A ream of paper in Chicago will be about the same price in Atlanta.& Not so for transportation assets; pricing (and value) are significantly impacted by where the truck, train or plane is at the completion of the shipment. A truck in Chicago has a different value than the truck in Atlanta, Albuquerque, or Amarillo depending on the day of the week, month and/or season. Just like real estate it’s all about location, location, location.

Not all lanes are the same. You may be shipping products to a market, and think that is the end of the transaction. A transportation firm has to reposition the asset to another market to earn money. If the freight destination is Albuquerque, what freight can be moved out of that area? If there are few opportunities, the cost of transportation has to go up to account for the imbalance of freight flows.

Direction matters. Pick two different origin–destination pairs, such as New Orleans to Chicago and Chicago to New Orleans. While they seem to be the same in terms of mileage – they are vastly different for a transportation provider. There is a lot of freight going into New Orleans, but not a whole lot coming out. Transportation rates will be different based on where the asset is headed both front- and backhaul. Empty miles impact everyone’s rates.

Know what you are buying. If procurement asks carriers for their lowest price – that is exactly what they will get. When a buyer asks for something that violates the four pages of assumptions used to derive the lowest cost, expect to pay for it.  This isn’t the carrier’s fault; carriers have been incentivized to quote the lowest price.

It’s all about risk. Every shipment moved by a carrier involves risk. Risks like not having a backhaul, or having a driver be idle for too long. Finding ways to help them reduce their risk will reduce your costs.

The Outlook

Procurement’s involvement in the transportation field is rapidly growing, and it is doubtful this will slow down. Transportation professionals should be proactive in communicating and educating their peers as to the discipline and all the variables that impact pricing. Getting ahead of the trend with solid education and communication will pay dividends. It pays to play nice, especially with your procurement team.

Procurement to Transportation: We Are Here To Help You