Executive Briefings

Revisiting a Shipper's Decision on Transportation Rates

Back in February, I wrote a piece on courage, trust, and patience in logistics where I relayed the following story:

I recently came across a Fortune 500 company that could have saved millions of dollars in transportation costs by putting its freight out to bid. But after much internal debate, the company decided to honor its current rates with carriers. Why? The company knows that capacity will tighten again down the road, and when that day comes, it expects its carriers to maintain their commitments to them and not abandon them for other shippers offering a cent or two more per mile.

Well, that day has arrived. Capacity is starting to get tight again in certain markets and rates are starting to rise. Did this shipper make the right decision?

"The jury is still out on whether our strategy has worked or not," the logistics executive at this company told me last week. "We don't know yet if we are going to have an advantage [relative to other shippers] or if carriers are going to decide that the temptation for quick outsized profits is just too hard to resist. How the carriers respond will 'train' the buyer for the next time this changes."

Over the past few weeks, as the economy has improved and transportation activity has increased, many carriers have started asking for rate increases. "Some carriers are presenting us with good justifications for raising rates," the logistics executive explained, "but others are just sending us letters saying that rates will be going up next week."

CSA 2010 is one of the factors that many carriers are discussing with shippers (see "Shippers, Time to Learn About CSA 2010"). As I wrote back in May: Shippers, if you haven't heard about CSA 2010, you will soon from your carriers. Take the time to learn more about this initiative now. Then schedule your own roundtable discussion with your carriers. But rather than just focusing on this one issue, make it part of a broader conversation on how you can work together to create more constructive and productive relationships as you enter a new cycle of reduced capacity, higher costs, increased regulation, and greater uncertainty. The broader the focus, the more win-win opportunities you will uncover.

Having a "broader conversation" with carriers, however, is easier said than done, according to this logistics executive. Although he has long-term agreements in place with a few carriers, "it's a struggle to get carriers to think long term. I'm willing to discuss different contracting terms and continuous improvement ideas with them, such as putting in price mechanisms that adjust over time and doing things at our end to turn their equipment faster, but when it gets to that second or third meeting, they just don't know what to do. Some carriers just say, 'Tell us what you want to do and we'll see what we can do.'"

Does this mean that many carriers lack the sophistication (management know-how) to engage in more strategic relationships with shippers? Could many carriers be "once bitten, twice shy" when it comes to engaging with shippers in more collaborative ways? I think the answer is a little of both.

And this experience illustrates once again how difficult it is to create vested outsourcing relationships. As I've said before, vested outsourcing (aka performance-based outsourcing) requires a mind shift that will be difficult, if not impossible, for many 3PLs/carriers and customers.

"Maybe when all is said and done, transportation is a commodity after all," said the logistics executive. "I don't believe it is, but most players in the market behave like it's a commodity."

The jury is still out on this shipper's strategy. While we wait for the final verdict, post a comment and share your viewpoint on this topic.

To view this post on ARC's Logistics Viewpoints and join in the conversation, head to: http://logisticsviewpoints.com/2010/07/13/revisiting-a-shippers-decision-on-transportation-rates/

Source: ARC Advisory Group

Back in February, I wrote a piece on courage, trust, and patience in logistics where I relayed the following story:

I recently came across a Fortune 500 company that could have saved millions of dollars in transportation costs by putting its freight out to bid. But after much internal debate, the company decided to honor its current rates with carriers. Why? The company knows that capacity will tighten again down the road, and when that day comes, it expects its carriers to maintain their commitments to them and not abandon them for other shippers offering a cent or two more per mile.

Well, that day has arrived. Capacity is starting to get tight again in certain markets and rates are starting to rise. Did this shipper make the right decision?

"The jury is still out on whether our strategy has worked or not," the logistics executive at this company told me last week. "We don't know yet if we are going to have an advantage [relative to other shippers] or if carriers are going to decide that the temptation for quick outsized profits is just too hard to resist. How the carriers respond will 'train' the buyer for the next time this changes."

Over the past few weeks, as the economy has improved and transportation activity has increased, many carriers have started asking for rate increases. "Some carriers are presenting us with good justifications for raising rates," the logistics executive explained, "but others are just sending us letters saying that rates will be going up next week."

CSA 2010 is one of the factors that many carriers are discussing with shippers (see "Shippers, Time to Learn About CSA 2010"). As I wrote back in May: Shippers, if you haven't heard about CSA 2010, you will soon from your carriers. Take the time to learn more about this initiative now. Then schedule your own roundtable discussion with your carriers. But rather than just focusing on this one issue, make it part of a broader conversation on how you can work together to create more constructive and productive relationships as you enter a new cycle of reduced capacity, higher costs, increased regulation, and greater uncertainty. The broader the focus, the more win-win opportunities you will uncover.

Having a "broader conversation" with carriers, however, is easier said than done, according to this logistics executive. Although he has long-term agreements in place with a few carriers, "it's a struggle to get carriers to think long term. I'm willing to discuss different contracting terms and continuous improvement ideas with them, such as putting in price mechanisms that adjust over time and doing things at our end to turn their equipment faster, but when it gets to that second or third meeting, they just don't know what to do. Some carriers just say, 'Tell us what you want to do and we'll see what we can do.'"

Does this mean that many carriers lack the sophistication (management know-how) to engage in more strategic relationships with shippers? Could many carriers be "once bitten, twice shy" when it comes to engaging with shippers in more collaborative ways? I think the answer is a little of both.

And this experience illustrates once again how difficult it is to create vested outsourcing relationships. As I've said before, vested outsourcing (aka performance-based outsourcing) requires a mind shift that will be difficult, if not impossible, for many 3PLs/carriers and customers.

"Maybe when all is said and done, transportation is a commodity after all," said the logistics executive. "I don't believe it is, but most players in the market behave like it's a commodity."

The jury is still out on this shipper's strategy. While we wait for the final verdict, post a comment and share your viewpoint on this topic.

To view this post on ARC's Logistics Viewpoints and join in the conversation, head to: http://logisticsviewpoints.com/2010/07/13/revisiting-a-shippers-decision-on-transportation-rates/

Source: ARC Advisory Group