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For shippers seeking transportation services, the good old days are gone. A scant two or three years ago, when capacity was plentiful, they had their pick of carriers. Contracts were mostly awarded on the basis of price. In short, shippers called the shots.
Not anymore. All that excess capacity has dried up. Shippers today are lucky to find enough truck, air, rail and ship space to get their products to market. And freight rates are skyrocketing.
Their options limited, shippers face rising freight expense and unhappy customers, who can't get their shipments on time because of severe bottlenecks in the system. But the news isn't all bad. There are still ways to manage cost while ensuring a steady pool of quality carriers. The answer lies in a fresh approach to transportation procurement.
Carriers might seem to be in the driver's seat, but they have a host of problems with which to deal. Prior to this year, they were already facing driver shortages, higher insurance costs, new emissions standards, and the rising cost of steel for trailer and container manufacturing, says Kevin Fletcher, director of transportation with Redwood City, Calif.-based Menlo Worldwide Logistics. Throw in the new hours-of-service regulations for truckers (the status of which remains uncertain), a huge upswing in demand caused by economic growth, and soaring fuel prices, and you have a situation that no shipper would envy.
In the end, everyone suffers. Rich Piontek, director of the manufacturing and industrial sector with TNT Logistics North America, in Jacksonville, Fla., calls it a "perfect storm of negative cost impacts on shippers and carriers." Never before has he seen a convergence of so many adverse factors within so short a time.
It's only natural that carriers would demand rate increases to offset those problems. Some will go too far, seeking payback for years of getting beaten down on price, and anticipating an eventual swing of the pendulum in favor of shippers. But industry experts say both sides have a chance to break the cycle, in favor of a more cooperative, and mutually beneficial, approach. "This adversarial taking advantage . . . is short-lived," says Jim Butts, vice president of transportation with C.H. Robinson Worldwide, Inc. in Eden Prairie, Minn. "It's not a practical way to look at the market."
New procurement strategies can help kick off a change in attitude. It begins with a fresh look at the process of bidding. The birth of electronic marketplaces, around the turn of the last decade, prompted shippers to embrace internet auctions for transportation services. Carriers and other vendors naturally balked at the use of a medium that they viewed as little more than a means of slashing rates. Many declined to participate, and the early promise of multi-user procurement portals dimmed.
Things are different now. "A lot of people are still going out to bid, but it's not being optimized [solely] around cost," says Pierre Mitchell, vice president of research with AMR Research Inc. "It's about cost and service levels." At a time of tight capacity, shippers are keen to avoid stringent penalties imposed by their customers, especially in the retail industry, for late deliveries and other missed targets.
Carriers, meanwhile, are more willing to consider internet portals because they lead to efficiencies such as pre-rated bookings and a lower rate of error in freight rating and payment, according to David Adams, vice president of operations with GT Nexus in Alameda, Calif.
Smart shippers are even willing to relinquish the right to dictate how their business gets divvied up among carriers, at least in the initial bidding process. Known as combinatorial bidding, the concept is "a good win-win tool," says Mitchell.
Its origins hail from other industries, especially finance and telecommunications. In the case of the latter, the technique has been used for auctioning off broadcast frequencies, according to George Grossardt, vice president of alliance services with Schneider Logistics Inc. of Green Bay, Wis.
In combinatorial bidding, a shipper puts its entire network, or a substantial portion, out for bid. Carriers then can select the specific lanes in which they are interested. Usually that means the ones in which they have the best or most cost-effective operations. The practice, or so goes the theory, yields the best carrier for any given route. Multiple carriers bidding on the same lanes can, of course, compete on price, but service remains a key criterion.
A related practice, known as conditional bidding, locks the carrier into a price and route subject to pre-determined conditions, such as the amount of freight actually tendered during the life of the contract. The common element between these techniques is flexibility on the part of the shipper, who cedes a measure of control in exchange for an optimized procurement process.
AMR is bullish on the whole notion of carrier bid optimization, a practice that Mitchell says is now morphing into the broader process of strategic transportation sourcing (STS). He calls it "the missing link between network design, transportation management, and direct materials sourcing processes." Other elements of STS include aggregating volumes at the corporate level, seeking out new supply sources, and performing total cost modeling and benchmarking. With the help of STS and optimized bidding, companies today are saving an average of 10.5 percent on strategic transportation modes, Mitchell claims.
Vendors such as GT Nexus, Manhattan Associates, CombineNet and FreeMarkets offer software that supports the strategic bidding and management of carrier bases. All types of providers, including common carriers, third-party logistics (3PL) companies and private fleets, are allowed to compete for business; the winner is the one with the best transportation network for a given situation. According to AMR, companies with optimization-based bidding save an additional 1.7 percent to 3 percent of transportation costs over traditional e-sourcing methods.
The use of combinatorial auctions helps ensure that the shipper will receive the service for which it has signed up. A large shoe retailer had employed a traditional reverse auction to get what it thought was a good deal from the carrier, notes Grossardt. Unfortunately, the carrier hadn't actually committed to haul any freight; it had agreed to what was essentially a paper rate. With the help of Schneider Logistics and a more flexible bidding process, the shipper got access to other carriers, some of which it hadn't even been aware of.
Core Carrier Strategies
The shift in the shipper-carrier dynamic has altered the number of core carriers that might be considered for a job. In recent years, shippers have worked steadily to concentrate more business with fewer carriers, thus obtaining better volume rates. But, with a general tightening of capacity, that practice has become something of a luxury. "The trend is moving away from that," says Piontek. "People should take a look at increasing their carrier base."
He doesn't mean that requests for bids should turn into a free-for-all. Instead, shippers should supplement some of their national contracts with regional specialists, who might possess strengths that can't be matched by larger rivals with greater geographic scope. In addition, the dispersal of business among several carriers can help to guard against supply interruptions caused by natural disasters, labor unrest, surges in demand or even terrorist attacks on the transportation system. Adams says partners secured on a temporary or provisional basis have the ability to ascend to the level of core carrier, if they perform well.
Carriers & Culture
A procurement software vendor such as Atlanta-based Procuri Inc. can help shippers to select a small but diverse number of carriers, says Doug Evans, Procuri's director of strategic sourcing services. In the case of Eastman Kodak Co., for which Evans used to work, Procuri helped the company to identify niche ocean carriers in Latin America, in addition to its major global providers.
Transportation may have turned into a seller's market, but the old rules of carrier selection still apply. Shippers shouldn't be so desperate to book capacity that they abandon good judgment. According to Butts, selecting the right provider is the most critical element in the success of a transportation program. And that means finding carriers with the right "culture fit." Not only must shippers' and carriers' needs dovetail; the two must share common business traits. Butts recommends performing a classic "SWOT" analysis: examining strengths, weaknesses, opportunities and threats on both sides. In addition, shippers must decide at the outset whether they want to manage transportation in-house, or hand over the task to a 3PL.
A third-party can guide companies through the task of carrier selection. Menlo sets out clear guidelines, says Fletcher, focusing on overall carrier reliability. Elements include the vendor's financial performance and stability, to determine whether it can sustain a long-term relationship with the shipper. Other criteria include sophisticated IT capabilities for document transfer and shipment tracking, and a creative approach to problem solving.
Factors involved in picking the right carrier may differ according to mode. For truckers, shippers must assess the stability of a given carrier's driver pool, Evans says. It's also useful to know whether the carrier is using its own employees or owner-operators to haul freight. And financial stability is a particular issue in the trucking industry, which has seen the failure of countless players over the last decade. Shippers making the wrong choice could find their freight locked up in the terminal of a bankrupt carrier.
For cargo moving by air, shippers should determine whether their freight forwarders have operations in Asia, the source of most retail and high-tech shipments entering the U.S. A good forwarder, says Evans, can guarantee space during peak shipping periods. The same consideration holds for ocean carriers, whose ships have been running at near capacity for most of the year. Shippers lacking strong ties to reliable carriers are likely to find their containers left on the docks during the Christmas rush in late summer and early fall. The introduction of new capacity in the ocean trades over the coming year isn't expected to alter that situation significantly.
A Look in the Mirror
Some of the biggest opportunities for improving a transportation procurement program exist within the shipper's own organization. Years of having the upper hand in dealings with carriers have made many shippers inefficient and lax in their methods. They must become more honest about what freight they have and where, says Bob Belshaw, chief operating office of Insight, a software consulting firm based in Manassas, Va. Carriers need to know exactly what business is available before they can intelligently bid on a shipper's freight. The reliability issue cuts both ways.
Shipper inefficiencies often are the result of bad business practices. Many companies don't have the requisite information stored in a central repository; it's parceled out among various departments and might not even be consistent in form and content. On top of that, says Belshaw, a shipper might deliberately misstate the amount of freight it has to offer, in order to ensure that it has enough options on hand.
Optimizing one's own processes reduces carrier costs and makes freight more attractive to vendors. "Waiting time is a big issue," says Piontek, especially in light of carriers' rising overhead and restrictive new hours-of-service rules. A shipper that regularly keeps carriers idling at the dock isn't likely to find many takers, come time for contract renewal. "Carriers are incentivized to take the easiest, no-touch freight," Piontek says.
Certain problems occur even earlier in the process, as far back as the planning of a supply-chain network. Grossardt says shippers can boost asset utilization by reevaluating plant locations in line with actual freight flows.
Piontek advises companies to look even further afield, to the whole question of inventory levels. "You can buy transportation in a world-class way, but if you're not holistically looking at a company's inventory situation, there's a lot of money left on the table," he says.
3PLs play an important role in optimizing transportation networks, claims Butts. Because they tend to handle larger volumes of freight than individual shippers, and have contracts with a greater number of carriers, 3PLs can cut down on the movement of empty trucks. And they can find ways to satisfy service demands that might otherwise be too costly or unreasonable for carriers to fulfill.
Carriers, too, need to take a close look at their operations in order to provide shippers with the most efficient service possible. In the past, they might have been less than candid about the drivers and equipment available to move a load. Burdened by poor business controls, they didn't know which resources were available. Or they were playing the same game as shippers: promise anything, then worry about the details later. Now, says Belshaw, "carriers are becoming more forthcoming [about] capacity."
Piontek says carriers can do a better job of monitoring their safety programs, which have a major impact on operating costs and figure strongly into a shipper's ultimate choice of vendors. "Safety is a very large wild card," he says.
Turning to Inbound
Creative bidding techniques aside, less control isn't always the answer for shippers looking to overhaul their transportation procurement. Experts urge them to get a grip on one of the most overlooked aspect of transportation: inbound movements. For many companies, that responsibility remains in the hands of suppliers, who choose the carriers, pay the freight, then "bake" the cost into the price of the product. Whether they're best qualified to handle that task remains an important question.
To be sure, taking control of inbound means inheriting a host of headaches for the shipper. But the payoff can be great. A large shipper with strong volumes, or a big 3PL acting on its behalf, could score better rates on inbound freight than the army of suppliers that serves a given customer. AutoZone, the aftermarket auto parts giant, cut transportation costs by 20 percent by taking over inbound, according to AMR analyst John Fontanella. "When inbound freight is actively managed, manufacturers estimate savings ranging anywhere from 4 percent to 8 percent," he says in a research report from last year.
"It's a huge trend right now," agrees Butts, "and it's still growing." Greater control over inbound gives shippers a better view of vendor compliance throughout the supply chain, he adds, and helps companies to pinpoint the real reason for a transportation problem.
Managing inbound can yield big rewards because it generally accounts for a larger percentage of total costs than outbound, says Piontek. Without such control, the true cost of inbound becomes invisible, lumped into the supplier's total price. And the customer asserts little control over which carriers show up at its dock.
No company can manage its transportation spend without closely monitoring vendor performance. Fletcher says shippers must sit down with their chosen carriers and clearly lay out expectations for service, including the number of shipments in various lanes. Carriers must reveal all of the possible surcharges that could be added to a base rate. That's a particular problem in the ocean-freight industry, where the final price of moving a container can double once all of the surcharges are factored in.
Menlo lays out performance measures for contracted carriers that go beyond the usual metrics of on-time and damage-free service, says Fletcher. Equally important are factors such as adherence to tight delivery windows, invoice accuracy, timely transfer of key documentation, and safety.
Shippers, meanwhile, must take care that their internal transportation managers allocate freight according to the formula dictated by optimization routines performed at the start. It's all too easy, says Butts, for a freight booker to deviate from the routing guide. But the consequences, in terms of higher costs and unhappy carriers, can be severe. C.H. Robinson's Transportation Management Center is one third-party tool created to monitor such variances.
It takes a high level of preparation to ensure that the parties live up to their commitments, along with good information systems to track order fulfillment every step of the way. But the effort is worth it. "What's promised is what's given," says Belshaw. "Both sides are more accountable."
One important question remains: Will carriers go along with these "win-win" initiatives, now that they have the advantage in dealing with shippers? Adams believes they will, notwithstanding a desire to make up for years of discounting. "They have a pretty good memory," he says, "but this is one industry where the customer really is king. Carriers are seasoned enough to know that the pendulum goes back and forth."
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