As the new millennium enters its seventh year, this should be a time of careful reflection by shippers. For the first three years of this decade, shippers had the upper hand in freight rate negotiations. With modest economic growth and ample transportation capacity, shippers were able to maintain good control over freight rates.
In 2003 the tables turned. Driver shortages, capacity constraints and fuel cost increases tipped the scales in favor of carriers. The decline in the value of the American dollar created a shift in the direction of freight flows, with U.S. imports becoming more affordable while southbound export traffic declined. For most of the past three years, shippers have had to endure double digit rate increases, particularly in the truckload sector.
In 2006, the economy reversed direction again, capacity increased and rate increases became more reasonable. Looking ahead to 2007, what strategy should shippers employ in negotiating with carriers? While no one has a crystal ball, there seems to be consensus around the following scenario.
The leading economists are predicting a soft economy during the first six months of the year followed by an upsurge in demand and a tightening in freight capacity during the last six months of 2007. For those shippers that have endured the roller coaster effects of the past six years, what is the appropriate strategy to secure capacity at the best price for your company? Here are some options to consider?
1. Negotiate a modest Rate Increase for 2007
Under this strategy, your company can secure capacity for 2007 at a reasonable rate. This provides cost certainty and capacity for 2007. Should the economy deteriorate in 2008, your company is in a position to negotiate another small rate increase or a rate freeze in 2008. On the other hand, if the economy picks up steam, fuel costs escalate and driver and capacity shortages return, you may face significant rate increases in 2008 or even before.
2. Take a Hard Line with Carriers and seek a Freeze or Rollback on Rates
For shippers with significant volumes, this is a time to secure a freeze or rollback. Some carriers added excess capacity in 2006 in order save money on the cost of the new 2007 engines and / or to better position themselves for the expected ongoing surge in demand. These carriers will be faced with the option of filling these trucks with volume at whatever price the market will bear or removing equipment from their fleet. Since there is already evidence of rate erosion in the market, this may be a time to leverage your volumes to mitigate or offset some of the rate increases that have been accepted in recent years.
The advantage of this strategy is that you can help your company by reducing freight costs, thereby improving your company’s profit margins. The downside to this strategy is that if the economy tightens, your carriers may allocate their equipment to those shippers with more attractive yields. This may jeopardize your company’s available capacity and as a by-product, adversely affect customer service.
3. Conduct a Freight Bid to Leverage Volumes and Sign a Multi-Year rate Agreement
Under this scenario, you can place your company’s freight for bid to a select group of existing and new carriers. You can then negotiate with those short listed carriers that can supply the service and capacity at the best price. To secure this capacity over a longer term, you can negotiate a multi year agreement with modest increases and SLA’s (service level agreements).
This scenario offers your company an opportunity to reduce freight costs and hold these reduced costs, with modest increases, over several (e.g. 3) years. The downside to this approach is if the economy softens, your company has locked into a multi year agreement with rate increases in subsequent years.
The writer would argue that option 3 offers most shippers with significant volumes the best opportunity for cost certainty, capacity and good service. By establishing a multi-year relationship with your core carriers, this fosters a stronger, more collaborative bond. Carriers that know they have a three year commitment on volumes and rates are more likely to work more diligently on behalf of your company. This scenario is most likely to create a win / win scenario and is in the best interests of both parties.
Dan Goodwill
President
Dan Goodwill & Associates Inc.
www.dantranscon.com
Comments (2)
As well as the stratagies mentioned above, one could consider joining with other shippers in a freight group, or negotiating those fuel surcharges which are currently plaguing the marketplace and everyones knows are a profit center for carriers. These fuel surcharges need to be eliminated now that high fuel costs have become the norm.
Posted by Alan Taliaferro | April 12, 2007 10:11 PM
Posted on April 12, 2007 22:11
It is that time of the year we all sharpen our pencils (now spreadsheets) and cut cost from every area, or at least review. Since transportation is now defined as a “commodity” it should be fairly easy to reduce cost from these suppliers and vendors. It is easy to see the pressure on the logistics managers, supply chain directors, value chain teams, 3PL, 4PL, and remember when it was the Traffic Manager?
The truckload industry has done a poor job of explaining the “value proposition” they bring to a company. I attended a conference where the statement “Dell is a logistics company first” and you know Wal-Mart and P & G are mentioned also.
Inventory, inventory, inventory, or as Clinton said in his first campaign “it’s the economy stupid”
Would you give up a 5% increase in the Truckload budget to receive a 5% reduction in inventory? If the answer is yes, you are very carrier friendly, and are going to drive your competition crazy, as they try to figure it out. By the way those stock outs have been reduced, making your company the first choice.
Truckload carriers can list all the cost they face and driver shortage, I don’t want to hear or see it. My boss just showed me our cost pressure points, and I need and want my job more than the Truckload carrier representative.
Bring me a solution that shows how we can work together to eliminate or at least reduce cost. Here is a good quote “FedEx freight has grown at almost twice the rate of the overall market, not by cutting price but by raising the bar on service and technology. I wonder if the same customers of FedEx freight have truckload shipments?
Be careful here, and make sure you define truckload not only by weight, or volume, but also revenue.
DOT Study:
Throughout the study materials and the Website summary tables, "truck" refers to a vehicle designed, used, or maintained primarily for carrying property, with a gross vehicle weight rating or gross combination weight rating of more than 10,000 lbs.
Posted by Hank Mullen | April 13, 2007 9:10 AM
Posted on April 13, 2007 09:10