A New Era in Freight Rate Negotiations is on the Horizon
Some profound changes have taken place in the freight rate negotiation arena over the past ten to fifteen years. On the shipper side, the calibre of people entering the logistics profession has improved significantly. Many young professionals coming out of university bring a much more advanced set of set of skills than existed in the past. As they enter the industry, they now find transportation management software (TMS) software to optimize loading, mode selection and carrier management, network optimization software to look at the best location of plants, warehouses and truck routes and route planning software to minimize driving time between stops. The new generation of transportation professionals can now apply their advanced supply chain education and the available software tools to perform a variety of transportation related analyses.
In addition, freight RFP’s increase in sophistication each year. Computer modelling tools allow shippers to request round trip rates and contingency pricing from their carriers. The computer programs can factor in consolidating provincial or state or regional volumes to better leverage freight volumes. They can compare modal options as well as factor in warehouse and handling costs in order to evaluate various total cost of ownership scenarios.
If the shipper does not have the software to conduct these types of exercises, he can reach out to companies such as mine or other firms that provide these capabilities. Various specific software solutions such as SMC3’s Bid$ense and Schneider Logistics’ Bid Smart are accessible to run a professional and cost effective freight bid. Supply chain executives also have the option of going to a 3PL (if transportation is not a core competence) and asking them to conduct the RFP and then manage the transportation function on their behalf.
While shipper freight rate analysis and negotiation skills have been upgraded in recent years, the carriers have not been standing still. For the most part, the industry giants in each sector of the transportation industry have elevated their game. Fifteen years ago CN Rail was a bloated and inefficient crown corporation. It is now a profit generating machine with an operating ratio in the high 70’s. The fact that a shrewd investor like Warren Buffet is willing to pay $24 billion for Burlington Northern Santa Fe Railroad, tells you how highly he views the rail sector. They have made great strides in asset management and cost control. The railroad sector of the freight industry has become much more profit driven over the past decade.
The leading long haul truckload carriers have refocused their business growth strategies on regional markets where they can better manage empty and out of route miles. In the case of J.B. Hunt, they have made a very successful transition to a multi-modal operation with intermodal transportation being their engine of growth.
The LTL sector is now dominated by FedEx and UPS, two very diverse and sophisticated transportation organizations that are able to offer air and ground parcel delivery, LTL freight, logistics and a host of other services. In other words, they have positioned themselves to meet an ever increasing array of supply chain requirements. They have upgraded their costing models to improve their evaluation of LTL and multi-modal business opportunities and select those that are the best fit for their organizations.
As these two scenarios were playing out, the world hit a speed bump in September, 2008. As a trucking executive said to me this week, “I woke up one day in September of 2008 and shippers stopped shipping. It was scary.” This caused both shippers and carriers to refocus their energies on cost reduction and profit optimization.
Shippers sought to draw down inventories and leverage their bargaining position to reduce rates. Carriers responded by parking excess equipment, cutting staff and reducing costs.
The results vary from segment to segment. The railroads were in the best position to take equipment out of service. With only six truly class one railways, they exhibited the best pricing discipline and fared the best, from a financial perspective, during the recession. The truckload carriers also took equipment out of service and targeted intermodal traffic to fill their trucks. They saw rates fall by an average of five percent in 2009. The LTL sector fared the worst. While some efforts were taken to reduce terminals and provide more direct routing of freight, some carriers placed too much emphasis on running troubled YRCW off the road. The strategy failed as LTL rates dropped an average of 10 percent last year. That segment of the industry is now not economically sustainable and is in need of restructuring.
While one can point to thousands of trucking companies that have gone out of business during the recession, there are very few tier 1 and tier 2 trucking companies, logistics organizations or railroads that have failed. Clearly, their pricing discipline, cost reduction initiatives and costing models, have enabled them to remain in business during this very challenging period. The question still remains. As we come out of the recession, will the banks prop up some of the weaker players, particularly in the LTL and truckload sectors or will we finally see some industry rationalization?
This sets the stage for some very interesting rate negotiations in the months and years ahead. The economies of Canada and the United States are on the mend, albeit slowly. Shippers now come to the negotiating table with the need to further rationalize their operations and drive costs out of their supply chains during a period of modest economic growth. Carriers come to the table with the need to improve yields on business that suffered revenue erosion during the Great Recession. This will require both sides to continue to elevate their game to achieve the maximum profits for their respective organizations. The next blog will focus on the most critical skill sets that shippers will require to successfully manage their freight programs during these changing times.