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.

The last blog looked at how shippers and carriers have elevated their game in the area of freight rate negotiations over the past 10 to 15 years. In this blog the focus will be on how shippers should prepare themselves to achieve the optimum results for their company. These are some proposed steps to follow.

1. Align Freight Rate Negotiation Strategy with the company’s Business Strategy

The recession of the past few years caused many companies to make fundamental changes in business strategies. These changes included integrating production into fewer facilities, closing warehouses, and/or reducing inventories. As 2010 unfolds, some companies are experiencing modest increases in demand. All of these developments have a direct impact on modal choices and freight rate negotiations. With customers ordering in smaller order sizes, will this require more LTL shipping? Instead of full loads can multi-stop truckloads with drops be a solution? Can customer delivery intervals be extended to allow sufficient time to build larger shipments and move them on designated days of the week? The first step in preparing to negotiate freight rates is to create a clear Freight Transportation Strategy that is in alignment with the company’s Business Strategy.

2. Reformat Historical Freight Shipment Data in Line with 2010 Transportation Strategy

Shipment activity levels and patterns in 2008 and 2009 may not be indicative of what may be experienced in 2010 and beyond. Since carriers need data upon which to create their rate quotations, there is a need to organize and structure shipping data in a way that is indicative of 2010 shipping expectations. If the plan is to move more full loads and this is not what has happened in the past, there is a requirement to convert historical data to current realities.

3. Do a “Deep Dive” on Modes and Carriers

In order to save money on freight, it is essential to perform due diligence on prospective business partners. The day of calling in a half dozen carriers in each mode and asking them to refresh their prior year rate quotes is not a viable strategy in the current environment. On every major shipping lane, there are carriers looking for head haul and/or backhaul traffic. The task is to find them. If this is done in a superficial way, this will not result in achieving competitive freight costs. Since carrier requirements change each year, the search for carriers is a never-ending process.

One large shipper with whom I spoke two weeks ago had recently completed their truckload RFP exercise. They approached 350 truckload carriers. While this may be overkill for small to mid-sized companies, the point is that to find the best rates, doing a “deep dive” on prospective carriers is a mandatory.

4. Use the Best Analytical Tools Available

If your company is spending more than a couple of million dollars on freight, you need good quality tools to analyze the quotes that you receive. As mentioned in the prior blog, there are companies such as mine that have years of experience in helping shippers execute freight RFP’s. My company and others use some excellent tools that are custom designed to evaluate the quotes or bids received and perform a variety of analyses. These tools can find creative ways of saving money on freight.

5. Add Multi-Modal Experience to the Negotiating Team

The modal options evolve each year. In addition to parcel, LTL, truckload and carload transportation, there are a host of other mode and hybrid options. Intermodal shipping via trailer or container, B-trains and “turnpikes” (long combination vehicles consisting to two 53 foot trailers), short sea shipping, and “roadrailers” are just some of the options available today on some shipping lanes. To build an effective freight negotiating team, shippers in 2010 should add this expertise on a full time or outsourced basis so as to ensure all cost reduction options are evaluated.

6. Learn how to Leverage Business Volumes and Negotiate Effectively

It is essential that every shipper gain an understanding of how to take their inbound and outbound shipping volumes and leverage these volumes with transportation providers. This starts with gaining an understanding of which transport companies would derive the most benefit from the company’s freight. Conducting multi-round RFP exercises allow shippers to identify and increase leverage over time.

7. Calculate the “Total Cost of Ownership” for Each Scenario

Freight transportation costs are just part of a company’s distribution costs. To perform a meaningful analysis of freight costs, they must be integrated with production costs (that can vary by plant), handling costs, warehouse costs, and cross-dock costs to calculate the total cost of ownership. This allows a company to compare alternate supply chains from different locations to serve specific geographic markets.

8. Take your Time

Conducting a multi-round sourcing project takes several months. By rushing, by cutting short on the number of rounds or the level of analysis performed, this limits the level of cost savings achieved.

As the “re-setting” economy evolves over the coming years, freight transportation sourcing professionals need to employ a full arsenal of skills and tools to provide full value to their employers.

Freight costs can be as much as 3 to 5 percent or more of gross revenues in many companies. This can represent tens or hundreds of millions of dollars in expenses on an annual basis. During the recession, the Transportation Directors in many firms were tasked with some new realities. Customers cut back on order sizes. Inventory reduction became a top priority. Staff cuts were demanded. The challenge faced by many shippers was how to reign in freight costs and maintain customer service with fewer employees while shrinking inventories. Some companies learned a number of important lessons during the recession.

Bring Freight Spend Under Management

You can only manage what you measure. To effectively control freight costs, it is essential to gain visibility into the key cost elements of freight. This includes being able to capture data on line haul costs, fuel costs and accessorial charges. It encompasses data on shipment sizes, modes, carriers, by day, by postal code/zip code. A recent Aberdeen Group study reported that every dollar brought under management results in a 5 to 25 percent savings. Visibility is a key to cost savings.

Focus on those KPI’s that mean the Most to Your Organization

In a recent Hackett Group study it was reported that of all the jobs lost during the recession, less than half will be replaced. This suggests that there will be fewer people available to monitor and act on a company’s freight spend data for an extended period of time. This requires companies to focus on those key KPI’s that mean the most to the organization. While many transportation organizations monitor the same data elements (e.g. on-time service, OS and D’s), there are often some specific variables that are most relevant to that specific industry or company. This may be a cost per ton, freight costs as a percent of revenue, freight spend by mode or inventory turns. With fewer resources, it is critical to focus on the key transportation related cost drivers that have the most impact on profits and service.

Revisit Current Benchmarks

Order fulfillment levels and transit times evolve over time. These need to be constantly re-evaluated and re-assessed. Cost savings can be derived from shipment consolidations and/or from modal shifts. With good quality data, shippers can revisit established benchmarks in consultation with customers to see if ordering patterns and/or shipping processes or modal changes can drive freight spend savings.

Don’t Forget About Inbound Freight

Inbound freight to some companies is viewed as an indirect or landed cost. It is managed in the Purchasing silo and sometimes does not command the same scrutiny as do outbound freight costs. However inbound freight costs can represent a large component of a company’s total freight costs. These expenditures have the same cost elements as outbound freight and can represent an important opportunity for synergy (e.g. creation of round trip or continuous moves) and leverage (e.g. integrate and strategically source at same time as outbound freight services are sourced).

Expand Carrier Base

As highlighted in last week’s blog, many shippers limit their opportunities for freight cost saving by approaching too small a base of carriers. Certainly in this day of staff cuts, it is challenging to find the time to perform one’s basic job functions while having the time to research the market. The fact is that this can be a very fruitful path to securing cost savings.

Upgrade Freight Procurement Management Tools

Since many transportation departments now have fewer resources, this makes it necessary to make the procurement and management of freight services less labour intensive. This means less dependence on manually created documents and spreadsheets while increasing the use of both freight procurement and freight spend management tools. While it may be difficult to justify the cost of purchasing a spend management tool specifically for freight, it may be much easier to justify piggybacking on a corporate spend management tool and applying it in the company’s transportation. In fact, the additional savings gleaned from more effective management of freight costs may be a key element in selling management on the value of this investment.

Identify and Collaborate with Key Transportation Vendors

The cutbacks in truck capacity make it that much more important to align your company with its key transportation suppliers. These companies can often identify wasteful transportation expenditures and provide insight and wisdom as to how to remove unnecessary costs from a company’s transportation expenditures.

Final Thoughts

In 2010, the message is do more with less. This applies to the freight transportation side of the business. Shippers that do not aggressively attack freight spend management may find themselves at a competitive disadvantage. Following these basic principles can help shippers deal more effectively with the realities of the slowly recovering economy.

Last year was a disaster for the LTL segment of the freight industry. As business volumes contracted and YRC, one of the industry giants, teetered on the brink of bankruptcy, many LTL carriers sacrificed their pricing discipline in the hopes of gaining market share and driving YRC off the LTL road. Rather than reducing capacity to meet demand, a number of carriers used price as a weapon to increase volumes. Ultimately this strategy failed with the LTL sector posting the largest year/year decline in rate levels.

The North American economy is improving in 2010 but very slowly. YRC, with its debt for equity swap, has a new lease on life. This has driven many LTL carriers back to their board rooms in an effort to revise their strategies and rebuild their tattered financial statements. The broad outlines of these new strategies are now starting to take shape.

Douglas W. Stotlar, president and CEO of LTL carrier Con-way described his company‘s strategy as follows. “Our focus is on driving efficiencies into the network, building volume and improving yield.” This is likely a theme to be repeated by many LTL carriers this year. Here is what Con-way and some other leading LTL carriers are doing.

Matching Supply to the Reduced Demand

Con-way Freight is approaching the task of building network efficiency with a broad re-engineering of its network, slicing transit times between 460 destinations by reducing handling, and, in turn, building the density on its shortest, most direct routes that truckers say is critical to profit.

Faster Service to Expanded Service Areas, including Canada

Cross-border freight between Canada and the United States has long been one of the most profitable segments of the LTL industry. Holland, a YRC regional carrier, announced the availability of its enhanced next-day service reach between Toronto, Canada, and seven markets in the Midwest and reduced transit times on an additional five lanes in and out of Toronto for enhanced two-day service.

Holland is claiming that these service improvements give them the largest next-day footprint between Toronto and the Midwest, including new next-day service with Chicago, Joliet and Wheeling, Ill., Cincinnati; Huntington, W.Va., and Indianapolis. With its expanded next-day service footprint, the company can also deliver enhanced two-day service to Joplin, Springfield and Kansas City, Mo., Memphis, Tenn., and Worthington, Minn., shaving a day off transit times to these markets.

UPS Freight is speeding freight across the Canadian border by stretching its two-day delivery network from Toronto and Montreal as far south as St. Louis, Mo., and Atlanta. The new two-day transit times include Montreal to Milwaukee, Rockford, Ill., and St. Louis. Also, Toronto now provides two-day service to key markets in Georgia and North and South Carolina to include Atlanta, Augusta, Charlotte, Charleston and Savannah.

Pricing Precision

Across the LTL industry, carriers are retreating from rate discounting that slashed profits last year, signalling a truce, at least, in the industry’s rate wars as they try to build a more profitable business. For Con-way, that means pruning unprofitable business from its books, customer by customer.

LTL carriers are also seeking general rate increases (GRI’s) on their non-contracted business. Con-way and FedEx have both signalled that they are seeking rate increases of 5.9 percent while Old Dominion is asking for 4.4 percent. Con-way has indicated that their GRI, implemented on Jan. 4 has held “pretty well.” The GRI applies to about 30 percent of Con-way Freight’s customer base. “We’ve seen volume maintained at 2009 levels for that segment, and we have not been negotiating price with that segment of customer,” stated John Labrie, President of Con-way Freight. For the other 70 percent, “We’re going through the book of business account by account.”

Bolstering Sales Teams

Con-way Freight is starting 2010 by strengthening its sales organization by appointing five sales managers — including three recruited from rival YRC Worldwide — to lead new regions in the South, Mid-Atlantic, and Mid¬west and Great Plains states. UPS Freight named Allan Robison, former president of Canadian carrier YRC Reimer, Vice President of Sales in Canada.

Improving Asset Utilization

One of the unique elements of LTL operations is the requirement to have geographically dispersed freight terminals. Rather than just use these facilities for local cross-dock and distribution, LTL carriers in 2010 are seeking to make better use of their assets. Carriers such as Midwest Motor Express and New England Motor Freight are making their terminals into bonded warehouses and receiving container loads of freight from overseas which they can strip and load into their LTL peddle runs.

Evolution of 3PL Services

Most LTL carriers have seen the 3PL industry become the point of contact with many of their clients. This has caused a number of companies to expand their skill sets, service portfolios and information processing capabilities. These skills and tools are allowing them to provide a more holistic logistics plan for their customers. Some LTL carriers have begun to gain recognition for their enhanced IT capabilities. Con-way Freight, YRC, Old Dominion and Pitt Ohio Express all made the 2009 Information Week 500 list.

Going Global

Con-way has been one of the leaders forming alliances with APL Logistics and TNT Express. The APL partnership focuses on inbound ocean freight from Asia to the United States while the TNT alliance is geared to streamlining combined air and ground logistics between the European Union and the U.S.

Clearly the LTL industry is going back to the basics in an effort to improve profits. Cost decreases, rate increases, improving the sales force, transit time improvements and new service offerings are some of the tools being employed to improve financial performance in 2010.