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.