The improving job numbers this past week provide further confirmation that an economic recovery is under way. The drop in commodity and fuel prices is likely a brief reprieve on the way to a further upswing in business growth. With rising demand, shippers are facing a broad array of challenges in 2011. A tightening transportation equipment supply is being triggered by driver shortages, new U.S. government regulations and by a reluctance of carrier executives to add capacity. This coupled with rising freight rates and fuel surcharges, are causing shippers to revisit their freight transportation paradigms.

Informed shippers realize that there are limitations as to what they can do to offset these market driven forces. To retain their business volumes, shippers must meet the demands of their clients in terms of order sizes and transit times. As discussed in previous blogs, large retailers are seeking greater control over their inbound freight transportation. Within these parameters, shippers are exploring opportunities to blunt the impact of some of these changes. As I reflect on my recent conversations with shippers and my review of various published reports, here are some of the strategies and tactics they are employing or investigating.

Create Pooling Programs/Convert from LTL to Truckload

Pooling arrangements allow sister companies or competitors to consolidate small parcel or LTL shipments in specific geographic areas in order to deliver lower cost truckload shipments. This approach, where feasible, offers some unique benefits. Participants in the pooling program have access to truckload pricing since their shipments share space on a full trailerload of freight. By filling trailers faster, the freight can move faster, speeding up the supply chain. The trucker wins by having more freight to transport.

Converting freight from LTL to less-costly truckload service is part of The Home Depot Inc.'s five-year supply chain transformation plan, in both the United States and Canada. The Atlanta-based home improvement giant has created "rapid deployment centers" (RDCs) in the United States and Canada. These are flow-through facilities that enable the cross-docking of large quantities of merchandise. By leveraging the RDCs, suppliers who used to ship direct to stores using LTL service can now consolidate their shipments into truckload quantities for shipping to these facilities.

In-source Freight Transportation

Some companies that have outsourced their freight transportation to a logistics company are rethinking this strategy. If the freight management company is not adding value to the process, then there is reason to question the financial benefits in paying a mark-up to the carrier and to the freight management company. For shippers that have straight-forward carrier procurement and management processes, particularly those companies with their own TMS system, it may be time to look at the option of bringing these functions in-house and saving the second mark-up. By conducting a comprehensive RFP every few years and then putting in place carrier scorecards to track performance, this may be an opportunity to reduce freight costs.

Improve Planning and Perform Load Levelling

Capacity shortfalls can cause shippers to select higher paying carriers that rank lower in the routing guide or go to the spot market to cover their loads. Shippers have several methods of trying to mitigate paying higher freight costs. For companies that can provide quality forecasts, this will enhance their opportunities of obtaining capacity from their core carriers. Best Practice involves working collaboratively with one’s major carriers, seeking ways to match supply with demand. In those situations where the freight is moving to company or third party warehouses, the option to smooth out the peaks and valleys, through planning and communication, may also result in better core carrier utilization and better spend management.

Increase use of Intermodal Transportation

On inbound movements to its manufacturing facilities and DC’s, where longer lead times can be built in, shippers are making increased use of intermodal transportation.

Network Optimization

Some shippers are reducing energy consumption and transportation costs by reducing delivery frequencies, reconfiguring the location of their "last-mile facilities," and integrating more energy-efficient vehicles into their fleets. Higher fuel prices will force many businesses to shrink the length of haul from DC to retailer. To accomplish this, additional and larger warehouses may be needed, which implies more stock and higher inventory levels and costs.

As we approach the mid year point, it is clear that shippers are employing a variety of strategies and tactics to make more cost effective use of the available carrier equipment supply, to utilize lower cost modes of transport and when necessary, reconfigure their networks to address tight capacity and rising costs.

Tight capacity is driving shippers and carriers to take a hard look at the value of freight contracts. Shippers are seeking rate stability, good service and capacity commitments. Carriers are looking at securing the most attractive yields on their assets and consistent volumes on lanes that fit with their core competence. One method of helping both parties achieve their goals is by capturing the key elements of the business relationship in a well crafted contract. To create truly Win-Win freight agreements, there are a number of core principles that need to guide these discussions.

Pricing is one Key Element of the Total Package

Shippers are looking for competitive rates. Carriers are looking at offering rates that are competitive, so long as they produce a satisfactory return. Competitive rates are a starting point, a way of filtering and ranking potential carriers in terms of cost savings or cost containment.

One of the critical guiding principles in the carrier selection process should be to evaluate potential business partners across a broad set of variables. These requirements should include size and type of fleet, safety rating, energy efficiency, service performance, and EDI capabilities. A good contract should spell out the shipper/carrier expectations and requirements for each of these items. Rates are very important and will ultimately be a determining factor but they should be part of the total package.
The contract should spell out the length of the award and the level of rate increases in future years. All rates, accessorial charges and fuel surcharges should be spelled out in the appendices.

Freight Characteristics

Both parties need to make sure that the freight tendered meets the characteristics as described in the rate request or RFP. The density of the freight, pallet configurations and ease of loading are critical attributes. Shippers that are “carrier friendly,” with fast and efficient loading/unloading processes, make it easier for carriers to make money. The pricing agreement must be consistent with the precise characteristics of the freight. Otherwise carriers are going to be seeking rate increases just before or after the agreement is signed.

Volume Commitments

Freight rates are often tied to volumes. Shippers that offer full truckloads or truckloads of LTL as compared to sporadic LTL or small parcel shipments offer more value. Many shippers seem to have a problem with the notion of volume commitments. Since shipper volumes are tied to customer demand, this can be a tricky item to negotiate.

Certainly it is important for both parties to have an understanding as to the volume expectations surrounding the proposed rates. Where high volumes are involved (and where the pricing has been developed on the basis of these volumes), the shipper needs to find a way to make some sort of volume commitment. This can take several forms.

One approach is to offer a minimum but significant volume commitment that can be tied to business levels. If a customer is lost, the volume may need to be adjusted and the rates may need to be increased. Some companies award business on the basis of primary and backup carriers with the split (e.g. 90/10, 80/20) reflecting the volume allocation and rate differential. As a minimum, there should be specific wording as to the volume and or ranking of each carrier.

Capacity and Service

Capacity is tied directly to volumes and yields. Shippers making volume commitments are entitled to expect capacity commitments from their carriers. While this can be solidified in a contract, other variables come into play. Smart shippers and carriers utilize scorecards to measure performance. These metrics can be captured in SLAs (service level agreements). One measurement of capacity commitment is the load acceptance/load refusal metric. If performance is below expectations, this can be as a result of several factors. The shipper may be providing more loads on specific lanes and/or at specific times than was expected. The carrier may have overcommitted or found another account that has higher yields on some of the shipper’s lanes. It is most important for the two parties to have an open and honest discussion up front as to what each expects from the other and for these expectations to be captured in writing. If volumes or load acceptance performance deviates from expectations, good contracts contain some sort of progressive discipline/dispute resolution process to rectify the problem.

On time service should be dealt with in the same manner. Prior to signing a contract, there should be a full understanding of the pick-up, drops en route and delivery parameters which are sometimes not fully spelled out in the RFP. Since deliveries to more remote locations may involve the use of interline partners, there must be an understanding of the hand-off process and the frequency of the interline delivery schedules (which may not be daily to all locations).

Good Contracts can lead to Longstanding Business Relationships

A well constructed and complete freight agreement can provide both partners with peace of mind and a solid business foundation. A weak contract can lead to disputes, hard feelings and sub-optimum financial rewards for both sides. For companies that lack experience in this area, it is highly desirable to reach out to experienced professionals who can guide you through the process.

Visit the Dan Goodwill & Associates website

A cost effective supply chain can be a competitive weapon. Companies such as Wal-Mart have reaped significant financial rewards from their skills in managing their supply chain costs. Even as the economy improves, manufacturers and retailers continue to seek ways to reduce their logistics costs and increase efficiencies.

As consultants who get to work with shippers on an ongoing basis, we continue to observe companies that are over-spending on logistics costs, particularly in the area of freight transportation. The opportunity for savings in freight costs goes undetected as a result of certain recurring patterns of behaviour or business paradigms, organization structure or a lack of knowledge of Best Practices. What are some telltale signs that may suggest the need for a transformation of the Transportation or Logistics function within an organization? Here are a few to consider:

 Key categories of freight spend (e.g. fuel surcharges, line haul rates, accessorial charges) are sourced once without ongoing cost reduction or supplier development strategies other than re-bidding out of contracts prior to expiration
 Freight costs are aggregated so that individual items (e.g. fuel surcharges) cannot be effectively tracked and analyzed over time
 The company does not possess accurate and detailed data on the densities of its products and on the percentage of its freight in each density category
 A formal freight RFP exercise has not been conducted in the past five years
 The results from a recent freight bid produce savings in excess of 15 percent
 The company has been using the same transportation providers for five or more years
 The organization doesn't track the implemented results of its sourcing efforts on a total freight cost and budget impact basis
 The company’s freight audit team, whether internal or external, is not routinely identifying opportunities for cost savings in terms of process or freight charges
 A disproportionate amount of freight is managed by a small group of core carriers
 The company has limited-to-no supplier (risk) management resources in place
 Communication with freight carriers is limited and non-collaborative
 Freight bids are sent every few years to the same limited set of carriers
 Freight carriers are passing along rate increases on an annual basis without detailed cost justification and during economic upturns and downturns
 The company’s transportation management personnel have been in their jobs for 5 or 10 years or more and have been largely unsupervised most of the time
 Inbound and outbound freight transportation are managed separately and not linked effectively
 Senior management has limited expertise and knowledge in freight management
 Senior management does not take freight management and procurement as seriously, on a comparative basis, as sales, production or IT, nor does it get a seat at the leadership table.

Do any of these issues resonate with you and your company? This may be good news and bad. The bad news is that your company may be overspending on freight and has probably done so for years. To correct years of neglect will require a transformation, not a tweaking. This is a significant undertaking. The good news is that a transformation in the management of the Transportation and/or Logistics function may represent an excellent opportunity for cost savings.

If the management of freight transportation in your company exhibits patterns that are consistent with five or more of the above listed issues, it is time to create a freight management transformation plan. While the plan often seems straight-forward, one interesting by-product is that its implementation can disrupt some aspects of this important business activity. More specifically it can change freight management's overall role and structure. No company should enter a freight management/procurement transformation without realizing that such programs will nearly always result in:

• Restructuring and reorganization
• Potential turf battles with Purchasing, Sales and Customer Service
• Technology and process change
• Highlighting of past areas of neglect and/or poor organizational performance.

If you cannot do it on your own, reach out for help. The odds are the financial rewards will more than offset the costs. Once you have completed the transformation process, the reduced cost base will pay dividends for years to come.