Feb
21
Every so often, it’s advantageous for companies to examine their suppliers to analyze potential savings and cost-efficiency. But will changing transportation companies really bring the expected benefit to your bottom line? If important factors are overlooked during the costs comparison, changing suppliers can actually cost you more.
Everybody is looking for ways to reduce costs and increase revenue to their bottom line. Analyzing your freight spend and exploring opportunities to reduce expenses in this area of your business can offer substantial savings to your company.
However, cost and value comparisons should not be a hasty decision. There are a few things you need to consider before making a change that can actually end up costing you more dollars and even more time. Making a significant change in service providers should be done with research, foresight and preparation. Before you hand over your keys to the kingdom to a new transportation partner, make sure they understand the requirements within your supply chain and the expectation of service. The following four highlighted topics are areas of important consideration to keep in mind when sourcing new provider.
Communicating the Data: Data Integrity
Many companies will use an activity spreadsheet for bidding purposes. This data is often collected from the current provider or from someone within the finance department. It is crucial that the data is reviewed and verified by a trained transportation professional. It is also important to recognize that the data must include all specific details that determined the level of service needed for the quote being provided. Here is a list of the information that should be included in the data to ensure that service providers understand the full scope of what to include in your quote. An analysis will also clearly show the cost difference in each category.
- Ship date
- Delivery date
- Delivery date requirements (if applicable)
- Unique shipment identifier
- Shipper and consignee names
- Origin and destination city (including state & zip codes)
- Freight class or classes (if multiple classes on a single shipment)
- Itemized charges (broken down by base rate, fuel surcharge & accessorials)
- Accessorial type/name
- Mode of transportation
Consolidating total charges into one price is a common error found when conducting cost comparisons. To correctly determine the cost, I recommend breaking down all charges, including accessorial charges, fuel surcharges, and lumper fees. Consolidating these costs into a total figure will make your existing rate look uncompetitive. Breaking down the costs and conveying to potential bidders the requirements (accessorial needs) of each shipment ensures you that you are comparing apples to apples and have a clear, concise charge comparison in every category. Too often, companies will receive bids or rate proposals that do not include all services required to meet the delivery expectations. Later when the requirements are learned, the pricing structure slowly starts increasing and the savings is lost.
Outlining the Service Requirement: Securing Value-Added Services
Never underestimate the value-add services that you may be receiving from your current provider. When presenting your RFP to your potential new partners, include a list of the value-added services you currently receive or the desired value-added services you would like going forward. This will ensure you are getting the most for your money and no reduction in service.
When negotiating new rates, it is key that you are fully educated on your on-time delivery percentages, all carrier reports, and any drop trailer programs. Oftentimes, when conducting a cost comparison, the highest focus is placed on reducing pricing but it is critical that you also focus on the standard of service. If service standards fall to the wayside, you may find that while you are saving money up front, you are actually losing money due to new ineffective processes put in place by the new provider. When you sacrifice a higher standard of service for lower pricing, you will see your expenses rise due to additional salaries, extended hours and overtime that are necessary to accommodate for the ineffective procedures.
Value-added services are not standard from carrier to carrier. Be sure that your preferred services are negotiated in your service agreement upfront and agreed to before making a switch. These special services can come at a higher price later and may not be offered for the pricing structure that was granted by your previous provider.
Contract Negotiation: Unethical Practices
Transportation is an ever-evolving industry. Our only constant is change and we see that everyday in shifting regulations, fuel fluctuations, and even your own volumes and shipping patterns. In this day and age, there is no reason you should sign a lengthy transportation service agreement unless you have somehow stumbled across a company with zero competition.
Ethical carriers will never require you to sign an exclusive contract in order to offer competitive pricing. Do not let “freight management companies” fool you into signing an agreement that you later discover is actually not beneficial to your company, yet impossible to get out of. Contracts that lock you into a relationship with your “freight management” company for 1-2 years are designed to eliminate the pressure to perform and continually earn your business day after day. Ask yourself: What are the benefits to signing a contract that extends out over a year? Will this prevent me from seeking service and cost improvements in an ever-changing market? How will I ensure that this provider will continue to seek improvement and positive change? Change in management at your company can also bring new vendors and relationships to the table. You do not want to be responsible for locking your company into a poor contract that binds the hands of people you may want to work with in the future.
Total Package Contracts: Do’s and Don’ts
At first glance, finding a provider that can offer the total package sounds incredible. The assumption is that by signing a total package contract will save you time and money is false. But keep in mind that sometimes, total package contracts are actually unrewarding and cumbersome. Ideally, you want a contract that encompasses a variety of services pertaining to your supply chain, but not bind you to everything. Alternatively, contracts that are “all or nothing” are also unfavorable especially if you wish to just tweak one aspect of the agreement. These often result in significant change and effort to improve in one specific area, which is not efficient in the supply chain realm. Wouldn’t you like the flexibility to send out an RFP and look for improvements from time-to-time without necessarily giving up all that has been established? This trap makes it extremely difficult to make any changes, improvements or independently work on your transportation and logistics infrastructure. Binding yourself to software that can only be used in conjunction with pricing and freight management services makes any change very difficult. Companies will promise you a data file, but searching through history in a file without the platform of the software can be very cumbersome. My recommendation is to ensure your software is independent of every other aspect of your transportation program, or be prepared to change software, if you elect to change carriers or freight management firms.
Usually, these total package contracts include software, which is actually, a great thing for your supply chain. However, make sure that your contract denotes that you own all of the rights to the information within the software and that you will not lose any historical data should you choose to part ways. Or if the software happens to be a great fit for your business but the partnership is lacking, make sure that you have the option to keep the software regardless of how things pan out between you and the partner. Failure to include a clause in your contract that protects the rights to your data will ultimately result in high costs and painful lessons. Also keep in mind that should you diversify your service providers, it is practical to choose providers that are cohesive but not reliant upon one another.
Accountability: Verify Savings & Results
One of the most important steps in any business is measuring your ROI. Verifying results is a process and you don’t wait until your new contract begins – have your data ready now so you know what to look for. It’s not possible to measure the savings and results in your new freight management partner if you don’t have the historical data to compare it to. Be familiar with your tariffs, fuel matrix, accessorial fees, and develop an internal method of measure to protect checks and balance. Some freight management companies are given too much leverage to determine the historical data that is used to compare savings and results. Be certain that you have evaluated and checked the data to be accurate. Having an internal resource that provides an unbiased opinion will ensure that you are capturing the savings you set out to achieve.
Exploring service providers is a never-ending cycle. We are all striving everyday to earn our customers business through the continuously reducing costs while improving services. Change is inevitable for every business but is not always necessary and may not produce the benefits you are looking for. Sometimes a change in providers can take years of struggling before getting back to where you were with your previous provider. When seeking out new supplier relationships, its important to always remember the four factors mentioned above – you could end up saving yourself more time and money by staying right where you are.