July 25 2006 10:57 AM

A topic I am routinely asked to address by transportation executives during my travel around the country is carrier rate benchmarking. Many professionals cannot resist the notion that, If my discount is better than someone elses, then I must be doing okay. But I am always quick to point out that nothing could be further from the truth!


Benchmarking is an excellent management tool but, unfortunately, not when it comes to assessing carrier incentive rates. Since no other company has the same parcel characteristics as yours, comparing incentive rates is a waste of time. In fact, I can guarantee you that the company next door, or your competitor across the country, doesnt have the same parcel characteristics as you. So when you compare rates, you are really comparing apples and oranges and driving yourself bananas!


There are many factors to consider when determining what incentive is warranted for your parcels. These include such factors as the varying physical parcel sizes, weight and zone distribution, parcels per pick-up and delivery stop.


Why is benchmarking so enticing? For one thing, upper management encourages it throughout the organization. And many transportation managers are unable to explain why it does not work for carrier rate analysis. Secondly, there is a certain amount of comfort derived from talking with peers about what rates they are paying to their carriers. But it is a false comfort.


Lets consider just one variable, parcel size, to make the point. In this example, all other variables zone distribution, parcels per pick-up, etc. are identical. Company As parcel size is one cubic foot, while Company Bs is two. When comparing the cost to service the two companies, a parcel carriers per package linehaul cost will be twice as much for Company B as it is for Company A. Thats because the carrier can fit double the number of Company As parcels in a trailer compared to Company B. So Company As incentive rate should be higher by that cost difference. Benchmarking cannot provide that answer. You need an engineered cost-based approach to understand the impact that your unique parcel characteristics have on carrier costs. Only then can you accurately assess your incentive level!


So what does this mean to you? For one thing, turn a deaf ear to all those consultants knocking on your door or inviting you onto their Web sites proclaiming they can assess your current carrier incentive if you simply tell them how many parcels you ship along with your incentive rate! It simply cant be done. They are probably throwing darts in some back room to come up with their recommendation. So dont waste your time!


One of the greatest myths perpetrated on you, the shipper, is that incentive levels are driven by volume. Nothing could be further from the truth. Do you think a carrier would offer an incentive to a shipper whose parcels could not be serviced profitably? Of course not, regardless of how much volume it had. The only thing that drives incentive levels is the profitability of your parcels. If your parcel characteristics translate into a low operational cost for the carrier and a high profit margin, carriers can significantly discount their rates. Naturally, it is a great sales tool for a carrier representative to say, If you only had a little more volume, I could get you some more incentives!


Very few shippers are receiving an incentive rate that properly reflects the value of their business to the carrier because they lack an understanding of how their parcel characteristics relate to carrier costs. Carrier cost-based knowledge is required to accurately evaluate your incentive. Without this understanding, you will continue to overpay your carrier.


So the next time someone tells you he can assess your incentive levels, ask him how that will be accomplished. If the answer is a form of bench-marking, dont waste your time. Seek an engineered, cost-based approach if you want a reliable analysis. Remember that there are no short cuts to an accurate answer.


Joe Loughran is president of SmartTran, Inc. and an expert in parcel carrier rate analysis. SmartTran is a transportation consulting company offering services in carrier rate negotiation, guarantee refund service and logistics planning. SmartTrans management team has over 60 years of experience in parcel transportation management. Joe can be reached by phone at 724-934-0626 or by e-mail at loughran@smarttran.com.