In todays rapidly-changing, deregulated transportation environment, a purchaser of transportation can significantly influence the bottom line of his or her company. Costs for freight paid by their company (and not added to invoices) flow directly to the bottom line.
Most medium-sized and larger companies have personnel responsible for negotiating rates with carriers. Many do a fine job, but most can do even better. Many negotiate hard for LTL rates but ignore small package carriers. There are some additional strategies a company can use to improve their success when negotiating with transportation companies, particularly as it relates to small parcel, air, ground and international shipments.
Understand your freight business
The first thing to understand is how carriers view your business. The pattern, shown in figure 1, is typical of what we see for package freight (shipments under 100 pounds).
Obviously, the more favorable attributes of your freight, the more demand there is for it and the better the price that can be offered by carriers. Examine your operation to see if you can increase the favorable aspects of your freight by reducing the number of carriers and offering more to those remaining, packaging in smaller boxes to eliminate wasted packaging space and reducing the number of pickup locations. All the carriers are getting much more sophisticated with pricing models and are quantifying these factors more thoroughly when proposing rates.
Gather your own data
Companies often ask their incumbent carriers to come in and look at their rates in hopes that the carrier will see enough favorable aspects to the freight to increase their discount. It is not uncommon to receive a small, incremental discount from this process. However, if the decision-maker prepares and analyzes his own data, it opens significant new (perhaps breakthrough) opportunities for their rates. Examples include:
Combining data from all locations and all carriers to increase the opportunity for an individual carrier (dont forget the mail center and other shipping locations as well as inbound shipments). This information is much more accurate than the small samples done by some carriers.
Allowing all potential carriers to bid on the business, not just the incumbent(s).
Seeking opportunities to segment the business for specialized carriers (i.e. messenger services, local or regional parcel carriers, etc.). Often this information begs the question,
Why are we shipping from different locations on different carriers?
What kind of data is helpful? For a representative period (at least a month) prepare summaries of the following:
Number of shipments, weights and average cost (retail) by service level and/or zone.
Primary shipping locations.
A to and from ZIP Code analysis study including number of shipments and weights.
Dollars spent (retail) for each segment of the business.
Current rate charts or contracts.
Gathering and summarizing this data will help the decision- maker understand his transportation business much better and better prepare him for good negotiation on a more even footing with the carriers.
Many companies have developed partnerships with their carriers that preclude them from aggressively negotiating for better rates. Incumbent carriers obviously encourage these relationships. Partnerships work well in some instances, particularly with very large companies. For small- and medium-sized companies, however, the benefits are less clear and often the partnerships are very one-sided (on the side of carriers). A Request for Proposal (RFP) will actually improve relationships with carriers in many instances (carriers become more attentive) and have a dual benefit of lowering rates and introducing new services.
When an RFP is in order and data has already been collected and summarized, the process is pretty straightforward. Decide which carriers you want to bid on your business, contact them and tell them of your intentions. Consider carriers which may have improved service since the last time you used them carriers like RPS, Airborne, DHL, regional carriers (like Pony Express, Eastern Connection or California Overnight) and particularly the USPS. If you are a heavy residential shipper, consolidators and the new Airborne@Home product are both well worth exploring. Incumbents are often unhappy to hear what you are doing, but with the opportunity for some potential new business or losing some or all of it, they usually participate enthusiastically.
When sending out RFP information, give all the carriers all the information for all transportation needs. Let them decide what to bid on. You may be surprised at the business some familiar carriers may seek outside of their well-known specialties i.e. FedEx has excellent ground and hundredweight programs for some shippers and many regional ground carriers offer overnight guaranteed service to extended areas.
Some companies share their current rates with carriers bidding on the business. They believe it gives others a benchmark to beat. That may defeat your goal, since carriers dont like their competition to see their rates. A carrier that expects to see its rates displayed in the next bid may be more stingy on prices for the current contract.
Analyze the benefits
When the carriers make their proposals, an analysis of the benefits needs to be done. Besides the non-economic issues and service offerings, there is the cost factor. I believe that it is extremely important to have a competent analyst with spreadsheet expertise working on the project. In addition, someone with strong carrier knowledge to help guide you could also be beneficial.
Get a solid sample of actual shipping data and run the rate proposals for each scenario. Rate charts are not a good way to evaluate rates, as one carrier may have an excellent letter and one pound rate, but you may ship 10 pound shipments. The bottom line figures are most important, not the individual shipment numbers.
Before selecting a new carrier, compare guaranteed carrier service levels to the ZIP Codes your company actually ships to. Sometimes you will find that your shipping pattern may not need the carrier that delivers to the most locations in the US by 10:30 AM. because you dont ship to many obscure points and a less expensive carrier can be used.
If you have solid proposals from regional or local carriers, have the analyst segment that business against the major carriers to evaluate the benefits to further segmentation. Sometimes niche carriers will offer excellent savings for shipments the major carriers dont really want.
Implementing the new program
When the program is decided, let all carriers who participated know your decision right away. Keep good relationships if possible. If incumbent carriers who have lost the business offer to keep their programs in place, accept it. This will lower costs during the transition instead of paying full price when shipments are mistakenly sent on the incumbent carriers. In addition, if the new carrier you have selected drops the ball, you still have a good transportation program to fall back on immediately.
Using these five strategies to analyze and implement package programs for your company will result in a stronger freight program and lower overall costs. Understanding your business thoroughly is the key.
Dwight Sigworth is the executive vice president at AFMS, Inc. Transportation Management Group. He has worked in the freight handling and transportation industry for over 20 years, including five years as Corporate Traffic Manager at Tektronix, Inc. Based in Portland, OR, AFMS is a national transportation consulting company specializing in helping clients reduce their shipping costs and enhancing their overall transportation programs. AFMS' staff & management include people who have direct experience with UPS, FedEx and Airborne. Contact AFMS at 800-246-3521 or visit their Web site at www.afms.com.