The Tesla’s Semi-Truck is a significant entry into an industry overloaded with antiquated equipment and technology.
For individual truckers and companies, the Tesla Semi-Truck will drive economic growth and unparalleled customer service while reducing the physical cost per mile by 17% from Day 1.
The enhancements for the driver experience may help to replenish the pipeline of new drivers into the industry; arguably the most significant issue for the trucking industry as a whole.
And there’s one more thing; the Drive Train is guaranteed to last 1 Million Miles and you may never even need to change the breaks in that amount of time.
Production starts 2019!
Today we continue to highlight and expand upon the key elements of the “Checklist for Transportation Spend Management” created by Transwide and Supply Chain Media. In today’s post we highlight checklist items three, four and five.
Checklist Item #3 – “Carrier Bid and Selection is an Automated Process and Rates are Automatically Updated.”
This point is an interesting and extremely important one because in many company’s bid processes, the final carrier selection is based solely on the lowest cost respondent. That single selection criteria process is not always the best choice, and in fact often times is the worst choice for the shipper. In any carrier bid process, the key element is making sure that all carriers who are invited to bid are in fact “all created equal.” If not, then selecting the least cost carrier may, and often does backfire because the lowest bidder may provide the lowest level of service.
To work with a bid process that is automated and where the carrier rates are updated automatically, is a very powerful tool for any shipper to utilize. Automating processes in conjunction with the carriers’ processes only strengthens the working relationship between both parties, creating true and hopefully long lasting relationships.
Checklist Item #4 – “Almost all of our Carriers are Meeting their Service Level and Routing Compliance Requirements, as a Percentage of the Shipments They Handle.”
The key words in the above checklist point is “almost” and “as a percentage of the shipments they handle.” First and foremost, we all understand that no transportation service provider will provide 100% on-time, damage free deliveries, 100% of the time. Having said that, every company must establish their own metrics for what they feel is a reasonable “fail rate”, because that is exactly what it is, a failure of the carrier to meet its service obligations as outlined by the shipper. If a carrier continually falls below that failure rate, the shipper must have a defined plan to replace that carrier immediately and perhaps even more important, is the need to get that change order message out to its suppliers, customers and other company employees involved in the process without any interruption in service.
Checklist Item #5 – “We Collaborate and Synchronize data with Carriers, Suppliers and Trading Partners, and we Only Need to Concern Ourselves with Invoice Exception handling.”
Collaboration is such a critical part of any business relationship, especially between shippers and carriers. But we are continually amazed at how often these relationships are thought of as vendor/customer relationships and not business partnerships. This is a fatal mistake and is usually made by the shippers who feel that they own the freight and they pay the bills so they are the ones that are in control…NOT!
The old adage “it takes two to Tango” is still true today. Yes, the carrier needs the shipper’s freight but equally as important is the fact that the shipper needs the carrier to get its goods delivered. Sounds simple enough and it is, but putting the proper tone on these relationships at the outset is critical for long term business success FOR BOTH PARTIES!
The issue of invoice accuracy is another critical aspect of any carrier/shipper relationship. If the rates and charges are agreed to by both parties, the rates and charges would be loaded into the freight carriers billing system and therefore each and every invoice it issues SHOULD be 100% accurate. That’s in a perfect world which none of us live in. Again, metrics are critical here as well. What percentage of invoice inaccuracies is acceptable? What happens if the carrier exceeds that percentage? There is a cost associated with the shipper’s need to audit and properly pay all of the carriers invoices in a timely fashion. So the more invoicing errors there are, the more cost the shipper bears. That is another recipe for failure that is often overlooked in the bidding process.
One final point that both shippers and carriers should always strive for. If the carrier and shipper agree to the rates and there is a total collaborative process in place between the shipper and the carrier, the shipper could “Pre-Rate” every shipment it makes based on the agreed upon rates and charges. That would allow the shipper to send payment to the carrier without ever having to receive an invoice from the carrier – How’s that for a collaborative and synchronized business operations process.
Today we continue on our mission of highlighting and expanding upon the Checklist for Transportation Spend Management created by Transwide and Supply Chain Media. The second item on their checklist is as follows:
“We source and negotiate freight rates and award contracts to the optimal carrier trading off between quality, speed and cost.”
So, what does this really mean and why is it so important? Many shippers, in fact all shippers are in need of continually reducing their transportation spends. The transportation industry is one of the only industries we know of that implements General Rate Increases year after year, while many of their shipper customers are usually selling their products at lower price points than they sold for the year prior. That’s where a big disconnect obviously comes into play between shipper and carrier partners.
Shippers in need of reducing, (or at least controlling) their annual freight spends often merely seek out carriers with lower costs. That process may be putting the cart before the horse, because what good is lowering shipping costs if the carrier(s) the shipper selects cannot meet the required service demands of the shipper’s particular business? The answer obviously is— “no good at all!”
So there has to first be an internal analysis completed by all shippers to determine exactly what service levels the shipper requires from its freight carriers. Secondly, the shipper needs to seek out ONLY those carriers that can fully meet those needs. Secondly, there may be times when extended transit times in exchange for lower shipping costs may be appropriate. If that is the case, the shipper should make sure their carriers can provide a multiple of delivery options to meet the shipper’s needs. If they cannot, the shipper may want to engage a freight broker or 3PL, who has contracts with a large and diverse variety of freight carriers providing a varying delivery schedules. The shipper would then have the ability to “rate shop” individual shipments to make sure they make the best “trade-off between quality, speed and cost” as the checklist points out.
One other item we wish to highlight in checklist item #2 that we find extremely valuable is the need to “award contracts” to the shipper’s carriers and/or freight brokers. Unlike tariff and rate schedule publications, contract agreements bind both parties and neither party may make any changes to the contracts without the written consent of the other party. So carriers and/or freight brokers cannot arbitrarily increase rates during the contract term without the written consent of the shipper. On the other hand, the shipper cannot decide to pay the carrier in 90 days when the contract specifies payment requirements of 30 days. These are just two simple examples of the benefits of transportation contracts.
One last critical word of advice. If you’re a shipper and your company is not entering into contract agreements with its transportation and logistics service providers, you should take the time to explore the massive benefits contracts can bring to your company. Also, don’t assume that your in-house council is completely familiar with transportation law and liability issues; seek the advice of transportation council to draft and monitor your transportation contracts. You’ll be glad you did.
A recent White Paper published by Transwide and Supply Chain Media provided a checklist for shippers to use to ensure they have their transportation spend under control. This is a very thought provoking list that every shipper, large or small should keep handy. You can download it here.
We’re not sure the authors intended to put these checklist points into any specific order of importance however, we do believe the first point on the checklist is the most critical one for all shippers. “We have the processes and capabilities to benchmark rates against a broader network than just our current providers on a daily basis.”
In order to be sure a company is receiving the “Best Deal” from its transportation and logistics service providers it must have the ability to benchmark their current services and pricing against a much larger and broader group of equally qualified service providers. The reality is that what may be a “Best Deal” for one company may be a terrible deal for another.
For example, some shippers are currently receiving discounts and incentives which are in the 90% range. While that may seem like the “Best Deal” at least price wise, it probably isn’t. Most of these discounts and incentives are being offered off of the carrier’s current, so-called List Rates. In many cases the “List Rates” have been inflated and that’s precisely why these carriers can afford to offer these 90% discounts. It’s what we call “The Retail Sell.”
What is the retail sell, you ask? The retail sell is when you see a sale off of the “Original Selling Price” of an article typically in a retail store. Those original costs are marked up, so they can be marked down to entice the buyer into thinking they got a great deal. The reality is the best deal is not necessarily the deal with the largest discount, (as some logistics and financial executives falsely believe); it is ALWAYS the deal that ensures the shipper is receiving the most competitive rate “for the services being offered by the most capable service providers.” Notice we didn’t say the “Lowest Rate” or “Cheapest Rate.”
So how does a shipper obtain the benchmarking information they need to perform these analyses? Most shippers do not have the ability to benchmark their rates against many other competing transportation and logistics service providers. The good news however is that there are firms who specialize in these services and monitor the markets closely on a daily basis. Transportation and logistics prices change on a daily basis. Shippers need to continually monitor their expenditures on a consistent basis to make sure their company receives the best combination of service and cost. Yes, these two characteristics, service and cost must be considered before entering into any long-term service agreements.
We urge all shippers to seek advice from the transportation and logistics consulting firms who specialize in benchmarking rates for all transportation modes and all levels of service. In some cases shippers may even benefit by changing modes of transportation, such as consolidating and moving parcel shipments to LTL; moving LTL shipments into partial truckload shipments, etc. So having an expert help you assess, benchmark and “Target Price” your business to make sure your company receives the “Best Deal” today and into the future will pay huge dividends.
We complement Transwide and Supply Chain Media for publishing this Checklist and we will continue to comment item by item in our future posts.
We recently received a call from the CFO of a company who was perplexed by the fact that his company’s sales have been flat the first half of 2017, however his freight costs have been on the rise. His question to us was, “how is that possible”? Well, having been in business for over forty years, we’ve “seen this movie before.”
One would assume that there is a correlation between sales dollars and freight dollars, however the rise or fall in either one of these categories typically has no relevance to the other category. A company could sell the same dollar amount of product year over year, or even more product but where they ship and how they ship those products will have a significant impact on their freight costs. Let’s also not forget that each and every year, all freight carriers implement General Rate Increases which average 5% per year. There are so many variables associated with transportation costs you simply cannot make a valid argument that merely because your sales are flat, your freight costs should also remain flat.
So, faced with a request from the CFO for an answer, we took a deep dive into their shipping statistics comparing the first 6 months of 2017 with the freight costs for the first 6 months of 2016. Our “Big Data Analysis” looked separately at the company’s actual shipping activity for small package shipments as well as their costs for Less Truckload shipments. Here are some of the highlights from this company’s shipping analysis and the story these highlights told.
- Domestic Small Package Shipment Analysis:
- The company’s average weight per package increased year over year from 17.5 lbs. per package to 18.7 lbs. per package, an increase of 4.7%
- The company’s average cost per package increased from $8.68 in 2016 to $9.32 per package in 2017, an increase of 5.5%. As mentioned previously, part of this increase was attributed to the parcel carriers 2017 General Rate Increase, and part if the increase was attributed to the higher weights per package shipped in 2017 vs. 2016
- One major factor that affected this company’s 2017 domestic parcel freight costs was a 47.5% increase in dimensionally rated packages over the prior year. When we reviewed these statistics with the company, they confirmed a major sales push for a specific product line where the boxes were larger than many of their other standard products
- Also affecting increased Ground freight costs was an approximate 0.5% increase in domestic fuel surcharges in 2017 vs. 2016. Air Express Fuel Surcharges increased 2% on average in 2017 vs. 2016
- International Small Package Shipment Analysis:
- International Fuel surcharges for import shipments increased 3-5% on average depending on the country of origin. This represented a 178.8% increase based on the countries the company imports from
- The average weight per shipment for international packages overall, (import and export), increased from 36 lbs. to 41 lbs., an increase of 13.8%
- The average cost for all international packages, (import and export), increased from $185.18 in 2016 to $206.25 in 2017, an increase of11.3%
- The number of international packages shipped increased 31.1% in 2017 vs. 2016
- Overall international shipment weights increased from 8254 in 2016 to 12322 in 2017, an increase of 48.7%
- Overall international shipment costs increased 41.6% from 2016 to 2017
- LTL Shipment Analysis:
- Overall LTL freight costs increased $83,992.30 in 2017 vs 2016
- Fuel surcharges increased an additional $25,951.09 in 2017 vs. 2016
- Interestingly the company’s average weight per shipment decreased in 2017 vs 2016 from 2,128 to 1,461, a decrease of 11.8%, which also equates to a higher cost per CWT
- The main reason however for the large increase in LTL shipping costs was the fact that this company initially enjoyed a 2011 base rate level with their primary LTL freight carrier, before applying any discounts. However, early in 2017, the carrier changed the base rates to a 2016 base rate level, but only increased the shipper’s discount by 0.5%, hardly enough to compensate for what we projected to be an overall increase of 35% by moving the base rate levels from 2011 to 2016
- To add insult to injury, the LTL carrier also increased their Fuel Surcharge 4.2% in 2017 vs. 2016
So what can we glean form this analysis? It is clear that many factors affect freight costs and they are not necessarily reflected by total sales dollars any company achieves. All shippers must have the ability to analyze their freight costs year over year. Unfortunately, as you can see from the example above this company had no idea that they would experience such large increases in freight costs, but more importantly, they had no way internally to track these costs year over year.
Sad to say, but many companies are in the same boat. So if you do not have the resources in house to perform these analysis, have no fear, there are third party consultants that not only have the expertise to perform “Big Data Analytics” but also have the ability to assist these companies in their negotiations with their freight carriers to ensure they ALWAYS receive the best deal possible!