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Deal

Should Shippers Negotiate Their Own Rates?

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Each and every day shippers are faced with the challenge of negotiating rates as well as contract terms and conditions with their freight carriers in an effort to control constant rising freight costs.  This is a challenge that must be met head on by all shippers, some of whom go into these negotiations confidently believing they fully understand freight carrier pricing structures. Then there are those shippers who really have no idea what a really good deal looks like or what they are about to encounter in these carrier negotiations.  The following is a real life story of a shipper in the latter group.  

The shipper we refer to is a global wearing apparel manufacturer with an annual freight spend well into the millions of dollars a year covering both domestic and international shipping activity.  The company does not currently employee anyone who has significant transportation and logistics experience to handle the negotiations. Unfortunately, this is the case for many businesses today.    

As anyone who handles these negotiations knows, it is never a one and done process.  The carrier typically makes an initial pricing offer based on what the carrier believes the shipper will accept and be pleased with.  That offer is almost always not the best offer for any shipper to accept.  But how would a shipper know that unless they had complete knowledge of all freight carrier pricing structures.  And, also had the ability to Benchmark and Target Price the shipper’s actual shipping volumes, lanes and product shipping characteristics to ensure the shipper receives the absolute best price offering from their freight carrier(s).

Since there was no transportation and logistics expertise in house, the company CFO was obviously charged with leading the carrier negotiations.  The CFO knew full well that some expert advice and guidance was needed to make this a successful negotiation process. The CFO made a wise business decision to hire our company to hold their hands throughout the entire negotiation process to ensure they received “best in class” rates for this multi-year transportation contract negotiation.  And, it’s a good thing they did because here’s what we uncovered in our due-diligence process.

As mentioned previously, these negotiations are never a one and done process and it was no different with this client.  After several iterations of price offerings from the freight carrier which we analyzed as all being less than acceptable price offerings, the CFO decided that she was tired of this process dragging on and on.  She was now committed to accepting the next carrier offer whatever it looked like and just move on to other corporate finance projects. The dragging on part was certainly not the shippers fault, but rather a carrier strategy to wear down the shipper to accept their “latest and greatest offer”.

Well, the carrier’s “latest and greatest” offer wasn’t so great after all, and here’s why.  The shipper actually had discounts and incentives in their current contract ranging from 50% to 70% that the carrier was now eliminating completely and replacing them with discounts in the 40 to 50% range.  The shipper was sure those 50-70% pricing incentives would just carry through into their new contract….WRONG!  

The net result of this “minor detail” alone would have increased the shippers international costs by 42% to 100% depending on whether the shipments were imports or exports.  The net dollar amount the shipper would have lost would have amounted to just under $100,000 annually, and this was to be a three year contract, so you do the math. And, to add insult to injury for the international shipments covered by this attempted pricing change, the shipper actually would be paying more than they are currently paying for similar import and export shipments.  So, this was certainly not a good deal at all for our client!

So of course our advice to the shipper was to stand ground and NOT accept the latest offer from the freight carrier but rather hold the carriers feet to the fire to change those international incentives back to where they were previously.  

In summation, the key to successful carrier negotiations is to always negotiate from a position of strength.  With our Data Science capabilities and forty plus years of contract negotiations experience, this shipper now had all the leverage it needed to obtain a world class transportation contract agreement.  

There is an old Latin saying, “Caveat Emptor” translated, “let the buyer beware” and doesn’t that say it all.  Remember, you don’t have to go-it-alone in freight carrier contract negotiations and never should.       

Truck

4 Tips to Improve Carrier Relationships

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To some shippers, the utilization of freight carriers has been a called a “necessary evil.”  “We make stuff and we need to ship that stuff.” Shippers with this attitude, and there are many, enter the marketplace with the perception that there really is no difference between the various carriers serving their company. To them, the only real thing separating one carrier from the other is price.  

The main reason for this thinking which has existed for decades, (and will continue to go on forever), is the fact that many of these shippers have not placed any real value in the services their carriers provide.

Let’s be honest here, pricing is important, but it cannot be the most important deciding factor in selecting the best carriers to handle a shipper’s business.

So we recommend a change in how shippers not only view their carriers, but more importantly how they measure the true value of the services being provided by those carriers.

Shippers need to be more strategic in the carrier evaluation process by looking beyond traditional cost-cutting and establishing several carrier selection initiatives to comprehensively evaluate how best to select and interact with their freight carriers for long term joint business success.

  • Determine appropriate Goals AND share those goals with the carriers

What are the shipper’s goals in establishing a relationship with a specific freight carrier?  Share those goals with the carrier or carriers. Does the carrier have the ability to meet those goals?  If not, it’s time to move on; and don’t just take the carriers word that they can meet the required goals, perform your own due diligence.

  • Set targets for key performance metrics

If the shipper’s due diligence has been successful and there is true confidence in the carrier’s ability to perform to the goals set out by the shipper, the next step is to create key performance metrics to continually measure all of the service attributes of those carriers. This includes on-time performance, zero claims initiatives, accuracy of billing, prompt problem resolution, easy to do business with and any other metric a shipper feels is necessary to track total performance of their carrier partners.

  • Measure variances over time

Once shippers start to monitor all of the key performance metrics they have established for their freight carriers, they usually find that the carriers are spot-on target out of the gate, but over time things begin to splinter and this is where relationships quickly come to an end.  It’s usually not a total meltdown across the board but small indications that somewhere along the line, focus has been lost. And if that’s the case, shippers and carriers must nip it in the bud to make sure this little pimple does not become a huge boil. Gut feelings are so critical in evaluating what’s going well and what isn’t.  Therefore, be sure to trust you gut.

  • Implement best-in-class scenario’s

So, at the outset of these business relationships, it’s important for both shippers and carriers to establish exactly what best-in-class actually looks like. Remember, to really be successful in establishing and maintaining best-in-class business relationships for the long haul, (no pun intended), both the shipper and carrier must be involved.  Both sides must be intimately involved in establishing exactly what they both agree best in class actually is; how it will be measured and should things start to go off the rails, how both parties will work to reverse the trend and get back on track for a truly successful long term business relationship.

How successful are your company’s carrier relationships?  Can they be better, should they be better?

Truck

So, you think your shipment is insured?

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Most shippers believe that if they tender a shipment to a domestic freight carrier and that shipment is lost or totally damaged in transit, they would receive full compensation from the freight carrier for that loss.  In fact, many years ago domestic freight carriers were required to compensate shippers for the “full actual loss” for a shipment that was either lost or totally destroyed while in the carrier’s possession and carrier liability had been proven.  Well, that was then and this is now.

Domestic freight carriers for years now have been limiting their liability by publishing various limits of liability within their rules publications.  These liability limits vary from carrier to carrier and it is incumbent on all shippers to have a complete understanding of their carrier’s liability limitations so they can avoid the loss of significant dollars should a loss or damage occur to their freight while in transit.

One such example is a limit of liability for “used machinery.”  One shipper we know shipped a large computerized fabric cutting machine back to the manufacturer for minor repairs.  The carrier unfortunately significantly damaged the machine while in transit. When the shipper filed their claim for the damage it was for several hundred thousands of dollars.  They were completely caught off guard when the carrier sent them a check for $120.00 claiming that shipments of “used machinery” were subject to a limited liability of $0.10 per pound.  The shipment weighed 1200 pounds so that’s how the carrier calculated the “whopping” claim payment.

That shipper certainly used poor judgement in tendering the shipment to a carrier who published the liability limitation, without seeking additional cargo insurance coverage.  In today’s fast-paced business climate, shippers are constantly seeking out the least cost carrier. And while that makes perfect sense, how diligent are those same shippers in researching the various carriers’ liability limits, just in case there is a loss or damage to their shipments.  Not very often we believe.

Of course shippers can obtain additional insurance coverage from the freight carriers for an additional fee, but knowing when to purchase that additional insurance is an important key to the carrier selection process.

On the other side of the coin, there are shippers that insure virtually all of their shipments with their freight carriers at great additional expense.  Well, if that shipper has limited claims for loss and damage, perhaps they should have opted to “self-insure” instead of paying a premium on every shipment they make.

Also, for the most part, paying freight carriers’ directly for additional insurance is typically the most expensive insurance costs a shipper will experience.  It may very well make sense for the shipper to obtain a separate cargo insurance policy from their business insurance company to cover them for any losses they may incur.  Companies must perform an insurance “sanity check” to make sure they make the most logical decision on what insurance provides the most comprehensive coverage for the least possible cost.

In addition to carriers limiting their liability, all carriers publish a list of items they will not pick up for transport.  These items are usually referred to as Prohibited or Restricted Articles and each and every freight carrier publishes their own distinct list of such restricted items.  

These items almost always include, US currency, precious metals, original works of art, live animals, hazardous materials, fireworks, household goods, etc., you get the picture.  It is incumbent on all shippers to know in advance if their carrier prohibits transporting particular products they intend to ship with that carrier.

To put this into perspective here is a real life example to chew on:  Recently a shipper of lighting fixtures advised us that they made a shipment to a customer by a certain freight carrier.  The carrier pickup up the shipment on the date specified, but then lost the entire shipment, (not sure how that happens, but apparently it did.)  The shipper immediately filed a claim for the loss of the shipment and the claim amount was in excess of $6,000.00.

The carrier replied to the claim by sending a letter of declination to the shipper claiming the shipper did not have “Prior Authorization” to make the shipment in the first place.  The carrier referred the shipper to a rule it published which states “the following items can be picked up but REQUIRE written approval by carrier prior to pick up.” The rule is very specific and states that written approval can only be given on a form authorized and signed by a member of the carrier’s regional operations management team.    

The carrier then proceeded to tell the shipper the lighting fixture covers it shipped to its customer for the fixtures the customer ordered were a “custom item, not typically maintained in inventory and with no other practical use or market value beyond the immediate intended use.”    Since the shipper did not obtain prior authorization to ship these goods, the carrier refused to pay the claim and the shipper was out $6,000.00.

The real concern here for any shipper thinking of using this specific carrier, is the carrier’s own definition of “custom Items.”  In our opinion, any item that is in any way customized, such as wearing apparel with company or team logos, any advertising material created for specific purposes, any food product which is labeled for a specific customer, any item that is cut to a specific size for a specific customer, (and the list goes on and on), can be considered a custom item and the carrier merely wipes it’s hands of any liability whatsoever and that should be a major concern for all shippers.

How well does your company vet it’s carriers to see if there are any similar liability restrictions that may come back to haunt them?  This should be a wake-up call for all shippers. Shippers must make sure they understand all liability limitations published by the carriers they utilize.  Shippers that utilize freight brokers and Third Party Logistics providers need to understand that each different carrier they utilize will have its own unique liability rules and regulations.  This is truly a “Caveat Emptor” scenario….translation, “Buyer Beware!”            

Success concept

Three Key Principles to Achieving Logistics and Supply Chain Success

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Today’s logistics and supply chain leaders are constantly implementing strategies to manage their daily challenges to ensure their businesses succeed.  We believe there are three core principles that must be adhered to in order to ensure that success is in fact achieved, and here they are:

  • Constant and Never Ending Improvement – Unlike creating a work of art, to be successful in business a company can never be “finished” with their logistics and supply chain improvement processes.  It is a constant work in progress. There must be ongoing and creative initiatives to continually seek out and implement improvements throughout the logistics and supply chain areas of the business.  Improve today and continue improving tomorrow and every day thereafter. It is never a one and done process.

If attitude dictates altitude then all members of the logistics and supply chain teams must truly buy into the process to achieve success.  They must feel it and do what is necessary to not only achieve success today, but more importantly, to work towards continually improving every aspect of their operations.  

  • Create a Plan with Capable Teams to Implement Those Plans – Having a plan of action will always make teams work harder and help them stay focused on their core missions and competencies.  There must also be total cooperation and buy in collectively from all teams. Teams must also learn to work collaboratively. Remember, it’s all about the “Yes.”  Yes, we can be successful if we make this operational change; yes, we can be successful if we implement these new business strategies; yes, we can be successful if we on-board this new 3PL business partner or implement this new software application.  

Teams must be relentless in their goal in achieving success by building high performance teams and encouraging everyone on those teams to be the best at what they do.

  • Continually Challenge the Status Quo – By challenging the status quo, logistics and supply chain teams will ensure they are in fact the “best they can be.”  Logistics and supply chain teams must continually strive to be creative, persistent, entrepreneurial, and always profit minded.  They must focus on key business drivers and never forget that they are in fact in the sales game; selling to their customers, continually selling to management and selling to each member of the various teams.

The logistics and supply chain teams must not be afraid to take risks, they must be willing to positively communicate ideas; they must not be afraid to challenge one another and, they must become change agents so they can create an amazing future for the business.      

We’re sure there are additional principles to achieving business success in the areas of logistics and supply chain management and we’d love to hear about your team’s experiences.

Deal

Five Keys to Improving Your Logistics Partnership Arrangements

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In today’s fever pitched, highly competitive business environment, many businesses are continually challenged to engage new and even varied Logistics Service Providers to enhance their businesses.  How a business approaches these engagements can be the clear difference between total success, or complete failure.

Here is a list of five key factors that will ensure businesses will succeed whenever they engage a new Logistics Service Provider:

Both Sides MUST Fully Understand the Business Opportunity – While this sounds logical for any joint business arrangement, often times one side or the other will inadvertently, (or sometimes even deliberately), leave out important and critical details of their operation(s) in an effort to hopefully gain a competitive edge over the other party.  This could simply be a shipper understating or overstating their actual shipping volumes to gain a pricing advantage. Or, it could be a service provider exaggerating their operational capabilities in an effort to secure the business and worry about the details later on in the process.  When this occurs, the result for both parties will be total failure of the intended partnership.

Failure to Involve ALL Key Stakeholders – In any joint business arrangement there are key stakeholders up and down both organizations that have important roles in either the success or failure of these new business arrangements.  These individuals or their teams can make or break any business partnership process either deliberately, if they do not fully buy in to the process, or inadvertently if they are not aware of all of the details of the business’ expectations.  ALL of these key stakeholders MUST be involved from the initial discussions all the way through to final implementation, or again the intended business arrangement is headed for complete failure. Never underestimate the power of any stakeholder within a business even if they or their teams are considered too far down the food chain to have an impact on the outcome.

Failure to Listen – Often times individual team members involved in the initial partnership discussions are so keen on moving the process forward, they fail to listen, or to actually hear key comments made by “the other side.”  Comments that most times will reveal loud and clear whether the intended partner is the right choice for the business or not. An old adage tells us that we have two ears and one mouth and therefore we should listen twice as much as we speak.  However, this very sound advice is very often ignored. Sometimes when sales teams are involved in these discussions they will “oversell” a particular service or continually highlight specific key points they believe are critical to closing the business.  And, sometimes when they do, the buyer, if they are listening intently, will get a clear signal that this company might not be the right fit for them. That is the time to walk away, before it’s too late.

Failure to Document ALL Processes – We all know it’s dangerous to ass-u-me, so don’t assume ANYTHING.  With that being said, failure to completely document all of the expected processes will again result in failure.  It’s the “devil is in the details” scenario. Taking the time to document ALL processes to gain assurances that both parties not only fully understand their roles in the intended business arrangement, but more importantly, that both sides can actually deliver on what is expected of them.  
Failure to Integrate Systems- How many times have we heard the term “you cannot manage what you cannot measure” (too many we’re sure.)  However, this advice is a key element for successful Logistics Service Provider partnerships that is often times overlooked.  Certainly, all Logistics Service Providers, regardless of the services they offer, have the ability to provide certain statistics and reports.  Shippers likewise should have the ability to provide complete shipping details to the logistics Service Provider. We say should because today, believe it or not, there are shippers that need help improving their processes and lowering their shipping costs, but they do not have the ability to provide even basic information about the products they ship, the volumes they actually ship or even the costs they are currently incurring.  Sounds illogical and it is, but unfortunately it’s true. It’s like going to the doctor a telling the doctor “it hurts” but not telling the doctor where the pain is. While both parties again should have the ability to exchange data and/or reports, the real key to success is integrating both parties’ systems together. This will create a consistent flow of intelligent, real-time information between both parties ensuring everyone that all processes are working exactly as planned.  

Business People Sitting in an Office Building Chatting

The True Cost of Going It Alone

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We recently had conversations with a large retail business to do some consulting work with an annual freight spend in excess of $100 Million.  Obviously that is a significant freight spend and one that should immediately command a great deal of respect from a freight carrier partner.  Against our best recommendations, the retailer decided to “go it alone” instead of working with us or another logistics expert.  They had some very talented and highly trained people in their logistics department and in their global procurement department as well and felt like they were well-equipped to handle the negotiations.

The reality is that due to the complexity of freight carrier pricing elements, which are  varied and include such items as application of varying base rates, discounts, incentives, carrier rules, regulations, additional surcharges, etc, requires a good deal of understanding before entering into any carrier negotiations.  These pricing elements are further complicated by complex and diverse freight carrier pricing agreements and contractual provisions offered by the freight carrier community.  Make no mistake, these complications are purposeful.  It’s simply impossible for an in-house logistics expert to have the knowledge and expertise to benchmark and specifically target price rates and examine these complicated and confusing terms without outside competitive analyses.

In addition to pricing and contract anomalies, a shipper needs to ensure they know exactly what will be thrown at them during the negotiation session(s).  Without complete knowledge of what to expect in the negotiation, the company might just have to fold their tent and accept what the other side has offered because they will be absolutely powerless.  They are putting their company at risk of losing ground each and every time they enter into these negotiations.

Just two short years ago, the logistics department of this retailer made the decision to change their primary carrier and give the lion’s share of their business to their former carrier’s top competitor. That change did in fact result in savings, but an important point here is that the shipper never really knew if they “left money on the table” because they went into the negotiations without any comprehensive competitive pricing data available to them. While they had a talented logistics team, they did not have the ability to provide the new carrier with any comprehensive shipment data.  So, they merely accepted the new price offerings the carrier had offered and signed a two year contract. Those negotiations did however provide a reasonable savings.

Also, two years ago the company for the first time hired a very qualified freight invoice audit company who in addition to auditing all of their freight invoices for billing errors, had the ability to dive deep into the company’s actual shipping transactions and with its strong data mining capabilities, provide the shipper with some very comprehensive information regarding its actual shipping characteristics which is vital in these negotiation sessions.  In addition, the audit firm had the ability to provide comprehensive competitive pricing analyses to show the retailer exactly what rates the shipper was in fact “entitled” to due to its large shipping volumes, freight shipping characteristics and extremely prompt freight payment capabilities.  All this information was now available to them before this new round of negotiations even started.  The information would be invaluable in the shipper’s on-going pricing and contract negotiations, only if it were used.

Now two years later, the logistics department began discussions with that current primary service provider to see what, if any additional savings they could achieve by extending their current business arrangement for an additional two or perhaps better, three years.

Over the span of several months, the freight carrier had been repeatedly requested to provide small tweaks to their numerous back and forth pricing offerings and provided the shipper with what in the end, amounted to inconsequential savings.  Then the carrier, who was clearly in the driver’s seat, dropped the hammer on the shipper.  They had had enough of the consistent tweaking requests and ultimately provided the shipper with what they termed was their “final offer.”

The carrier gave the shipper an “offer it couldn’t refuse” to take what they had offered or find another carrier to handle their shipments.  While changing carriers was certainly an option for the shipper it would have meant months of searching out and qualifying additional competitive carriers.  Secondly, the carrier knew the shipper did not have an appetite for changing carriers in the first instance by tipping their hand to that point early on in the negotiation process.

To make matters worse, the carrier added insult to injury by publishing a penalty provision in their new contract that if the shipper stopped using the carrier at any point in the next three years, the shipper would have to pay steep penalties for taking such action.  Now, it was even more evident that the carrier and not the shipper, was in fact in the driver’s seat.  The shipper who was totally unprepared for the negotiation process in the first place was totally intimidated and decided to sign the contract and say no more.

It’s worth repeating, that the shipper failed to fully understand the need to enter this negotiation from a position of strength; they certainly did not.  They had no idea once they started the negotiations as to what a successful negotiation should really look like.  They failed to utilize the resources it had available to them, that being the comprehensive shipment data and the Target Pricing and Benchmarkinganalyses the shipper’s audit company had provided.

The so called “experts” in the logistics department felt they knew what they were doing and didn’t need any expert advice. .  Had the shipper properly done its homework, it would have known from the comprehensive shipment data and benchmarking analyses it had in its possession what rates it should accept to ensure the lowest rates for the services offered.  More importantly, the carrier would have clearly understood that the competitive pricing information the shipper had was in fact pricing the carrier and shipper could both live with.

They also should have let the carrier know early on in the negotiation process that it did not have a lock on their business.  Once a carrier knows it has a lock on the business and there are no apparent competitors, it’s time to “take your ball and go home.”

Perhaps the shipper should have thought twice, or even three times about going it alone, because after the contract was ultimately signed, the revised Target Pricing and Benchmark Analysis revealed that the shipper did in fact leave money on the table to the tune of over $5 Million annually.   The procurement department at this point was at a loss as to what the next steps could be, if any.  It ultimately decided its hands were tied behind their back and it was not in their best interest to challenge the freight carrier, after all, the damage had already been done.

Our goal should always be to evaluate what expertise may be lacking in certain areas of our business and decide what resources we need to engage and, when best to engage those resources to ensure we overcome any internal shortcomings which will always guarantee a positive outcome!

Many companies today are taking the approach of focusing on their core competencies with their in-house staff and outsourcing all other areas of the business to the best available SME’s, Subject Matter Experts.  This is a smart business decision and one that over time usually pays huge dividends.

Clearly the first step is to admit to ourselves and to corporate management when we are faced with a challenge that, if we go it alone, we will be working at a distinct disadvantage and the actual outcome may not be a positive one for the business.