How Should Shippers Manage Carrier Rate Increases in 2012?

Carriers and the transportation media have laid out a compelling case as to why transport companies should be receiving rate increases in 2012.  As the Great Recession of the late 2000’s unfolded, shippers put significant pressure on their carriers to roll back their rates.  For many carriers, rates have not returned to pre-recession levels.  The driver shortage is putting upward pressure on driver pay.  Government regulations (e.g. CSA, HOS) are being cited as some of the causes for a shrinking driver pool.  Despite the recent easing in fuel costs, petroleum costs have also been on the rise this year.  The increased cost to purchase insurance and upgrade fleets are driving further cost increases.  Shippers are being told to accept the proposed rate increases to ensure they have available capacity if the economy begins to grow at a more rapid pace.

These are compelling reasons and the various Canadian and American rate indices suggest that shippers are consenting to rate increases.  What can shippers do to help mitigate these increases in their supply chain costs?

Here are a few suggestions.  In my last blog I outlined a number of steps that shippers should take.  These include looking inward at their current packaging, taking advantage of consolidation (e.g. combining small LTL shipments into larger shipments), modal conversions (e.g. over the road truckload to intermodal) and other related opportunities to reduce costs.

Every shipper should also look outward at the market rates for their freight.  An annual freight bid that goes to an extended range of carriers and logistics service providers is also a must to ensure the company is paying competitive rates.

The operating ratios of publicly traded transportation companies are easy to access.  While costs have certainly gone up for most transport companies, one of the “dirty little secrets” of the Great Recession is that many costs have gone down.  Many trucking companies parked equipment, reduced wages, changed their operations (e.g. switched some long haul trucking business to intermodal) and improved their efficiency.  In other words, they adjusted their cost base to correspond with their reduced volumes.  This begs the question of what level of increase should a shipper accept?

The days of a freight salesman walking in and saying that my management is asking us to secure a 6.9% rate increase this year should be long gone.  This is not the time for shippers to “roll over and play dead.” Carriers need to do more than “cry the blues” and talk about cost increases.  They should lay out a “business case” as to why they need a specific level of increase.  The business case should not be generic but tailored to the specific requirements of each shipper. I encourage shippers to prepare a checklist of items to see if their carriers are doing everything possible to improve efficiencies.  The list should include:

• A summary of the cost increases they have incurred and what they are doing to mitigate them
• Their financial performance over the past 3 years (Some privately held companies may resist this question but it is legitimate if they are asking you to pay more).
• The miles per gallon they are currently achieving with their fleet and what is their plan to improve in this area (The better managed fleets are in 6.5 plus range.)
• Are they a SMARTWAY carrier and what are their SMARTWAY scores?
• What are their fleet management (e.g. tractor tracking and trailer tracking) processes? (This is an important indicator of efficiency.)
• What are their CVOR and CSA scores (which are available online)?  (Good scores are a sign of  a safe, well maintained fleet)
• Asking about their use of technology (e.g. EBOR’s), systems and participation in new programs (e.g. long combination vehicles) to improve efficiencies

Finally shippers should be asking their core carriers about how they can work together more effectively.  What can the shipper do to remove obstacles and streamline processes to reduce costs and mitigate rate increases?

The key is to be prepared for these exchanges.  Certainly shippers should try to maintain their relationships with their core carriers if they are performing well and if they are operating efficiently.  In fairness to carriers, fuel costs and driver wages are largely driven by market conditions.  On the other hand, transportation executives have a responsibility to their employers to filter “boilerplate” rate increases and engage in a thoughtful exchange of information so as to make responsible and informed decisions that affect an important component of their costs and profit margins.