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Final Reflections on Freight Bids

Posted by on in Freight Bids

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Freight bid projects have become one of the most commonly used methods of sourcing freight transportation services over the past two decades. They have become popular with shippers for obvious reasons. When done well, they produce good results. Manufacturers and distributors can strengthen their supply chains by selecting a dedicated group of professional transportation companies and save money on freight costs.

The carrier perspective on freight bids is often quite different from that of most shippers. They tend to dislike them for several reasons.

1. Many bids are not well done.

2. The process of responding to these bids is a lot of work and they often don’t produce any business.

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Some shippers operate under the misconception that once the bid awards have been made, the RFP process has been completed. This is not the case. There is another critical step that can “make or break” the bid process. It is absolutely essential, particularly in multi-plant companies, to have a process in place, immediately upon implementation, to monitor routing guide compliance.

There is an old adage in business that you cannot manage what you cannot measure. This fully applies to the implementation of freight bids.

Never underestimate the power of human relationships. Tickets to sporting events, golf outings, annual fishing trips or vacations at a carrier’s summer or winter residence can do wonders to dismantle the work of a freight bid. In our work we have seen companies use low ranked carriers, or even carriers not listed in the routing guide, to move their freight. To maintain certain long standing carrier relationships, some shippers can and will find reasons to make a switch back to the incumbents.

We would recommend that you not conduct a freight bid until your company is able to put in place some form of reliable compliance tracking. Even a weekly spreadsheet that displays by lane, the carriers moving the freight that week and the reasons for replacing a carrier in the routing guide, would be a helpful tool.

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As the freight bid process comes to conclusion, there is an urgency to award the business so the shipper can begin enjoying  the cost savings that were achieved. While this is understandable, it is important to keep several things in mind.

First, if business is being awarded to new carriers, they need to come up a learning curve before they are as experienced as the incumbents. Second, some new carriers may have over committed during the bid process and are not able to perform at the expected level. For example, they may only serve certain lanes on particular days of the week or they may not have enough head haul or back haul traffic to bring their equipment back as quickly as expected.

Sometimes the shipper is at fault by not identifying the full scope of their requirements during the bid process. The company may have forgotten to disclose or incorrectly assumed that every carrier can make an 8:00 AM pickup or delivery every day. When informed, the carrier may determine that the best they can do, with their network, is effect a 10:00 AM or 11:00 AM delivery but no earlier. This may not be satisfactory for the shipper since they may need the freight early in the morning so they can dispatch their delivery vans at 8:00 AM to provide the service demanded by their clients.

We suggest that you test market at least some of the new carriers while keeping the existing carriers in place on those blocks of business. In other words, share the freight until such time that the new carriers have demonstrated that they can meet the service requirements. Guide the new carriers through the transition in order to increase their odds of success. Remember that this will create a win/win situation. This is also a good test of the professionalism of your incumbents.

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We live in an ever-changing world. Trucking companies come and go. They are being bought, sold, merged, downsized and resized every day. Under new management, a company may flourish or deteriorate. In this era of driver shortages, carriers are being very deliberate about how they allocate their capacity. As they focus on yield management, this precious capacity is being supplied to the carriers' most profitable customers.

In addition, trucking companies are constantly adding and losing business. A trucking firm may add a new account tomorrow at a higher margin than they are receiving from your business. This may cause them to make their capacity more readily available to another client. The bottom line is that it is always prudent to prepare for a “rainy day.” In other words, there is value in having backup carriers for most of your business.

This means that it is critical during the rounds of bidding, to smooth out the variances in rates between your “low bidders” and the others who were on the short list. By doing this, it reduces the cost differential in making a switch for any of a variety of reasons (e.g. poor service, carrier goes out of business, de-markets certain lanes etc.).

It should also be kept in mind that a carrier will not be too motivated to serve your company if they are a backup carrier in name but receive no freight. To achieve success with freight bids, carefully determine your primary and secondary carriers. This should include both asset and non-asset based providers.  While the temptation is there to give all your freight to the low bidder, to maximize savings, this can be a risky strategy. Where possible, select primary and secondary carriers. Give your backup carriers a reasonable volume of freight so as to keep the primary carriers “honest” and to keep all of your transportation providers engaged in serving your company.

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We live in an era of impersonal communication. E mails, text messages, tweets and GoToMeetings have replaced face to face communication in many instances.

The decision to award millions or tens of millions of dollars in freight transportation to a set of carriers is a very important one. You don’t want to entrust your company’s business and reputation to poor service providers that say they will meet your needs and don’t deliver. You don’t want to commit your business to carriers that offer low pricing to secure the contract and then come back a few weeks later with a rate increase, claiming they misunderstood the bid. These situations happen all too often and they can be very disruptive and financially punitive to shippers.

It is our view that the bid evaluation and award process cannot be done effectively through automated computer programs. There is a requirement to meet “eyeball to eyeball” with companies that may be your future business partners. These meetings should have a formal agenda. In addition to pricing issues, there is value in reviewing the carriers’ operations in detail. This includes:

a) fleet size and age

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The objective of a freight bid project is to secure a range of carriers and logistics service providers that are best able to supply a shipper with the service (e.g. transit times, customer service, shipment tracking information), capacity (e.g. drivers, tractors, trailers, straight trucks) and pricing to ensure the company has a competitive advantage in the market. It takes time to do this right.

If your company has conducted a professional bidding exercise, you should be able to rank your service providers on a set of variables at the end of the first round of bidding. If the bidding process has been conducted effectively, there will likely be some significant cost savings, particularly for companies that have not gone to the market for several years.

There is a temptation on the part of some shippers to “take the money and run.” This could be a big mistake.

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There are thousands of freight carriers, load brokers and logistics service providers throughout North America. One of the important elements of an effective freight bid is to seek out those carriers that can provide the best combination of service, capacity and rates to meet the unique needs of your business.

Over the years, we have observed some companies that do freight RFP exercises but limit the carriers they contact to the same group of companies year after year. My colleagues and I will hear comments like “we used that carrier in 2002 but their service was poor” or “most carriers in that lane have the same rates” or “we know the carriers that can handle our freight effectively.” It is our view that conducting an RFP is a great time to learn more about the various players in the industry.

Times change and so do carriers. New management will strengthen some carriers while weakening others. The quality level can vary significantly from carrier to carrier.  There can be a wide disparity between carriers in their ability to serve certain geographic areas.  

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In order to conduct a freight RFP exercise, shippers need to secure historical data on their traffic volumes by type of service (e.g. small parcel, LTL, over the road truckload, intermodal etc.) and freight costs by lane (e.g. origin – destination pair). The data serves two purposes. First, by capturing and sharing shipment activity data, it guides the carriers in creating their bids by helping them understand how the freight will impact their business. Second, the freight cost data serves as a benchmark against which to compare the rates and other carrier data (e.g. transit times) that are received.

To create an accurate data base, the following key elements are required:

a) For small parcel shipments, origin and destination postal codes are essential.

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In an RFP, the carriers are being asked to bid on specific types of freight moving on specific traffic lanes. The rates they quote are based on the freight descriptions that you provide. It is essential that all aspects of the freight be documented in sufficient detail so as to ensure the quotes received are an exact match for the freight being shipped. These are some of the areas that require their input.

a) What do typical shipments look like (e.g. pallets, pieces, a combo, drums, totes etc.)?

b) What are the precise dimensions and weights of the freight?

c) How is the freight loaded and unloaded (e.g. crane, fork lift, lumper service, side loading, apartment deliveries etc.)?

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Over the past eleven years, my colleagues and I have worked on a variety of successful freight RFP or freight bid projects. During that time, we have observed a number of factors that are the keys to success. This is the first in a series of blogs that will provide tips on how to run a successful freight bid.

1. Obtain Buy-in and Participation from the Operating Divisions

In some multi-plant or multi-division companies, the RFP project is approved by the head office CFO or President. While the divisions may pay the carrier freight invoices, their participation in the RFP may be limited to reviewing the proposed carrier list or bid documents or simply being made aware that the project will be undertaken. This is not adequate.

Since the division managers are directly involved with shipping and receiving goods on a daily basis, they often have information that head office personnel don’t have. It is essential that these people be engaged at the beginning, at key milestones throughout the project and at the end to ensure a successful project. The division freight personnel should be asked to not just read status requests or respond to written requests for information; rather they should also be engaged in conference calls on specific topics (e.g. freight loading and unloading requirements, documentation of local cartage runs, pick-up and delivery requirements in specific branches etc.) so the bid documents completely and accurately reflect the shipping characteristics of your firm.

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This year, major freight carriers have been seeking general rate (GRI) increases, higher fuel surcharges (at a time when energy prices are at their lowest levels in years), accessorial charge rate hikes and the implementation of dimensional LTL pricing. In other words, shippers, particularly in the small parcel and LTL sectors are facing a barrage of rate increases in 2015.

This brought to mind some words of wisdom I heard from Jerry Hempstead, President of Hempstead Consulting during the Logistics Management 2015 Rate Outlook webinar. Jerry made the comment that when it comes to freight rates, shippers “don’t get what they deserve, they get what they negotiate.” This sage advice has stayed with me since the call and is the inspiration for this blog. Here are a few thoughts to consider.

Data is Power

Shippers without good freight data are virtually defenseless in rate discussions. If you don’t have accurate data on the density of your freight, you are at the mercy of freight companies, their scales and dimensioning devices. If you don’t have quality data on your volumes by lane and on the various components (e.g. line haul charges, fuel surcharge, accessorial charges) of your freight spend, you are not able to able to manage your freight and communicate effectively with your carriers.

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Here are few statistics to consider. On June 27, 2014 a barrel of crude oil cost $107.26 U.S. On the same date, a gallon of diesel fuel cost $3.91 in the U.S. or $1.35 per liter in Canada. The cross-border (Canada/U.S.) fuel surcharge was 20.1 percent on LTL, 47 percent on truckload.

Last week, the price per barrel dropped to $50 while the price of diesel fuel fell to $3.13 in the U.S and $1.18 per liter in Canada. The cross-border fuel surcharge fell to 13.4 percent on LTL and 31.6 percent on truckload. This week the cost per barrel is trending below $50. The cost per barrel has dropped by over fifty percent in the past six months. In the same period, fuel surcharges have declined by about a third. Here are few thoughts that shippers need to keep in mind.

1. Shippers will receive a freight cost saving windfall in 2015

An energy expert suggested this week in Forbes magazine that we may see the cost of a barrel of diesel fuel fall to as low as $20 this year. While no one knows what the bottom is or how long energy costs will remain at these levels, the end result will be an unexpected cost saving bonanza for shippers. Enjoy it as long as it lasts.

2. What comes down will go up

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This year, all signs point to rising freight rates. With driver shortages across North America, driver wages are on the rise. On an almost daily basis, there are reports of trucking companies offering signing bonuses and pay for performance (productivity) packages to attract more drivers (at a higher cost) to their firms. Capacity shortages, government regulations and increases in fleet costs are all driving upward pressure on costs. In addition, economic growth is increasing the demand for transportation services as freight carrier consolidation, particularly in Canada, reduces the range of carrier choices.  New pricing methodologies (e.g. Dimensional Pricing) will also serve to push up freight rates, particularly for low density LTL shipments.

Shippers have been using Freight RFPs or Freight Bids for years in an attempt to keep freight rates under control. The question is whether FRPs still work effectively in a climate of rising freight rates? As a company that has been conducting freight bids for over ten years, the answer is yes, but they take more thought, more planning and more work than is the past. Here are a few tips to ensure your company achieves the best value for its transportation dollars.

1. Leverage your volumes

Your company’s volume of freight, in the traffic lanes where your vendors and customers are located, is the deck of cards your company brings to the table. One of the keys to success is to leverage these volumes as effectively as possible. To do so, it is helpful to consolidate (for purposes of rate negotiations) the freight volumes you have across multiple plants, divisions, sister companies and/or even competitors, if possible. Larger freight volumes give you a bigger bargaining stick.

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Freight rate increases are coming this year. The economy is on the upswing. Truck capacity is tightening as driver shortages, government regulations, cost overruns from a very challenging winter and carrier financial prudence all push freight rates in one direction - - - higher What can shippers do to mitigate the impact? A lot. Here is my list.

1. Capture your Freight Costs

Take a look at your freight costs and compare them to prior years. Look for opportunities to fix negative trends (e.g. lack of discipline in moving less than optimum size shipments, too much expedited or air freight etc.) that may have arisen.

2. Benchmark your Freight Costs

Obtain rate quotes from carriers that serve your traffic lanes. Compare their rates to yours. If your company ships high volumes, consider obtaining a benchmark freight rate service on at least your major lanes of traffic. The study will at least tell you if your company is paying market rates or higher and identify carriers that provide the same service at lower rates. There are also companies that provide an ongoing fee-based benchmarking service.

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As the year 2013 winds down, it is time to reflect on the major transportation trends of the past year.  While I saw and read about a wide range of developments, these are the ones that resonated most with me.

1.Technology Comes to Freight Transportation

Last year I predicted that we would see a flurry of new technologies come to freight transportation.  They did and I wrote about some of these new companies on several occasions during the year.  Technology was successfully applied to the freight brokerage business, freight portals, LTL density calculations and to other segments of the industry.  Buytruckload.com, PostBidShip, Freightopolis, QuoteMyTruckload,  and Freightsnap were featured in various blogs during the year.  They are changing the way business is done in freight transportation.  Watch for more of these companies to surface in 2014.

2013 has been called the Year of the Network by numerous supply chain and transportation industry thought leaders.  Companies that built a successful supply chain trading partner network focused on three elements:

Connectivity— unite disparate systems and trading partners

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The subject of Shipper-Carrier Collaboration and Freight Bids came up in at least three tracks at this week’s Supply Chain Canada Annual Conference, presented by SCL and Canadian Industrial Transportation Association.  The subject was discussed at length during a panel discussion entitled, “Shipper-Trucker Relations” led by Lou Smyrlis, Editorial Director, Transportation Media, Business Information Group.  To address the sad state of relations, the panelists highlighted some of the issues raised at a recent meeting held between representatives of the Ontario Trucking Association and the CITA, one of Canada’s leading shipper advocacy groups. 

This discussion was of great interest to me and my company since we have been involved with freight RFPs (Request for Proposals) for over nine years, helping shippers design and execute their bids and helping carriers respond to some of the more complex RFPs.  Here is some of what I heard this week and a few ideas on how to fix several of the problems.  First here is a bit of background.

The Great Recession – the Trigger for the Freight Bid Mania

Prior to forming my consulting practice in 2004, I worked for carriers in the freight industry for many years.  Freight bids have been around for at least twenty years.  Before entering the consulting arena, I had seen and responded to my fair share of RFPs.  Freight bids became very prevalent during the Great Recession in the late 2000s.  As business volumes and revenues shrank, many shippers employed this tool to drive down their freight rates. 

One of the panelists on the Shipper-Carrier Relations track spoke about how overused and abused the tool became.  He highlighted the fact that some shippers conducted as many as three bids on the same freight in the same year to drive down rates.  Freight bids have now become an overworked and often times poorly used instrument to source modes and carriers.  One trucking company executive on the panel was very blunt in his views on freight bids.  He stated simply, “I hate them.”

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Trucking is a $37-billion industry in Canada. The U.S. trucking industry is about ten times the size of Canada’s trucking industry.  In 1998, almost half of the industry's registered trucks in Canada were heavy-duty vehicles weighing more than 15 000 kg (33 000 lbs.) in gross vehicle weight (GVW). They were used primarily to transport freight between urban centres across Canada and to transport goods between Canada and the U.S. and Mexico.

The same study showed that forty-one percent of the energy consumed to transport freight in Canada was used by heavy-duty trucks, and the commercial road transportation sector produces 19 percent of the total emissions in Canada. Carbon dioxide (CO2) is the principal greenhouse gas (GHG) that contributes to the global problem of climate change. A fuel-efficient truck fleet lessens negative impacts on the environment, improves a company’s image and, most importantly, boosts a its bottom line. A November 2012 Carbon War Room report found that purchasing new or retrofitting existing trucks with fuel-saving technologies can cut fuel costs by 30 percent and result in savings of up to $167,000 per vehicle over 10 years.  The long-term cost benefits of adopting fuel-efficient fleets are clear. But adding up the cost of a new tractor-trailer, top-of-the-line battery, aerodynamic fairings, advanced cruise control and a fuel-efficient transmission brings the price tag to nearly $130,000 per truck — a hefty upfront cost and a tough sell for buyers.

This report also found that employing a full suite of fuel-saving technologies generates annual fuel savings of $26,400 per tractor-trailer. When you consider that the upgrades pay for themselves in fuel savings in just 18 months, this is a powerful incentive to obtain and utilize these technologies.

The Canadian and U.S. governments recognize the importance of energy efficiency and the need for resources and subsidies to make it happen.

Types of Incentives

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An article in the February 11 issue of Bloomberg BusinessWeek caught my eye and got me thinking about another way of reducing freight costs.  Here is the idea.

Hardys became Britain’s best-selling Australian wine brand by selling wine for as little as $5 a bottle, despite the 37 percent surge in the home country’s currency since 2009.  To do that and earn a profit, Hardys changed their paradigm for shipping wine.  Accolade Wines, the producer of Hardys, came up with the idea of shipping the equivalent of 32,000 bottles of wine in a 24,000 liter plastic bag.  The company reduced shipping costs by $3 a case by moving the wine 10,000 miles to a bottling plant that is a two hour drive from London.  The bottling plant receives the shipping containers via truck each day.

Australia’s wine industry that generates the equivalent of $5.8 billion in annual sales, now ships more than half of its overseas shipments in bulk.  The wine makes the 40-day trip to Europe in plastic “bladders.”  Richard Lloyd, Accolade’s global logistics manufacturing director stated:  “We don’t ship glass around the world; we ship wine.”

The BusinessWeek article highlights that shipping in bottles can add 25 cents per bottle to the cost.  Shipping wine by the case fills a ship with containers of bottles.  A third of the volume is taken up with bottles and cartons.  While a 20-foot container can hold 9,000 liters of bottled wine, it can carry a 24,000-liter bladder at slightly higher cost.

While shipping freight in bulk is not new, it is not commonplace for certain commodities.  For low cost products, that typically move in bottles or cans (e.g. no name fruit juices or tomato sauce), “deferred packaging” may help reduce freight costs.

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