The New Year has started off with a bang. With the stock market at record levels, unemployment at historic lows in Canada and the United States and a new U.S. tax bill that promises to put extra dollars in the hands of American purchasers, it is not surprising that consumer confidence is at a high. The strong GDP numbers reflect that people are spending money again. It is no wonder that the Dow Transportation index is also at record levels (https://blogs.wsj.com/marketbeat/2011/07/01/dow-jones-transportation-average-close-to-record-high/ ). This is great news for trucking companies.
December was also a historic month for the trucking industry. The electronic logging device (ELD) mandate took effect at the end of December. This measure which is designed to increase driver safety, is projected to restrict the availability of truck capacity in the United States. Of course, a driver shortage has already made capacity tight. Companies that comply with the mandate must work within specific time windows. Those that don’t conform to the mandate risk being pulled off the road, over time, as compliance becomes stricter.
The result is that freight rates are projected to increase in 2018. In a letter to customers (https://www.sdcexec.com/warehousing/news/12371547/jb-hunt-tells-customers-to-budget-for-10-percent-cost-increase ), JB Hunt suggested that freight rates may increase by as much as ten percent or more. At the Surface Transportation Summit held in Toronto in October 2017, John Larkin, Managing Director of Research, Stifel Financial Corp. shared the following rate increase projections with the audience.
It is against this backdrop that shippers and carriers begin preparations for the annual freight bid ritual. Here are some suggestions on how each side should prepare for this process.
Shipper Freight RFP Preparations
1. Get your house in order
This means take any inefficiencies out of your freight operations. As I outlined in a previous blog (https://www.dantranscon.com/index.php/blog/entry/shippers-need-to-become-more-carrier-friendly-to-minimize-freight-rate-increases ), truckers will be looking for “carrier friendly” shippers. This means that freight companies will be giving priority treatment to shippers that offer well packaged palletized freight, clean paperwork, freight ready at time of pick up, clean docks, and scheduled appointment times. In this era of ELDs, shippers that allow carriers to drop trailers and pick up full loads will receive preferred status.
Another element of getting your house in order is creating a comprehensive, well written RFP package. At times, some shippers omit key elements of their freight (i.e. early morning pickups) in their bids that can nullify the exercise. It is critical that new carriers are given full, accurate details so they don’t bid improperly and then must rescind or revise their pricing when the project is completed.
2. Recruit a broad selection of carriers and freight management companies
Even if your carriers are providing great service at what you consider fair rates, add a group of new companies to the mix. In fact, begin testing some of them now before you start your RFP exercise. Have a pre-RFP chat with each carrier. Find out how your freight fits within their system, how much volume they can handle, the lanes they want and don’t want and where your company’s freight ranks in their customer list.
Have “heart to heart” discussions with those carriers that are not providing good service. Ask them if it is case of the profitability of your business and/or the lanes that they are receiving from your company. If you don’t receive straight answers, then you need to start looking for replacement carriers now.
3. Benchmark your freight rates
There are several ways to do this. If you have sister companies, share freight costs. If your company is part of an industry association, speak with other members of your association and see if you can share data, at least on some specific high-volume lanes. This will give you an idea of where your freight rates rank with respect to overall market levels.
There are companies that, for a fee, supply benchmarking data. If necessary, obtain data from them on specific corridors of traffic. If your company ships on longer lengths of haul (i.e. 750 miles or more) and you are not using intermodal service, obtain a set of rates on your key corridors and compare them to your truck rates. Also, sign up for one of the published sources of monthly rate increase data. This will give you an idea of where you sit and how rates are trending in your markets. Since this will be a tough year for rate negotiations, preparation is critical to success.
4. Develop an effective carrier leveraging/negotiating strategy
Leverage your freight to gain the best advantage for your company. There are several elements to consider. If your company does not have a large freight spend, think about partnering with other shippers. There are some established consortiums or think about forming your own consortium. The key to leveraging is having partners that have volume on your core lanes, that can help create round trips and continuous moves and are also “carrier friendly” shippers.
Remember your consortium is only as strong as its weakest link. Be prepared to award more freight to a short list of quality, price-competitive carriers that want your freight and can service it properly.
5. Sign multi-year contacts with volume commitments, SLAs and rate increase formulas
Shippers are encouraged to sign multi-year contacts with their larger core carriers. These agreements should include minimum volume commitments, service level agreements, and rate increase formulas tied to performance KPIs and CPI increase levels.
Carrier Freight RFP Preparations
1. Focus on your business and financial requirements
There will be lots of RFPs circulating through the industry this year. Carriers need to focus on their network, skills, and financial requirements. Some RFPs will be “fishing expeditions.” There are shippers that conduct RFPs every year but use them as leverage with their core carriers. At the end of the process they go running back to their same group of carriers. Check the type of freight, volumes, and lanes in the bid. Focus on what best meets your needs.
2. Contact shippers to find out where they are facing challenges and if you have a legitimate chance of securing some business
To increase your odds, contact the shipper to find out where they need help. For new carriers, this is a great way to “get in the door” and prove yourself. Doing what you do best can serve as a stepping stone down the road, over even in the short term if one or more carriers do not perform up to expectations.
3. To ease the burden on your traffic department, prioritize your bids and lanes and set aside those where there is a minimal chance of success
There is no need to burden your traffic department by asking them to prepare a quote for every bid that arrives. Be selective. Quality is more important than quantity. Pick the pieces of business that best meet the needs of your company and prepare thoughtful quotes that will deliver value and profits to your company.
4. Submit rates that are profitable but do not rape a shipper
Business goes in cycles. Just as there are periods with strong economic conditions, there are recessions. The pendulum will swing in the other direction, perhaps sooner than we would like. As a carrier, don’t go overboard with your pricing and then crawl back (with rate decreases) when volumes decline. Treat others as you would like to be treated.
5. Don’t overcommit or lie to a shipper
Some carriers bid on the basis that if they quote on large blocks of traffic, more than they could reasonably handle, they increase their odds of securing a satisfactory volume of business. When they are awarded more than they can handle, they fail and jeopardize their entire bid allocation. Focus on what you can do well. There is plenty of freight to go around this year.
Happy New Year! These are interesting times.
If you need help in designing and executing a bid or responding to a bid, please contact me at dan@dantranscon.com. We have been doing this for the last 14 years. To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).