Recent stock market and currency value declines in China and Canada point to a challenging year ahead for the economies of these two countries and many others around the world. While the United States has remained fairly stable amidst current world turmoil, its high valued currency may slow exports to its key trading partners. If business levels deteriorate this year, this will place added pressure on shippers who are trying to manage their freight costs? Is this a year to conduct a freight bid?

Certainly faltering economic conditions typically encourage manufacturers and distributors to conduct RFPs to keep freight costs as low as possible. Beyond the general state of the economy, there are a usually a range of conditions that set the stage for a successful freight bid. Here a few to consider.

In my last blog, I outlined a set of tips to help carriers achieve greater success with Freight Bids. Here are a few more.

Put your best foot forward early in the process

Freight Bids or Freight RFPs have been around for over two decades. Every year we hear comments about their imminent demise. Unfortunately for many motor carriers, this is wishful thinking. While these exercises are often detested by freight companies, they are popular with shippers across North America. Why? When well done, they provide the shipper with better service providers at a lower cost.

One of the popular themes at many freight conferences is the talk of shipper-carrier partnerships and collaboration. I have heard this theme for a decade. If only shippers would sit down with their carriers, they could pull costs out of their operations and become more efficient.

While this is possible and even probable, the problem with this scenario is that the shipper is left wondering if carrier B could pull even more costs out of the operation than carrier A. This explains why so many shippers have contracted their freight to logistics service providers. They are not convinced that if they forgo the RFP in favor of collaboration, they will derive the maximum benefit. Thus the popularity of freight bids.

In the last blog, I highlighted some of the opportunities that shippers miss out on to save money on freight when they don’t manage their freight spend data effectively. What steps can a shipper take to correct this situation? Here is a partial list.

• Utilize a Transportation Management (TMS) System. TMS systems have changed significantly over the past ten years. Shippers can now buy or lease a TMS system at a reasonable rate. For companies that don’t wish to make this investment, they can reap many of the benefits without making a capital investment by working with a logistics service provider that has a leading edge system.

• Make sure the company’s or LSP’s TMS system is capturing the key data elements on a daily basis that are needed to monitor freight expenditures. This includes complete and accurate commodity descriptions, actual weights and billed weights, capturing the various cost elements of their shipments individually such as the freight rate, fuel surcharge, currency exchange, accessorial charges, carrier name, origin and destination cities, state/province and postal codes/zip codes, ship date and arrival date.

• Sort the data in the following ways to help identify opportunities for improvement:

             By carrier – to reduce the company’s dependency and vulnerability in case of a strike or business failure and to leverage shipping volumes

A company’s freight costs often represents between two and ten percent of total revenues. For many companies in the manufacturing, distribution and retail sectors, their freight spend has a direct impact on their bottom lines. Nine years ago I wrote a blog with the title above. In that blog, I identified one of the consistent problems we encounter in working with shippers on a day to day basis, namely a lack of complete and accurate information on their freight transportation activities.

Nine years later, this problem persists and it is not limited to just small companies. In fact, many companies with freight expenditures of five to fifty million dollars or more face the same problem.

The challenge now is that freight companies have figured out that if they use their scales and dimensioning devices, they can weigh and measure the freight they move more accurately. If shippers have poor practices that hinder the flow of their assets, they can calculate the cost of these deficiencies. They are now charging more aggressively for these additional costs and for the precise cubic space occupied by the freight. As a result, carriers can and are securing revenue that they may have missed in the past.

What is interesting is that some of these shippers have high quality ERP and accounting systems. However, when you try to extract a year’s worth of freight transportation data, you receive a file that is riddled with errors and omissions.

As we all know, freight capacity throughout North America is tightening. A shortage of drivers, new government regulations and rising fleet costs are making it increasingly challenging for trucking companies to operate their fleets. As a result, carriers are being selective in terms of the shippers for whom they will offer their fleet capacity.

Smart carriers are ranking their customers on the basis of profitability and ease of serving. Shippers must now make their companies and their freight attractive to their carriers to secure the capacity they need. These are some things they can do.

Run a Clean Operation

Simply put, shippers need to be organized. As carriers enter their customers’ yards, they want to find an available dock door and they want the freight and paperwork to be ready for pick-up. They don’t want to have to wait as other carriers to block their way. They also don’t want their customers to call them back 30 minutes after they left the yard to pick up an extra skid or two. In other words, trucking companies want consistency, reliability and predictability. They want to work with shippers that are efficient and keep their costs down.

The previous blog focused on some of the core freight management processes that are part of a company’s supply chain. For many years, prior to the age of computers and tablets, these processes were performed with manual procedures, calculators and spreadsheets. Some companies still use spreadsheets to manage a few or all of these processes. The good news is that there are some excellent technology-based tools that shippers can acquire or outsource to manage freight transportation. They include:

Transportation Management Systems (TMS)

A good TMS system can perform many of the activities outlined in the previous blog (http://www.dantranscon.com/index.php/blog?view=entry&id=202). These include shipment planning, shipment consolidations, mode and carrier selection, carrier performance management, exception reporting and a host of other functions. When linked with a strong Warehouse Management System (WMS), they provide a powerful integrated system to perform “end to end” supply chain management.

Shipment Loading

In many firms, freight costs can be in the millions or tens of millions of dollars. This large expense can represent a significant percent of a company’s revenue. As a large expense item, it needs to be managed very skillfully.

The first blog in this series (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-1-freight-data-management) looked at the need for detailed, accurate, freight spend data. One of the benefits of having this type of quality data is that it allows the transportation leaders of an organization to create a quality freight budget. The budget should be tied directly to the company’s business plan and supply chain strategy. Every manufacturer or distributor must make certain assumptions about how it plans to transport its inbound raw materials and deliver its finished goods. These assumptions outline the modes and expected costs.

The budget should detail on at least a monthly basis, the projected revenues and freight costs. Since many companies utilize multiple modes (e.g. small parcel, LTL , intermodal, etc.) and multiple service options (e.g. next day by 9:00 AM, regular ground, air freight etc.), it is important to capture this type of granular data since the costs will vary based on the mode and service chosen. Similarly, projections should be made concerning fuel surcharges and any other extra cost that can be a significant component of the freight budget.

The company should also produce a monthly transportation expense variance report. The report should be granular and provide variances on expenses by mode and cost item. It should highlight percentage changes in modal utilization and carrier collaboration.

Best in Class shippers have high quality, granular, historical freight data. They capture clean, accurate, complete data on all of their inbound, outbound and inter-branch transfers, across all modes. The most fundamental building blocks are the individual boxes, parcels, envelopes, cartons, drums or pallets.

Capturing this data correctly and completely allows a shipper to address such fundamental issues as the type of container to be used, space occupied, loading plan etc. This data is also critical when conducting an RFP as a means of selecting the appropriate modes and carriers. The data that each shipper maintains must contain certain data elements in order to be useful for analysis and planning purposes. The following data fields are essential.

 Shipment number

 Pick up date

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.

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

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.  

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.

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.)?

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.

As we approach the end of February, most truckers would acknowledge that this is a good year for the North American motor carrier industry. Business volumes remain strong, in fact stronger than they have been during the first few months of prior years. Supply and demand remain in pretty good balance. Capacity is tight as experienced drivers remain in short supply. Low diesel fuel costs are keeping this operating expense in a more manageable range than it has been in some time. For Canadian manufacturers, the eighty cent dollar is helping drive exports to the United States. Many shippers are receptive to rate increases to ensure they retain their core carriers. There hasn’t been a better time in years to improve yields.

In the past, truckers would go to their low margin accounts during the good times and seek a significant rate increase or de-market some accounts in the hope that new, more profitable accounts would be added. As economic conditions worsened and revenues declined, these same truckers would often go back to the accounts they de-marketed and then try to re-secure them. This feast or famine approach to yield management did not appreciably improve the business on a long term basis. Some companies have learned from experience that there is a better way. During these fairly buoyant times, the opportunity exists to make some significant and sustainable improvements to the bottom line of your trucking business. Here’s how.

Get an Accurate Reading on the Margins on all of your Accounts

If you haven’t invested in a good cost accounting system, now is the time to do so. As a starting point for any yield management initiative, it is critical that you don’t guess at the margins of your accounts. A good costing system will supply you with high quality estimates of the margins of your clients. The system should supply you with a list of your accounts in descending order by contribution margin by lane. There is a need to fully understand what is driving these numbers.

Which specific costs are contributing to the low margins on some accounts? Does a particular account incur too much waiting time? Is the freight difficult to load? Does the driver have to incur too many out of route miles to pick up or deliver the freight? Are the costs in line but the rates are non-compensatory? Do the rates not sufficiently cover fuel or accessorial charges or freight density? What are the factors that are producing an inadequate return on the account? Where do the rates have to be to achieve a satisfactory yield on the account? This will serve as a partial roadmap as to where improvements are required.

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.

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

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.

Freight costs have historically been calculated on the basis of gross weight in kilograms or pounds. By charging only by weight, lightweight, low density packages become unprofitable for freight carriers due to the amount of space they take up in a trailer or container in proportion to their actual weight.

Dimensional weight is also known as DIM weight, volumetric weight, cubed weight or density-based pricing. The concept of Dimensional or Cube Weight is gaining popularity in the LTL freight industry as a uniform means of establishing a minimum charge for the cubic space occupied by a carton or pallet. Three of the largest LTL freight carriers, UPS Freight, FedEx Freight and YRC introduced dimensional LTL freight pricing this year. Currently FedEx Ground only applies dimensional pricing to packages measuring three cubic feet or greater.  Effective January 1, FedEx and UPS will apply dimensional pricing to all packages.  

The implication of this change in pricing methodology has caught the attention of the media (see article in Wall Street Journal). Experts say the impact could result in increased shipping costs of 5 to as much as 25% - - - if shippers don't take action. This blog will provide shippers with a guide to prepare for the introduction of this LTL pricing methodology.

A Definition of Dimensional or Cube-Based Pricing

Dimensional weight is a calculation of a theoretical weight of a shipment. This theoretical weight is the weight of the package at a minimum density chosen by the freight carrier. If the shipment is below this minimum density, then the actual weight is irrelevant as the freight carrier will charge for the volume of the package as if it were of the chosen density (what the package would weigh at the minimum density). Furthermore, the volume used to calculate the Dimensional Weight may not be absolutely representative of the true volume of the shipment. The freight carrier will measure the longest dimension in each of the three axes (X, Y and Z) and use these measurements to determine the shipment volume. If the carton or pallet is a right-angled box, then this will be equal to the true volume of the package. However, if the package is of any other shape, then the calculation of volume will be more than the true volume of the package.