Static Pricing Models Out of Synch with Today’s Transportation Market
I don’t know anyone who would argue with the assertion that supply chain operations must be highly dynamic and adaptable in order to succeed in today’s fast changing markets. Why is it, then, that pricing of transportation and other supply chain services remains a largely static process, based on annual bids and static routing guides that can never do more than reflect a single snapshot in time of a company’s freight volumes and flows?
At best, this practice often causes a shipper to be behind the curve of market demand. At worst, it results in situations where the freight is not moved at the lowest cost possible.
For example, we recently had two freight lanes, one to Youngstown, Ohio, and the other to Pittsburgh. The “number one” carrier in the routing guide had the best rate, but they were frequently declining the loads when tendered because their network had changed. The rates charged by the next few carriers in the routing guide actually exceeded the best current market price resulting in excess cost to the shipper.
Based upon our experience in working with many shippers, we know freight volumes and capacities ebb and flow far more frequently than can be accommodated by the traditional practice of awarding annual contracts and then assembling a routing guide that will govern service and rates until the next round of bids.
Our shipper clients are realizing this, too. And this is why they expect us, in our role as a 3PL, to more frequently interact with carriers and analyze lanes to and match their freight with available capacity. Helping our customers continually recognize where their needs most closely complement carrier capacity is key to ensuring they get the best rates and the best results.
The good news is that the ease of today’s electronic communications means there is no reason why shippers and 3PLs should not be able to reach out to carriers on a more frequent basis and elicit the market information they need to dynamically match their freight to actual capacity.
At Penske Logistics, we use an online portal to keep carriers informed in real time of shipments we have available and we take aggressive steps to stay current on carriers’ capacity situations.
One of these steps is to ask each carrier to submit a detailed profile of its equipment and capacity in each lane, which we use to populate our database. By pushing just a couple of buttons, we now can narrow down to a handful the field of carriers that are capable of meeting a particular need; these few then can be contacted and further analyzed to find the best fit.
Another area where Penske Logistics is helping shippers get a better handle on pricing is inbound transportation. We commonly find that the cost of transporting goods is folded into the procurement price.
In other words, goods are procured based on a delivered price, with the supplier being responsible for arranging and managing the delivery. Decoupling the cost of transportation from the cost of goods can be truly eye opening. One way we bring value to such situations is by using our broad knowledge of the transportation market to provide our customers with comparable transportation rates.
For example, suppose a customer is buying $1,000 worth of widgets, to which is added $100 in transportation charges, for a total delivered cost of $1,100. Our market research can show the shipper whether that $100 add-on is a premium charge or a good value for the transportation provided. This knowledge can then be used to guide future procurement negotiations with the supplier.
A thorough analysis of inbound transportation also enables us to identify opportunities for our customers to balance inbound and outbound networks.
If an inbound truck can be reloaded with outbound freight, the carrier eliminates empty miles and is able to offer reduced rates for the round trip.
This is another instance where relying solely on routing guides is insufficient, since by their nature such guides reflect inbound and outbound separately. Gaining more control over inbound freight can generate significant savings and is one of the activities that shippers increasingly are asking us to address.
Penske Logistics also is well positioned to reduce transportation costs by co-mingling a customer’s freight with that of other companies having similar service parameters.
For example, If shipper A has a requirement that freight get to a particular destination in three days and shipper B has the same parameter for a nearby destination, then we can satisfy both clients, at a lower cost to each, by combining their freight within our network.
Such opportunities also can be driven by geography. A lot of manufacturing activity has moved back into Mexico from Asia.
We see quite a few shippers today sourcing from multiple suppliers south of the border. If five Midwest companies all are sourcing commodities from suppliers in Mexico, Penske Logistics can co-mingle their freight and bring value to all.
Another lever we can pull to successfully play in this arena is around complementary hours of operation. Some shippers, such as newspapers or those providing direct store deliveries, does their logistics work at night, while others have mostly daytime operations.
We analyze these to find situations where we can use the same group of vehicles to serve one group of customers during the night and another during the day.
Shippers today are much more open to opportunities like these than they were before the recent recession. The resistance to co-mingling freight with that of a competitor or even a non-competing company has largely disappeared.
Savvy shippers now are saying, ‘if you meet my service parameters and can do it at a lower cost, go for it.’ At Penske Logistics we use our transportation management expertise and technology to continue unearthing such possibilities.
By Andy Moses