Can this marriage be saved

Can this marriage be saved?

The love-hate relationship between shippers and carriers can lead to a mutually beneficial collaboration — but both parties have to be committed to it

at a glance

This article offers practical advice to shippers wanting a more collaborative partnership with their carriers.

Transportation has been largely deregulated for nearly a quarter century. During that period, it became commoditized in many respects, with prices tumbling and thousands of carriers failing. A few companies managed to survive by developing differentiated service models, but for most, the mantra was “run cheap or die.”

Dying, in fact, was the predominant course: Among the top 50 motor carriers in 1980, only four are still on the road today. And two of those — Roadway and Yellow — are now one company.

Perhaps the toughest thing about commodity environments is their adversarial nature — the love-hate relationship between buyer and seller. Like a rocky marriage, a mutual need clearly exists. But each party needs something that the other is hard-pressed (or loathe) to deliver. It's the battle of the bottom lines — the constant and unrelenting pressure for carriers to raise prices and improve return on invested capital, versus shippers' ubiquitous mission to reduce transportation costs as a percent of sales.

Another problem is that most commodity relationships reach a “theoretical minimum” when the provider's costs simply cannot fall any lower. In many ways, transportation has reached that point.

So if divorce is not an option and costs can't fall much further, what happens next? Perhaps it's time for better collaboration — reshaping the relationship so that both parties get more out of it.

Collaboration is hardly a new concept. But in practice, it's still pretty foreign to most of the shipper/carrier community. Complete harmony probably isn't possible. The fact remains, however, that formerly unattainable benefits can and do emerge when parties willingly share information, such as anticipated volumes and capacities; current problems and barriers; and ideas for improving logistical efficiency and developing new customers. We're talking about a cooperative effort to bilaterally remove costs from the relationship, rather than unilaterally cut costs.

In the transportation world, both shippers and carriers have expensive assets they need to deploy as wisely as possible. From the carrier's perspective, it therefore makes sense to solicit the involvement of a party that actually needs and uses those assets (the shipper). And from the shipper's perspective, it's logical to leverage the insights of the business entity to which you are entrusting your assets (the carrier) — particularly since transportation is a core competency of theirs but not of yours.

Here are some specific ways to do just that — to work together openly, effectively and (yes) collaboratively:

Improve negotiations

Real win-win scenarios are possible when both parties honestly and openly negotiate prices. In effect, this means altering rates up or down as the demonstrable need arises. It doesn't mean raising or lowering all rates simultaneously, but rather keeping a balanced perspective on what should go up, what should come down and what can stay the same.

Obviously, this approach would be very complicated and burdensome if every lane in every contract was negotiated every year, but that is not the vision. Instead, the idea is that current rates are reviewed for revenue adequacy (carrier), and competitiveness and cost effectiveness (shipper), with a new base level of rates established. Everything else flows from these conclusions, with rates adjusted as-needed on a market-specific, commodity-specific, point-specific or lane-specific basis.

“Global adjustments” (e.g., “let's raise all rates 5%”) are not a cure-all mechanism. In fact, they often undermine competitiveness, market position and share.

Rethink volume guarantees

Many contracts refer explicitly to a percentage of shipments. Typical language might speak of “a minimum volume requirement of 95% of all traffic” or contain a provision that “shipper shall pay carrier XXX dollars for each load that falls short of the prescribed volume requirement.”

The problem with this approach is that the guarantees generally refer to all volume, not just a particular mode, such as truck or rail. However, shippers seldom control all the outbound, much less the inbound traffic. More often, customers dictate who the carrier will be or what mode shall be used. Sometimes, too, service constraints or product requirements necessitate specific modes.

Nevertheless, volume guarantees are not inherently bad. In fact, they show the depth of commitment carriers seek. But the real test is “consideration.” Once that is met, it is a matter of discretion, negotiation and the need for “reasonableness” on both sides.

A commitment of 100% of volume controlled by the shipper is certainly feasible, and may even be desirable under certain circumstances. However, care and deliberation are needed to develop contracts that avoid potential long-term problems.

Consider new contracting approaches

Carrier contracts are frequently arcane, cumbersome and one-sided. They often contain unnecessary provisions that make contract administration an unwarranted burden for both shipper and carrier. A better, more collaborative approach revolves around standardization, simplification, accountability and regular “report card” sessions that involve the shipper, carrier and shipper's customer.

Here are some reasonably generic parameters that could be built into a standard, yet customizable, shipper-developed contract:

Simplify pricing The regulatory era spawned vast and complex rate-making approaches and processes which — to this day — complicate transportation pricing and administration (e.g., rating, billing and payment). However, in today's environment of lean corporate overhead, it is essential to change these fundamentals to eliminate unnecessary complexity and streamline the process of making, obtaining, issuing and administering prices.

Standardize accessorial charges On top of arcane, confusing, rate-making practices, wildly variable accessorial charges often create another layer of complexity. This problem can be addressed in at least two principal ways:

  • Base freight rates solely on the cost or price of providing transportation. This is not to say that all rates should be cost-based, as opposed to value-based; only that they represent transportation net of ancillary billings (i.e., without a lot of add-ins). The only exception might be when an accessorial charge is repetitive, for example, why have an accessorial charge for weighing, when all cars are weighed? Why not build it into the rate? Although there may be some good reasons for not doing this, they can be countervailed by component pricing. Component pricing aggregates freight charges and repetitive accessorial charges into a single price, but preserves the ability to adjust the individual components as required and to maintain visibility over what makes up the price.
  • Standardize accessorial charges. Contracts should seek to reduce the number of accessorial charges and standardize them among carriers to the greatest extent possible.

Alter the pricing paradigm Multi-year agreements can be advantageous from a pricing standpoint. The problem stems from the typical method of escalating prices on the anniversary date. General increases (i.e., raising all rates by the same amount, say, 1% to 3% per year) are destructive. The reason for this is that not all rates were created equal.

If you look back to the beginning of common carriage, freight rates were essentially the same regardless of commodity (often expressed in cents per ton-mile). However, as new commodities were introduced, carrier modes and pricing mechanisms proliferated. The end result was a large and complex set of rates, based almost literally on “who knows what?”

So when carriers decide to raise rates across the board, they're not starting on an even playing field. Rates that are too high get higher faster than they should — often becoming non-competitive and forcing traffic diversion. Rates that are too low never catch up.

The bottom line is that the time has come for a new approach to pricing that reflects market demands, competitive factors and rate histories. Combining this with standardized, simplified contracting and component pricing could lead to a new vision for the future, as well as expanded market share for both carriers and shippers.

The simple key is to minimize the time, expense and acrimony that shippers and carriers typically spend administering agreements. The benefit — in an era of pared-down staffs for both parties — is more time for thinking strategically and tactically, and less time performing onerous clerical functions relating to rate-making, contract provisioning and auditing/ paying freight charges.

Collaboration actually should go well beyond contractual relationships, which really only memorialize the way parties want to do business together. So, what are some of the things that can be done? Carriers, for example, could:

  • Form partnerships to drive out the costs of doing business and leverage the operational competencies of individual carriers.
  • Develop guaranteed (“time definite”) operating plans and reduce variability from plan.
  • Implement quality programs that use key performance indicators (KPIs) to maximize accountability and create a process for exchanging performance information with customers.
  • Develop real-time tracking, tracing and delivery-signature capabilities to provide full supply chain visibility.
  • Implement proactive notification of in-transit delays.
  • Develop automatic claims-processing capabilities.
  • Implement “invoiceless” payment mechanisms for freight and accessorial charges.

For their part, shippers could:

  • Provide carriers with accurate, timely volume and scheduling forecasts.
  • Integrate enhanced equipment-management tools/processes with carriers.
  • Streamline and enhance freight-procurement processes with carriers.
  • Establish more effective communication links with carriers by utilizing electronic data interchange (EDI), Internet or other automated linkages.
  • Help carriers identify back-haul and other efficiency-enhancing opportunities.
  • Optimize mode-mix and mode-shifting opportunities.
  • Build fact-based business cases for change.

All in all, “collaboration” probably is a somewhat hackneyed and overused term. But at the same time, there are precious few companies and individuals who honestly think that collaboration's potential has been fully addressed.

The point is simple: Collaboration is over-discussed and under-applied. Shippers and carriers that successfully minimize “adversarialism” and maximize cooperation will discover that there still are plenty of costs that can be removed from an effective relationship. LT

Brooks Bentz is an associate partner in Accenture's Supply Chain Management Practice (http://www.accenture.com), based in Boston. His expertise is in transportation strategy and operations, shipper/carrier management, third-party logistics and private fleet management as well as strategic transportation procurement. He currently serves on the board of directors for the University of Denver's graduate transportation program and on the program committee for the Intermodal Association of North America and International Intermodal Expo.

Logistics Today logo
May, 2004

Feedback on this article?

© Want to use this article?
Click here for options!

Copyright© 2004 Penton Media, Inc.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish