by Mike DuVall and Mark Beischel
Shippers are continually searching for new opportunities to reduce logistics costs and improve service levels. Most recently, core carrier programs have proven to be a popular means to accomplish this. Unfortunately, the results of these programs have been mixed. Many shippers watch the savings from these programs deteriorate over time, while others fail to realize any financial benefit at all. Further, few companies see improvement in service levels.
Motor carriers, on the other hand, see core carrier programs as a one-sided affair — an opportunity for shippers to pressure carriers to lower their rates. With the economy picking back up, carriers can now afford to be more selective about their freight, and many are revisiting their existing agreements to increase rates to accommodate the last few lean years. On the surface, it appears that shippers will have a harder time reducing costs and maximizing service as the economy improves.
The fact is, though, that shippers can create sustainable cost reduction through a core carrier program. However, this requires a fundamental shift in the way shippers do business with their carriers today. A better approach to driving sustainable results includes the traditional core carrier program attributes of bidding out lanes and optimizing costs, and adds six rules that can provide long-lasting results for both the shipper and the carrier. After all, if one party wins and one loses, the results will be sub-optimized and temporary.
With that in mind, then, following are the Six Rules of Sustainable Savings:
1. Optimize, don't minimize
In a traditional core carrier program, the shipper bids out its freight to garner the lowest possible rates for the promise of additional freight density. This approach is based on the theory that in order to drive costs down, the shipper must capture the lowest rate per lane.
While reducing rates by lane does drive savings, it does not capture the full value potential of a core carrier program. It fails to address other key components, such as service, availability and the value of the shipper-carrier relationship. Excluding these factors fails to account for the total cost of doing business with a particular carrier. Hidden costs, such as service failures, can quickly erase any potential savings promised by low rates.
2. Provide full disclosure
The second rule in creating a win-win program requires that the shipper provide true full disclosure to the carrier when describing its freight situation. This includes inbound freight, backhaul opportunities, long-term growth rates and mix changes anticipated, freight density, lane-by-lane volume, and any additional services that may require accessorial charges.
Some shippers do not trust the carriers enough to provide this level of information. Additionally, because this data is difficult to obtain even with the best of information systems, many shippers are unaware of their complete shipping needs. Doing the necessary homework to provide a comprehensive view of shipping needs is a significant undertaking, but it is an essential step in achieving lasting results.
3. Let the carriers help
Interestingly, the only way to optimize rates and service levels is to let your responding carriers choose the lanes they want. For this rule, you must get out of the way and let your carriers do their homework. Only the individual carriers know the subtleties of their networks — where they need density, how their network is expanding or contracting, and where they feel they can make a profit in the long run.
Rather than the traditional approach of "squeezing" carriers, a better approach is to let each carrier choose the lanes they wish to serve at a rate they can comfortably deliver. In effect, an informal bond is created without pressuring the carrier into an agreement. This considerably reduces the likelihood that a carrier will later back out of its agreement. The carrier entered into that agreement with full knowledge of the both the benefits and costs associated.
4. Do the math
As mentioned in the first rule, the traditional approach requires that the shipper merely reduce costs on a laneby-lane basis. However, to achieve the greatest potential, three factors must be optimized: lowest cost, fewest carriers and highest service. While this exercise is not particularly difficult, the shipper is trying to solve a complex optimization problem that cannot be accomplished on a simple spreadsheet. A robust model that includes all factors must be built to test all potential business scenarios.
Optimizing this model requires involvement from multiple executives within the shipper company. With a good analytic engine to drive out scenarios, the executive team can use their collective experience to pick the scenario that best fits the business. Through an iterative process, the team can develop the best possible solution.
5. Drive from the top down
While it sounds like a clichè, executive sponsorship is particularly critical for freight programs. These efforts often get lost among higher profile programs and shippers quickly revert back to their old ways. The challenge stems from the fact that the value of a core carrier program is difficult to see for those closest to the process. Their vantage point does not afford them a view of the total savings opportunity.
It is critical that the leadership communicate this information to their teams so that they understand and buy into the program. Also, freight optimization must be balanced with the physical network, customer lead times and product costs. Only the COO or CEO can provide the right sponsorship. For example, a perfectly optimized freight program that lags your competitors' lead times will not help your company compete.
6. Measure, measure, measure
The success of any core carrier program requires that the shipper's traffic department stick to the new carrier agreements. Unfortunately, these teams will look for opportunities to migrate back to the legacy carriers, with reasons ranging from lack of availability to personal relationships. Failure to comply with the core carrier agreements undermines the total savings potential.
Compliance must be tracked and made highly visible to the shipping teams. A simple weekly compliance scorecard keeps everyone on the same page. Additionally, it is important to track the cost reduction achieved. Detailed tracking of new rates against old rates at the new volumes will keep any detractors from pulling the program back.
Finally, it is essential to track service levels to ensure lasting progress. Problems in service levels must be tracked to keep the carriers compliant with their commitments, but documenting the improvement in service levels supports the momentum of the core carrier program.
Although core carrier programs have been utilized by many shippers for some time, the results have been lackluster. Those companies that have yielded savings have found the benefits difficult to sustain. Capturing the greatest savings — and maintaining them — requires an approach that ensures long-term value for both the shipper and the carrier. It requires that shippers create win-win opportunities where both the carrier and the shipper profit.
By following the six simple rules outlined here, shippers can achieve lasting results.
Michael DuVall and Mark Beischel are with business consulting firm Charter Consulting (www.charterconsult.com). DuVall is a principal of the firm and a member of the products industry practice, and can be contacted at [email protected]. Beischel is a partner of the firm and leads Charter's Cincinnati office; he can be contacted at [email protected].