Copyright 2004, Traffic World, Inc.
There is more to an effective contract with a freight carrier than well-discounted shipping rates. The best contracts are carefully tailored to what and how your company ships.
When you prepare to negotiate with your carrier, prepare to get it all right. Then, when you have the favorable terms in place, make sure they are used effectively to the best benefit of your company.
What follows is advice and observation based on years of experience with small package ground and air contracts. I believe that the same strategies a company uses at this end of the shipping spectrum apply across all forms of freight agreements.
When auditing this portion of your logistics function, you should examine three main criteria: rates, contract terms, and contract utilization.
All three of these are important and integral pieces of a freight contract. Without all three working together, your traffic program is compromised and overall freight costs will be inflated needlessly.
Let''s look first at rates you have in place for shipping your materials.
Since most carriers offer discounted rates for medium and large shippers we''ll assume that you have a discounted rate program in place. The question is how were those rates put in place? This is important because, if there was little or no negotiation or planning on your part in the way the rates were set, they probably aren''t as attractive as the rates your competitors are getting.
There are three paths to discounted rates:
1. You request nondefined discounts from the carrier. The carrier supplies you with nominal discounts that, after some limited negotiations, are accepted.
2. The carrier perceives some competitive pressure, which causes them to offer you an unsolicited discount.
3. You negotiate with the carrier based on the attractiveness of your shipments, good data from the audits discussed in previous articles, and, if applicable, competitive pressure.
In the end, the company that knows what, how, and where they ship and can tell the carrier what it wants receives the best rates and ultimately the best contract. For instance, telling a carrier simply that you spend $1 million a year on freight that averages 16 pounds apiece won''t necessarily trigger the carrier''s pricing department to price aggressively. You''ll receive less than stellar discounts as a result.
To get the pricing discount you need, you must be prepared to offer the kind of information to a carrier that will unlock more discounts.
To do this, you can build a chart of:
-- Services, weights and zones of shipments for a representative time period.
-- A list of Zip Codes you ship to and from.
-- The density of your product, the seasonality of your shipments.
-- Other attractive aspects of your shipments.
This is the detailed kind of data that allows the carriers to better price your business. You are more likely to get corporate pricing to look at your opportunity rather than getting the standard local matrix rates.
Better data results in higher visibility that begets better rates. Then, if you add into the equation that you are looking at alternative carriers and include volumes from all carriers, not just the one you are talking with, you have a legitimate chance of negotiating the best deal.
There are a variety of professionals who can help you with the process if you don''t have the time or resources.
Carrier contracts have become much more complicated over the last five to 10 years. Any traffic department would like to go into a senior executive meeting noting that they got a basic 15 percent discount, but the real value of the contract may come in the terms that set the pricing - or perhaps penalties - for shipping.
-- Contracts are likely to include discounts off of base rates that are tied to shipping or spending volumes.
-- Base rates will rise over time so there is a built-in rate inflator.
-- Discounts can vary by weekly volumes or averages over several months.
-- Discounts can even vary by weights and zones and even by time of year.
-- Discounts may or may not apply to Alaska/Hawaii shipments or residential shipments.
-- A minimum charge may apply for certain shipments, regardless of the discounts in place.
-- Dozens of extra charges for residential, rural, weekend pickup/delivery, address corrections all apply and most will not discounted.
Considering the complexity and multiple extra charges possible, there should be a thorough analysis concerning the terms and/or waived charges that should be negotiated. Some small but strategic tweaks in key contract items can make huge differences in your costs and the effectiveness of your contract with the carrier. Here are some examples of small changes that resulted in significant savings to clients:
-- Waived oversized charges for ground shipments.
-- Waived dimensional weight charges for a company that had both dense and "fluffy" - or low-density - air shipments but on average had good, dense freight.
-- Negotiated a longer or shorter moving average to benefit shipping volumes used in calculating discounts. If these aren''t set properly, a company with some seasonality in their shipping pattern can lose their discounts completely for part of the year.
-- Arranged a ramp-up period to reach the targeted discount volumes so that the averages start when it is advantageous to the company.
-- Received carrier-paid assistance for processing your packages for shipment.
-- Waived Saturday delivery charges or other key charges.
The key element behind all these examples is that they demonstrate that a contract is made up of many components. Identify the key variables that are part of your shipping patterns that will have the largest impact on your costs and then negotiate.
After auditing the rates and other contract provisions with your carriers, it is incumbent to audit actual shipping results and to determine if everyone who ships on the company''s behalf properly uses all the positive features of the contract.
Effective companies will get close to 100 percent of the available shipments on their contracted carriers.
To do this is not a simple process; in many companies only 75 percent to 85 percent of the shipments use the negotiated contract. The others use noncontracted carriers - often at undiscounted rates and standard contract terms - adding needless expense to the bottom line.
This situation is doubly painful because it lowers the volume measures that drive the discount levels in your carrier contracts.
Where does this leakage take place?
The biggest problem in most companies is inbound freight - purchasing goods from suppliers and not requiring the use of contracted carriers to transport them.
This is an invitation for suppliers to prepay and add whatever cost they wish for the freight. This is a costly practice for your firm and easily can be curtailed by the use of new technology such as the Web-based shipping options described in my column in the April 12 issue of Traffic World.
A second cause of poor contract utilization comes from groups, subsidiaries, or departments within the company using noncontracted carriers for their needs. Often this practice stems from some perceived shortcoming of the contracted carrier or a bias toward a particular carrier by a key person responsible for the shipping - sometimes at the whim of the shipping clerk.
Often a frank discussion with the management of the rogue shippers, along with a good accounting of the extra costs of using noncontracted carriers, can turn things around.
A third cause is shipments by nonlogistics people in the company.
An amazing amount of paperwork, samples, literature, drawings and so forth are shipped by infrequent shippers within a company. These shippers often are unaware of the contracted carriers and the benefits of using them. Smart logistics groups put together presentations for support groups, complete with savings opportunities and prime-carrier Web shipping information, to encourage infrequent shippers to use the contracted carriers.
This is an effective tool when presented professionally.
Finally make sure that all company account numbers are tied to the main contracts. Carriers are not infallible and we''ve seen dozens of examples where legitimate shipments go undiscounted for years.
By auditing your contract rates and terms as well as freight program utilization you will assure the most effective traffic programs for your company.
-- This is part four of a six-part series on tools and tactics for today''s shippers. Dwight Sigworth is president of Shipping Strategies Group of Portland, Ore., a consulting company. Its Web site is www.shippingstrategies.com.