Carrier Negotiations Case Study
High transportation rates are the most common reason for high transportation cost. This client compared his transportation cost as a percent of sales to other companies in the home workshop and power tool industry and was shocked to see that his cost was in the highest quartile. Seventy-five percent of the comparison group of companies had costs that were lower than his! A quick check with the traffic manager assured top management that “our rates are the lowest possible.” While all traffic managers claim to have the lowest rates, only one can truly have the lowest rates.
A more thorough review of the situation uncovered three significant opportunities to reduce freight costs:
Carrier selection and rate negotiation for LTL shipments.
Optimization of the plant and warehouse network.
Improvement in stock performance to increase shipment sizes .
The highest potential savings was the result of obtaining the lowest rates possible from a few of the best carriers. Rate benchmarking based on a sample of freight bills and comparison of average cost per hundredweight against a database of other similar shipper rates confirmed that lower rates could be negotiated. For less-than-truckload shipments, the potential rate reduction was 20 percent. After negotiation and implementation of new dispatching decision rules, the actual rate reduction achieved was nearly 24 percent.
The second cause of high freight cost was a poor network of plants and warehouses. By concentrating these facilities in a single geographic region, the deliveries to customers across the country were made with long distance LTL and truckload shipping. Others in the industry had a network of warehouses configured to allow for more economic positioning of stock near the customers. This resulted in shorter LTL shipping distances and an overall cost advantage.
Finally, a comparison of average shipment sizes revealed a significant difference compared to other companies. The smaller average shipment size for our client was not the result of order sizes but of shipment sizes. Orders were being split into several shipments because the products were not in stock when needed. The potential here has not been achieved, but it is significant. Just take a look at the cost per hundredweight of 1,000 or 2,000 pound LTL shipments compared to 10,000 pound LTL shipments, and the 25 percent additional savings opportunity becomes clear (see our Five Reasons for High Transportation Cost Case Study).
This client used 68 different common carriers for LTL shipments from their single location. While the traffic department reported an ongoing program to reduce the number of carriers, there were many reasons for the long list. Most of the reasons related to specific customer requirements or preferences. The logistics department needed to gain the confidence and support of sales management to simplify the outbound routing to include no more than four outbound carriers. The result was three outbound carriers selected as core carriers, and the three included one carrier that was not on the original list of 68! An important key to reducing freight rates is to be able to provide significant volume to a candidate carrier.
Many carriers were eliminated even before the rates were discussed. Trucking is a service to both the shipper and consignee. A list of key service requirements was developed and carriers were invited to present qualifications and demonstrated performance in meeting the transportation quality needs of this client. At the same time, an information package containing details on the shipping volumes, destinations and shipment sizes was prepared and distributed to the candidate carriers. Both regional and national carriers were included in the list.
The list was now reduced to about a dozen qualified candidate carriers. Each was then invited to visit the site with the objective of presenting their specific qualifications to handle the business (all the business, if they could), to walk through the shipping operation and view the condition of the freight and dock areas, and to hear an explanation of the rate expectations of the client. Within two weeks of the last of these meetings, rate quotes were received and evaluated. The client prepared a draft of the routing guide, estimated the savings and impact on transit times, listed the customers that would be affected by the new routing, and reviewed the recommendations with sales management. Customers and carriers were notified and the new rates and routings were in effect.
The results were excellent—cost reductions were realized, service levels improved (less damage, more consistent and shorter transit times), and few complaints from customers. These were resolved quickly by working with the carrier involved and the customer. Fifty percent of the total opportunity for freight cost reduction was realized in the first pass.