HOW TO NEGOTIATE THE BEST TRANSPORTATION PRICING

 

by Scott Rattet

Reprinted with permission

For all modes of transportation (truck, air, rail, ocean, parcel), most pricing is negotiable. 

 

How your company approaches carrier negotiations may make a great difference in your bottom line. 

 

The two basic approaches are:

 

1.  Negotiating with individual carriers

 

2.  Using an RFP (bid) process

 

Advantages of an RFP

 

Negotiating with individual carriers may be desirable in certain situations, such as when marketplace choices are extremely limited, or when an incumbent carrier has been providing such outstanding specialized services that your company doesn't want to consider other options.

 

An increasing number of companies, however, are learning that the RFP process is often the best strategy for obtaining the most competitive pricing.  Here are some of the key advantages of an RFP:

 

      It's an efficient way to learn what price the market will bear.  One RFP can be sent to as many carriers as you choose.

 

      The transportation business is extremely competitive.  Your company's shipping clerks and traffic manager are constantly being contacted by persistent carriers who  want their business.  When those carriers receive RFP's, they know they finally have the chance they’ve wanted, and they will naturally propose aggressive pricing to take advantage of the opportunity.  Carriers you have been doing business with will understand that they could lose your account if they don't make a competitive proposal.  The positive effect on your company's bottom line is obvious.

 

      The organized approach needed to prepare an RFP encourages your company to review its transportation requirements, so that pricing is obtained for the services that will truly meet your needs.

 

      The RFP process enables you to maximize the opportunity presented to carriers.  For example, all RFP's should include some corporate-wide transportation activity data.  Incumbent carriers will see data concerning shipments that  other carriers have been handling, but which they may be capable of and interested in handling.  The result will be more attractive proposals.

 

       Carriers in most modes are expanding their coverage and service capabilities, in order to gain market share.  Most companies utilizing RFP's find that they don’t  need as many carriers as they've been using.  When you offer more freight to fewer carriers, your pricing leverage will naturally increase.

 

What's your savings potential?

 

If your company has never used an RFP to solicit transportation proposals, your annual savings potential is probably in the range of 10 – 25%.  Variables affecting your actual freight cost reduction include:

 

      The effectiveness of your company’s previous negotiations.

 

      Mode of transportation  - for example, LTL motor carrier price improvements tend to be greater than truckload improvements.

 

     The centralization  or decentralization of transportation purchasing (centralized purchasing will leverage improved pricing).

 

      Recent and projected changes in:  average shipment size, weight, and frequency; total shipping volume; origin and destination locations; commodities shipped; carrier service requirements, etc.

 

      Your freight’s susceptibility to loss or damage

 

How to develop an RFP

 

Determine whether you have the expertise and time in-house.  If not, you can hire an experienced transportation consulting firm.  Either way the process is similar.

   

  1. Identify requirements - Meet with the appropriate staff, company-wide, to review and clarify transportation requirements, obtain feedback about current carrier performance, etc.
     

  2. Gather data – Compile or obtain reports illustrating recent (6 – 12 months) transportation activity.  Preferable details for both outbound and inbound traffic include origins, destinations, and weight.  Totals and averages should be provided.  Never include information about which carriers have hauled which shipment or the amounts you’ve paid.  If your company outsources the freight bill auditing function, such reporting should be available.  If not, a transportation consulting firm can generate suitable reports by entering data from your past freight bills into a reporting template.

  3. You should also obtain information concerning your company's recent and projected growth, prevalent commodities, packaging, etc.  The idea is to give carriers all the information they will need to make their most competitive proposal.
     

  4. Determine your preferred pricing and contract formats – Carriers vary in the pricing and contract formats they prefer.  Naturally, they tailor them to their advantage.   In order to allow "apples to apples" comparisons of the proposals you'll receive, and in order to protect your company’s interests, require all carriers to use the pricing and contract formats you prefer.  Tell carriers that any accessorial charges (e.g. trailer detention, etc.) must be indicated in the proposal and the contract, rather than included by reference to the carrier’s Rules Tariff.  If your company doesn’t have its own standard transportation contract, a transportation consultant can draft one for you.
     

  5. Prepare a booklet including all the information you have gathered, and include clear instructions to carriers concerning information you want them to include with their proposals (insurance certificate, terminal/equipment lists, references, financial information, etc.)

  6.  Decide which carriers should receive the RFP.  If your company has several shipping and receiving locations, be sure to obtain input from all locations concerning this decision


Analyzing carrier proposals

 

You should confirm that each proposal uses the standard pricing format you requested.  Then select “finalists” based on criteria including price, service capability, financial stability, and any other factors which are important to your company.

 

What about next year?

 

Some companies send out RFP’s annually, but most do not.  The RFP serves its purpose by bringing your pricing for a given transportation mode down to the competitive market level.  For many companies, that means bottom-line savings of hundreds of thousands  of  dollars annually. 

 

Once  that’s  done, your objectives will shift.  You will want to monitor the performance of all contract carriers, keep abreast of new options in the marketplace, and respond carefully to future carrier requests for price increases.  If your business changes dramatically, due to acquisitions or growth; if contract carriers pressure you for price increases which don’t seem justified; or if one or more carriers’ service performance is unacceptable (e.g. excessive frequency of loss or damage), you may want to initiate another RFP process. 

 

But if no such changes occur, you will want to maintain a close working relationship with your contract carriers, in order to ensure optimal service for you and your customers and a competitive price for your bottom line.

 

Scott Rattet is Senior Logistics Consultant at Williams & Associates, Inc., a transportation consulting and freight bill auditing firm based in Bloomington, MN.  Williams and  Associates  has assisted dozens of firms, in a wide variety of industries, with carrier RFP'S  and contract negotiations.

 

You may contact Scott Rattet  at  Williams & Associates’  at:  http://www.waionline.com