Demystifying Transportation Sourcing
9/2/2021 – Guest Blog Post from Kumar Kannan of Procural
If you are like me, transportation sourcing is a mind boggling and complex field. My colleague Dave Uncapher used to do some magic and deliver savings (and sometimes he did not!). So, I thought why not pick his brains and demystify this space.
This article is about creating value in transportation sourcing. Savings is one component of value; in a constrained market, the best sourcing expert may only be able to control cost increases, and not offset them completely.
If you are a small or mid-size company in manufacturing, agribusiness, retail or distribution, your transportation spend can be substantial. Applying sound sourcing principles will enable you to unlock value. Additionally, you can ensure that your supply chain is smoother and more predictable – less production downtime, less stock outs, and better promise to delivery for your customers.
Think strategically about transportation spend
If your transportation spend is unmanaged or is procured operationally, then consider these fundamentals to decide if you should more actively manage it.
- Determine your spend amount, spend pattern and carriers you use; is it seasonal, uniformly spread over the year; which lanes – origin and destination, truck capacity, type of equipment required – flatbed, vans, less than truckload (LTL), containers, or special equipment.
- What is the biggest concern to your business? Shipping cost or ability to deliver. If cost is a concern then favor short term commitments; if capacity availability and service are critical then favor longer term, more committed deals. In transportation, any term over one year will be considered long term.
- What service levels do you require from your transporters and what are you getting?
- How much of your spend is committed and under contract, and how much is procured on a spot basis? If a significant portion of spend is committed, then consider a dedicated fleet or perhaps investing in your own fleet.
Managing transportation spend
This is a tough time to go to market, but it is an even tougher time to be in the spot market. Capacity is tight; unutilized capacity is apparently nonexistent. Given these constraints, here are some considerations for managing spend.
Is trucking a commodity?
It may appear so, to the extent that there are thousands of carriers and technology is making it seem more like a commodity market. Whereas pork bellies and frozen orange juice are truly commodities driven by supply and demand, transportation is differentiated by service levels, capacity, performance, equipment capabilities and limitations.
Shippers and carriers have different demands, capabilities, and networks. They have different types of freight, service needs, lead times, dwell times, and handling criteria. Carriers have different assets, driver constraints, lane handling capabilities, and networks, all of which drive operating costs and return requirements. Aligning shipper and carrier requirements is key. Matching thousands of lanes with the capabilities of hundreds of carriers is complex but is critical to unlocking value.
Network and commitments
Understand your demand model. Depending on your requirements you can design your sourcing strategy to commit a portion of your freight volume, and procure the rest on the spot market.
- Know the characteristics of your shipping needs such as lanes, quantity, and service levels, and align them with the right carriers. How much can be committed, how much is mildly variable and how much is wildly unpredictable? The more you can secure and keep moving at the lower cost end of your routing guide the better. The more variability you have in shipping, the more your rates will spike. It may pay to secure some capacity insurance, by being slightly over sourced. It is preferable to pay for some underutilized dedicated trucks than move the same amount in the spot market today.
- Establish a core network of carriers, build a transparent collaboration model where you both search for win-win solutions. Helping a carrier better utilize equipment, keep it moving, have less dwell time, and less empty miles will ultimately keep costs thus rates at more favorable levels. There is a time where shippers need to move freight that is not ideal for the carrier but the better a shipper can build their network around the right fit for both parties, the better will be service and price.
Scan the market
Looking for alternative suppliers is a core principle of sourcing. It has never been truer than in this tight trucking market. This is a time where access to a wide variety of carriers is an advantage.
“I am continually searching for and responding to interested carriers. Locking in a rate for a period of 3 – 6 months protects both parties” says Dave.”
- Using any of the larger brokers theoretically provides you access to many carriers. In practice though, it is limited to how hard the agent or dispatcher works for you and on tightness in the market. There are several new digital brokers and conventional brokers utilizing digital means to access capacity. Brokers, load boards, and digital providers expose a lot of “invisible” capacity and are valuable resources.
Much of the inflation you see happening is on the spot market, which is very sensitive to supply and demand. More demand, less supply, rates go up, with no ceiling.
- Price drivers: With brokers and in the spot market, price is simply driven by supply and demand. Contractual rates, negotiated with asset-based carriers are less volatile. Asset-based carriers own their fleets and employ drivers. Their cost drivers are labor, equipment (trucks, tires, trailers) insurance, fuel, taxes, and overhead.
- A tight market does not necessarily drive rates of an asset-based carrier up, other than to the extent of increasing wage for drivers; likewise, a soft market does not drive their cost down; thereby translating into less extreme price swings.
Most of us associate price with service – you get what you pay for. In transportation the correlation between price and service is not as high as one is predisposed to believe. Service levels are more dependent on committing to capacity and lanes. Therefore, a dedicated fleet may be sitting idle some of the time but will be there when you need it and could be cheaper when prices are rising; and conversely more expensive when there is excess capacity in the market. Many shippers feel they cannot commit to volumes because they cannot forecast their volume or lanes far enough into the future. Both parties must collaborate to ensure that the carrier has a good view into demand and isn’t compelled to accept lanes that do not align with its network.
When you make contractual commitments, you are basically hedging against huge price volatility in both directions. Recognize that you could end up paying more in a down market. Negotiating long term rates in this market is probably not beneficial for the shipper or the carrier. In our experience, rarely are both parties happy in year 2 or 3 of a multi-year agreement. Having said that, shorter period contractual commitments related to capacity and service levels should be established, while ensuring that shipper’s demand and lanes align as best as possible with the carrier’s network.
The right relationship will provide better cost and service. Not because you share a beer at a game but because you work collaboratively to put the right carrier on the right lane. Refer my previous article on Supplier Relationship Management (Supplier Relationship Management: Putting the “R” back in SRM – by Kumar Kannan – Sourcing: A Practitioner’s View (substack.com).
Business cycle impact
Overall economic health clearly has an impact on trucking. Additionally, trucking is also impacted significantly by seasonal trends. Produce seasons, retail seasons, construction activity and significant weather events can all impact truck availability. Knowing the nature of your demand and the markets in which you operate is critical to smoothing the volatility.
Technology in sourcing transportation
Sourcing technology use will continue to expand and impact transportation whether it be via TMS for managing sourced capacity, or e-sourcing and optimization tools, or load boards. The driver shortage is putting emphasis on the need to introduce new technology across the entire spectrum of transportation activities.
For the purposes of sourcing, here are some tools and systems that you may want to consider:
- A TMS system with route optimization capability to use the sourced capacity most effectively can save significant dollars by building the best utilization of the capacity available.
- Use an e-Sourcing tool with freight optimization functionality to bid and award lanes. At Procural (www.procuralservices.com) we use EC Sourcing (www.ecsourcinggroup.com) for this purpose.
This is the most challenging market that shippers have experienced in recent years. We are not only seeing inflationary pressure on the domestic side but import ocean rates are up significantly as well. Freight tonnage has seen some recovery over Covid, but the capacity has not rebounded with the demand rebound.
We believe transportation capacity will continue to be tight with inflationary pressures for the foreseeable future. Think strategically about your transportation spend. Understand the nature of your needs and spend. Align your demands with carriers whose lane profiles and needs best matches yours. Determine what part of your spend needs to be committed and how much you are willing to float. Above all stay informed.
Informative websites and articles
- A good indicator for where trucking is headed is the Industrial Production Index published by the St. Louis Federal Reserve (https://fred.stlouisfed.org/series/INDPRO)
- Morgan Stanley published comprehensive freight periodical – https://www.freightwaves.com
- EC Sourcing’s eSourcing tool and optimizer www.ecsourcinggroup.com
My sincere thanks to Dave Uncapher for his inputs to this article. Dave is a Senior Advisor at Procural and has prior senior leadership experience in logistics, distribution, and supply chain at Owens Corning and UPS. He has led panels at transportation conferences, The Ohio State University, and at investor and carrier advisory meetings.
If you have comments, questions, or suggestions for future topics email me at firstname.lastname@example.org.