1. Segment lanes by complexity and service level
A shipper needs to focus on protecting capacity among its preferred carriers for high complexity/high service lanes and is unlikely to reap any appreciable savings (‘protected spend’). The name of the game in this situation is to be as attractive a shipper as possible and focus more on guaranteeing volume to secure capacity than on rates. If a shipper is unable to obtain capacity on these high complexity lanes, it may need to consider setting up dedicated fleet operations. But before deciding whether a lane or geography would be a good candidate for insourcing, a shipper should create the business case for doing so and take a hard look at its internal capabilities.
On the other hand, for low complexity shipping needs, a shipper might be able to achieve a higher level of savings by cultivating relationships with smaller or regional carriers (called ‘bottleneck spend’). On these lanes, a shipper should focus on finding carrier “sweet spots” to ensure it can secure competitive rates and an acceptable service level.
2. Identify carrier sweet spots
Once lanes are segmented according to key variables such as complexity, service requirements and strategic importance, a similar exercise should be completed on carriers to understand their value criteria. A sweet spot is an area in a carrier’s network that maximizes its asset utilization and provides the best operating cost.
A shipper should look at a carrier’s business model and capabilities and identify the geographies/areas where it wants to have volume. The shipper can then match a carrier’s sweet spot to each identified lane segment and create value for both parties.
3. Develop a core carrier program
Once a shipper systematically matches its lane complexity with carrier capabilities and sweet spots, it can develop a 'core carrier' program in which the shipper commits volume to at least three carriers in order of volume awarded. A program like this has several benefits. First, and most importantly, it enhances the ability of a shipper to ensure capacity. If a shipper has three carriers on a given lane, each with guaranteed volumes, it increases the availability of capacity on that lane. It also helps maintain an acceptable service level, as carriers will not want to risk losing guaranteed volume, knowing there are other carriers available to carry the volume.
A secondary, but consequential, benefit of limiting the numbers of carriers is that it enables a shipper to reduce its operating costs. Minimizing the number of carriers overall makes the management of those carriers (e.g., carrier communications, freight payment, metrics/business reviews) by logistics teams much easier. Furthermore, having a prescribed set of three to four carriers that shipment executers can call on for every lane will limit the amount of time those employees spend playing the spot market or calling other carriers to look for capacity.
The success of the core carrier program largely relies on the execution of contracts with select carriers to create certainty in shipping rates. While contract duration can vary, a typical contract last from two to three years. Even so, shippers should plan to revisit their spending every year to ensure that contracted rates are in line with the industry.
4. Become more carrier-friendly
Here are several actions a shipper can take to become more appealing and accessible to carriers:
- Improve forecasts and pickup schedules so carriers can get in and out according to schedule.
- Increase the speed of load and unload times to help a carrier save time. This is especially important, as the new ELD (electronic logging device) mandate limits the number of hours a driver can work, even if the wheels are not moving.
- Increase the tendering lead time provided to carriers from 24-36 hours to at least 36-48 hours to allow carriers to perform more detailed planning. This can be further expanded by allowing carriers to have a broader pickup or delivery window (e.g., four hours rather than one hour) for shipments that are not considered urgent.
- Invest in automation to improve interactions with carriers. For example, automated dispatching helps to streamline communications with carriers, and automated billing and freight payment (e.g., a three-way match) ensures carriers are paid in a timely manner.
- Standardize fuel and accessorial programs to provide carriers with more stability in the structure of shipments as well as delivery and billing.
- Reduce the payment terms for some carriers down to 15 days or less, if possible. Getting paid faster is very important to carriers, as they operate on thin margins with high pressure on cash flow.
