Although organizations cannot control fuel prices, they can cut, or at least control, transportation and shipping costs by ensuring they have developed the most effective carrier sourcing processes and locked into the most favorable rates possible. Learn how to improve your spending on carrier services.

Rising fuel costs are eating away at retailers’ and manufacturers’ profits and driving up the price of goods for their customers. Meanwhile, today’s shorter delivery lead times and reduced inventories demand a higher level of transportation service throughout the supply chain.

Although organizations cannot control fuel prices, they can cut, or at least control, transportation costs by ensuring that they have the most effective carrier sourcing process and rates possible. The findings of a recent Supply Chain Consortium benchmarking and best practices survey of 100 top retailers and retail suppliers provide the following key points:

• Negotiate bid methodologies that are flexible and offer carriers the opportunity to propose solutions that best fit their capabilities and network.
• Collect the data needed by carriers to bid on your freight aggressively; leverage the characteristics of your freight that are attractive to carriers.
• Build trusting relationships with carriers; for incumbent carriers, measure performance in an open and equitable fashion.
• Understand that shippers achieve higher levels of service and better supply chain integration by focusing on core carrier programs.

Negotiate Shipping
A good negotiation process with carriers is essential. Now is a good time to negotiate contracts for small-parcel shipping services, according to Bill Knasinski, vice president of the parcel division of Pittsburgh-based Genco, in a recent Purchasing magazine article.

Today UPS, FedEx and DHL are all fighting to get a piece of your business. And they’re ready to deal.

In addition to the increased competition in the U.S. market thanks to DHL’s continued push, the increase in the number of surcharges can give shippers an advantage, as well. Knasinski says that with carriers implementing surcharges and accessorial charges for nearly everything imaginable, small-parcel shippers and buyers have more areas and points to negotiate with carriers on — taking a perceived negative and turning it into a positive.

“What we’re seeing the best companies do is…in many cases trying to lock in multi-year agreements,” says Beth Enslow, an Aberdeen Group analyst who advises e-commerce companies on controlling shipping costs. In an ECommerce-guide article, Enslow says that a merchant wouldn’t need to be a big player to get such a multi-year agreement. “I’ve seen relatively small companies do this effectively.”

Further, HH Sumco senior buyer Robert Newton tells Purchasing magazine that every LTL carrier should provide some kind of discount program, even in today’s pricing environment. “If your company does not have an LTL carrier with a discount program, call one up and ask what kind of discount you can get,” Newton says. To ship without some kind of discount will almost certainly double your freight costs, if not more.

Rate Shop
Effective negotiations with carriers require a merchant to understand their shipping patterns fully. So prior to coming to the negotiation table, shippers should first evaluate and fully grasp their current and projected volumes, lanes and priorities.

According to Knasinski, a third-party negotiator can help shippers by establishing what rate levels are realistic based on their volumes and which surcharges should be targeted for negotiation. Some carriers consider certain surcharges negotiable and others non-negotiable, so knowing where to focus a negotiation is half the battle.

Genco uses a rating engine to help translate what a carrier’s proposal will mean to a shipper’s bottom line, saying: “There are so many different characteristics for each shipment — it’s hard to understand what exactly you are paying for. It’s unfortunate that carriers have made it that complicated.”

LTL buyers should require all carriers to use a single rate base to rate their freight bills, Troy Minnaert, manager of expedited and specialized transportation at Anheuser-Busch, tells Purchasing. “This will help your company in contract negotiations because you can compare apples to apples when evaluating carrier bids,” he says. “It also helps in analyzing specific lanes for cost analysis and auditing of freight bills. The resulting LTL program will have uniform pricing less the negotiated discounts, regardless of which carriers are used.”

Many businesses have contracts with multiple carriers and use these multiple contracts to quickly rate shop between shippers. They set up “rule of thumb” guidelines that enable them to choose a carrier quickly, depending on destination and weight. However, it is not so easy to calculate because of the changing fuel surcharges. However, the “rules of thumb” aren’t the best way to do it, according to Enslow, because “the correct way to ship to a customer two months ago might now actually call for a different carrier.”

Some companies are moving away from “rule-of-thumb” guidelines that are set quarterly or annually, in favor of a true per-parcel approach that optimizes the cost of each individual delivery.

Due to rapid price increases, merchants must do two things, Enslow notes: 1) Be aware of every cost change as it happens, and 2) as soon as a fuel surcharge is increased, update your internal “rule-of-thumb” guidelines as soon as possible.

Also, play the carriers against each other. Get rates from all carrier considerations, compare them, and then use the power of negotiation to get the lowest possible rate.

Capitalize on Technology
Tamra Lewis, a traffic coordinator at electric-fencing-goods manufacturer SafeFence, emphasizes online tools are especially useful to midsize shippers that may not have the volumes to leverage with carriers in pricing negotiations.

One strategy that can enable you to minimize the impact of LTL rate increases, for instance, is the use of online bidding tools, which allow a more streamlined bidding process for time-sensitive shipments.

Lee Cornell, a logistics manager at Firstar, recommends tracking service levels of carriers as closely as possible, but says it can be difficult. “When there is a service problem, carriers usually say it is because of a late pickup at the last stop or because of a driver shortage.” There is also technology available to track shipping charges.

Many online businesses have a software program built into their shipping department to help calculate the best carrier for each parcel. A merchant enters in the variables — location, weight, delivery date — and the software chooses among UPS, FedEx, USPS, DHL or other regional carriers.

The cost of these software shipping programs is a worthy investment, Enslow says.

Not only do these programs allow merchants to choose the lowest-cost shipper, but cost quotes for customers are accurate. Such software also enables a merchant to make sense of the “tangled thicket of international shipping”; with the guesswork taken out of international fees, some merchants might consider shipping overseas. And, if incorporated into a merchant’s online checkout, this software gives a merchant the advantage of customer segmentation: the segment of shoppers who live in one Zip code could be offered a higher shipping rate, while shoppers in a low-cost Zip code are offered a much better rate.

In addition to the above tips, merchants need to examine their monthly bills with an eagle eye. They should verify that they are actually paying for only the service that they receive and not for tacked-on charges such as “bad address,” etc. Again, take advantage of technology that tracks shipping charges.

A final consideration for controlling and even cutting shipping costs is this: often it is advantageous to instead route an order first through the shipping department, to allow this function to drive fulfillment, focusing on delivery at the lowest possible cost. Enslow says that some companies have lessened shipping costs by 10 percent with this strategy.

Do not be complacent. Even if your shipping is as it should be now, it may not be next month. As time goes on and shipping trends change, so should your processes.

Resources

Supply Chain Consortium Suggests Ways to Cut Transportation Costs; Use More Effective Carrier Sourcing as the Fuel
Supply Chain Consortium press release, May 24, 2006

Buyers work to get their arms around small parcel spend
by David Hannon
Purchasing magazine, May 4, 2006

Cutting Shipping Costs: An E-Tailer’s Guide
By James Maguire
November 21, 2005

Best-kept secrets for reducing LTL costs
by David Hannon
Purchasing magazine, May 18, 2006