The freight and logistics market is often fraught with legends and folklore built on the “good ole’ days” of wheeling and dealing that came out of the deregulation of trucking in 1980. Out of that time has come stories and beliefs that have continued to carry over to a more “professional” time where new entrants to the industry are coming out of colleges and universities with a four year degree in logistics and supply chain management. As the old moves out and the new moves in, there are still thoughts and beliefs that often do not fit reality, which is what we’ll cover first.
Larger Volumes Mean More Leverage and Better Pricing
Larger volumes brought to an RFP process is often thought to drive better pricing.
I was a big believer of the previous statement, until I had an “OZ Behind the Curtain Moment” that found holes on this thesis after working at different sized shippers and logistics companies.
I’m going to address the misconception of bigger volumes equals better rates from a shipper’s perspective first.
Bigger means better pricing when talking LTL freight. Larger organizations can leverage the total spend with an LTL carrier to drive better pricing for its buyers. The reason being is they can provide meaningful volumes to an LTL motor carrier’s network to improve yield as well as opportunities for the larger shipper to drive strong LTL FAK pricing.
Bigger is better also works for parcel freight where a larger shipper provides meaningful volume to a parcel carrier and thus helps its operating yields.
The story of bigger is better for leverage begins to breakdown to some degree with truckload and intermodal.
Bigger shippers can get the attention of the larger truckload carriers with the total spend they have and greater potential to match headhaul and backhaul loads for the motor freight carrier’s network, but the leverage dissipates on the less popular lanes where smaller carriers will participate.
There are some opportunities to work better pricing on intermodal transportation services if the IMC has business it can match back to other shipments it has within its customer base. The ability to do this is fairly limiting, so don’t get your hopes up.
Where larger volumes work the most in the intermodal market is when JB Hunt, the 800 pound gorilla in the intermodal market and the single largest intermodal player among the biggest intermodal providers in the market is interested in a shipper’s business. JB Hunt has the ability to outprice anyone when they want the business. At times it feels like there is no price too low they will accept to get a piece of freight that works well in their network. There are some negatives to working with bi-modal intermodal providers like JBH, but that is a topic for another time.
Other than working with JB Hunt intermodal, shippers are not typically going to find significantly better pricing as a larger shipper when shipping intermodal. There are several reasons why this is the case such as market size, number of class I railroads, who the competition is for the beneficial cargo owner (BCO) and limited number of good intermodal lanes, to name a few.
The areas that bigger volumes do not always bring better pricing hits a couple of areas for intermodal and truckload.
The reason leverage is not as effective as often believed in the truckload market is because of the massive fragmentation found in the truckload industry. According to the US Department of Transportation, there are over 700,000 registered motor carriers, with 91.0% operating six or fewer trucks and 97.3% operating fewer than twenty trucks. It is tough to drive leverage in this highly fragmented market where it is often difficult to even find the motor carrier that will be the most effective on service and price. Also, some of the smaller carriers cannot take the lower prices and extended terms larger shippers make a part of their RFP.
To add to the leverage issues is larger shippers often have lower volume lanes that the larger carriers will not be interested in and the shipper is forced to use smaller motor carriers that they cannot leverage, as outlined in the previous paragraph.
On the intermodal side of the 53’ freight capacity market is intermodal. Other than working with JB Hunt intermodal, shippers are not typically going to find significantly better pricing as a larger shipper when shipping intermodal. There are several reasons why this is the case, with market size, number of class I railroads, who the competition is for the beneficial cargo owner, BCO and limited number of good intermodal lanes, to name a few.
Logistics Companies Are Better When Bigger
Many shippers often tap into the freight brokerage market to capture buying power through their vast network, but know that bigger is not always better in this area either.
The largest freight brokers and logistics companies are often thought to drive better freight pricing, but that is not necessarily the case, although the ever increasing mergers and acquisitions would say otherwise.
While bigger does bring with it more resources and capital, it often brings a disconnect between the customer and provider that over time diminishes the value of the original solution brought to the table by the executives that sold the solution. In the bigger logistics company dealings, the top executives move from deal-to-deal closings, then leave the implementation and daily operations to the good folks in those organizations. Again, this often leads to holes and diminished returns over time as the heart of the solution is lost.
A new twist on the bigger is better theme of resources is it was once true that bigger did bring with it better solutions because of the technology and the mountains of data required could only be driven from the larger companies.
This fact has fallen to the wayside as the price of technology has decreased tremendously and the freight data consortiums rolling up massive amounts of data that go far beyond what a single “large” logistics company can pull from their own data.
All-in, the playing field has been leveled because of the cost of top-tier logistics technology has decreased tremendously and the data rich companies rolling up industry data from across the market is well beyond what could have been imagined just a few years ago.
The argument could be made that the research and solutions that come from medium-sized logistics companies could be even stronger because their executive teams are often the ones doing the work versus mid-managers at larger firms. Additionally, some of the larger firms have lost touch with the new market conditions and are still only using their data versus tapping into the mountains of industry data now readily available.
There is a lot said and believed in the freight and logistics world that the larger freight brokers bring better pricing because of leverage.
Much like the larger shipper discussion we had in the previous section, it can be true that larger logistics company can roll volumes to offer an RFP that runs across multiple shippers. While this is the case for some of the larger larger logistics companies, it isn’t for all of them. The reason being is that they don’t operate their business that way because of TMS system deficiencies or because they operate a disjointed agent network.
The “bigger is better” thought process does work in the LTL market, where a logistics company can roll up all its volume it operates for shippers and assemble one RFP to leverage its volume. While this has been a big selling point for LTL shippers looking for better LTL pricing through logistics companies, this tactic lost a little of its edge with many national LTL motor carriers negotiating rates by customer served by a logistics company, not its total spend.
The more established logistics service provider companies are somewhat exempt from this because they established their pricing and national LTL relationships back when all national LTL’s negotiated blanket contracts.
As mentioned earlier, there’s an opportunity to leverage truckload and intermodal rates through a larger provider, but not as much as thought because of the fragmentation of the trucking industry.
All said, there are advantages with the “bigger is better” leverage mentality with logistics companies, but not all. Quite often, the mid-tier logistics companies have more flexibility and creativity, along with more hands on service that brings more value to shippers.
In other words, being a bigger fish in the medium pond versus being the small fish in the ocean does bring advantages that need to be weighed out before a decision is made.
You Get What You Pay For
The thought that the higher the price, the better the service, or the lowest cost brings the worst service is just not the case.
There is something to be said for this on the lower end, but a high price does not guarantee a great service when it comes to freight and logistics solutions.
As an example, many of the largest managed transportation services companies have extremely high fees for integration and ongoing support, but offer no better service or technology than a mid-tier managed TMS company.
As mentioned in the previous section, the larger logistics companies can often lose their sizzle between the sale made by their executive team to the time it gets down to the execution of the solution. This doesn’t happen all the time, but enough to be mindful during the vetting process.
We’ve also seen enough occasions where the $50,000 price tag for an analysis that looks great on paper cannot be executed in “real-life” because the solution made too many assumptions that are not realities in a trucker’s day or the solution created was a canned presentation that did not take into account the realities of the company requesting the work.
Again, this does not happen frequently, but enough to put it into the classification of “you get what you pay for,” meaning a high price tag does not always mean better.
Before closing out the section of “you get what you pay for” does come into play when pricing freight we need to add a bit more to the topic. Often the lowest price on an RFP is because of a pricing strategy of just getting in the door and will turn into many tender rejections or the bidder did not understand the business well enough to assemble the correct price for doing the business. So, when you see a freight price that is an outlier on a bid make sure you investigate it further before awarding the business because the performance may not match up to your expectations.
Need to Be Tough Negotiator to Drive Down Prices
A common belief that often comes from freight RFP is that one needs to “take off the gloves” and get tough on negotiations to drive the best price. This is why some freight RFP’s have been moved out of logistics departments and into the procurement or finance area.
While freight may be thought of as a commodity buy, it is not.
Freight is a service buy and just because there is an agreement on rate there is not an agreement on capacity, unless the buyer is purchasing a dedicated service which will be priced at a higher level.
Freight pricing tends to be done with the information the pricing person has firm knowledge of at the time they assemble pricing for a shipper.
So, the best tactic to negotiate the best freight pricing is to come in with an open book, have market data on the lanes your company moves and time the bids on market weakness.
What is meant by time bids on market weakness is two fold. One, freight is a cyclical market, and two, t it does have a seasonal pattern.
So, the strategy is to price at the intersection of the trough of seasonal and cyclical patterns. Now this will not happen at every cyclical trough, but when it does, it is a win for the shipper.
Also, cyclical freight patterns do not happen every year, but seasonal patterns do.
Our suggestion with the above in mind is to do the annual freight bid in late February or early March. When the market is in a downward trend, push the bid out to where the trough appears to be landing.
If these two things are done, along with having market data in hand, the shipper will surely gain their best freight rates.
For more on the topic of obtaining the best freight rates, we recommend reading How-to Negotiate & Execute Best Freight Rates: Comprehensive Guide.
Freight Providers, Particularly Brokers Are Out to Make a Buck
While it may appear freight providers may be out to make a buck is the case for some, it is not for the majority.
It does not take a financial wizard to look at a publicly traded company’s 10K to see that profits are razor thin for freight and logistics companies and there are definite feast or famine times over the years.
That said, pay close attention the the financial strength of the freight providers your company works with or risk getting your freight stranded or having to double pay for a load that was moved on a cash strapped freight broker that files bankruptcy.
A 100% Asset Model is the Best
We have all learned a one-size fits all approach does not work with just about everything. Just as financial advisors tell their clients that the only free lunch is diversification of their portfolios, the same holds true for freight and logistics managers.
Shippers need to diversify their logistics and supply chain strategy across asset and non-asset providers.
There is a fit for both non-asset and asset freight providers and when done properly, along with diversifying mode and freight service providers between modes shippers will find that their service and cost metrics will improve exponentially.
A well diversified logistics and supply chain will bring the best performance and reduce risks.
Continual Rate Shopping Improves Pricing
Long-term relationships drive far better results than continual rate shopping. While it makes sense to continually comb the market for the next best mouse-trap, it makes even more sense to develop an open and transparent logistics relationship with the freight providers you trust.
The reason being is the more they know about your business, the better the rates and cost savings ideas will come. Quite often, the savings ideas will not come out of the gate, but after a period of time where the freight provider has an opportunity to learn the pick-up and delivery dock operations, the people moving the freight, the company it is moving the freight for, and the overall customer needs of the shipping company.
The knowledge learned over time brings the best solutions that cannot be had without time and the commitment to forge a long-term logistics relationship.
Spot Rates Bring the Cheapest Rate
Freight spot rates do not bring the cheapest rates to a shipper.
Freight spot rates are a function of supply and demand and when demand is required that is when price is at its highest, so it is best to buy under a freight contract at a point in time during the year, not when capacity is required.
After the last freight upturn, our hope is the myth that spot rates bring the least cost rate has disappeared from the water cooler conversations. The inconsistency of service and price associated with freight spot rates caused many CFO’s to re-evaluate their company’s logistics strategy and execution.
The actions the CFO’s forced were new logistics teams, some forced a major overhaul of their freight providers, some brought in a new transportation management system (TMS) and some weren’t asked to continue in their position because of the impact spot rates had on their financials in 2018.
To add more to the spot rate fuel, know that spot rates are not significantly different from one freight broker than another. The reason being is the freight spot market is primarily driven by the same freight load boards, no matter what freight broker is quoting the business. These load boards have leveled the playing field with their transparency and efficient flow of postings. So, the difference in pricing is the profit a freight broker is willing to take or the timing they make the quote.
One thing spot rate shippers need to know is since freight brokers are all playing within the same field of databases when you make the quote request you are often artificially bid up the price with the carrier that will move your freight. This happens because multiple freight brokers are bidding on the same piece of freight and the carrier recognizes it and increases their price. So, to avoid this happening to you, take out the rule where you are to bid 3 to 5 brokers before moving the freight. Pich the one you trust and provides the best service.The last point on spot rates is some, not all of the largest freight brokers will do internal load matching for improved pricing, but this does not happen as much as one would think and often is done for improved margins for the broker, not improved pricing for the buyer. So, don’t jump to the conclusion that the larger freight brokers will provide a better spot price.