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Freight Costs: An Insider’s Look on Freight Pricing Buyers Should Know

Make the best choice that fits your needs with this comparison guide

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Introduction

Whether you’re in your first year or last year of a freight and logistics career, the number one issue you are tasked with is driving down freight costs while increasing service.

how much does the freight costMany in the freight industry dance around the topic of pricing, but not us.  

Throughout our site you’ll find a number of articles about cost and here are some examples:

We continue to add more articles and content on the cost and pricing topic. The reason being is business relationships take on similar characteristics of a marriage and one of the top five issues that cause stress in the relationship is money.  If it is not the topic of money itself, it is various topics that boil down to money.  Money can be the most heated subject and one that drives trust out of the relationship.  

For that reason, we work to be as open and transparent on the cost and pricing issue as possible, so freight buyers know all there is to know to help them make the most informed decision that is best for their company.

So, with that all said, let’s once again dig into the topic of freight cost and pricing.

Unlike the article entitled How-to Negotiate & Execute the Best Freight Rates where we discuss the tactics and strategies for buyers in the freight RFP process to obtain the best pricing, we will be breaking down and digging deeper into the behind the scenes topics on pricing that often go unspoken yet are highly important to know and understand in freight pricing.

Top Topics Associated with Freight Cost

  • Unpack the truths and myths about freight cost and pricing
  • Breakdown the largest components that drive freight cost and pricing.
  • Talk about the pricing strategies used by many freight providers.
  • Discuss the proven methods to reduce freight pricing for your company.
  • Discuss what value a third party can bring to the equation of freight cost reductions.
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Truths and Misconceptions of Freight Cost

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

Freight VolumeLarger 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. 

trucks on highwayOther 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 

Leverage Freight with Largest Logistics CompaniesMany 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.

truckload and ltl freight pricingThere 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

Price vs QualityThe 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

freight contract negotiationA 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

show me the freight moneyWhile 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 

motor carrier assetsWe 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

best freight spot ratesFreight 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.

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Breakdown of Freight Cost Components

So, with the veil having been lifted from a number of freight pricing myths, let’s take a look at the cost components that drive pricing.

Freight pricing is determined by the following components: linehaul, fuel and accessorials.

freight pricing componentsLinehaul

The linehaul cost is the cost to go from the origin address to the destination address.  The components that drive this cost up are distance, and in the case of LTL and parcel shipments, weight or volume the shipment will occupy in the trailer.

So, the further a shipment has to travel and the greater the weight, the more expensive the linehaul will be.

Fuel Surcharge

Fuel is a surcharge added to shipments to adjust linehaul rates for the fluctuations in diesel fuel prices.  Fuel can either be a percentage of the total linehaul cost or a cost per mile.

Freight providers typically base their fuel charts off the U.S. Energy Information Administration (EIA) posting that comes out every Tuesday.

Accessorials

Accessorial charges are additional charges added to a shipment to account for added work or time a freight provider had to put into the shipment that was not accounted for in the negotiated price.

The key words in the above definition is “negotiated price”.  This means that if you are a shipper that has longer than normal waiting times, a high percentage of residential deliveries or additional touches on a load, then negotiate them into the linehaul price.

Accessorial charges are a full topic in themselves, so I recommend reading Cost of Freight Accessorial Charges: Definitions & Tips on How-to Avoid.

Different Freight Pricing Methods

Freight PricingWhile pricing seems fairly simplistic because there are only three components, more needs to be said about pricing methods before we can get into why some freight providers are typically higher priced, while others are lower and how to bring freight savings to your company.

So, the next item to discuss is pricing methods because of their importance to high, medium and lower freight costs.

Spot

Spot pricing is the negotiated price a freight buyer can get at the time the shipment is tendered.  

Spot pricing is all about supply and demand, so spot pricing can be very volatile because of market demand and shifts in supply.

We see spot pricing as the pricing of last resort.

Contract

Contract pricing is a negotiated price based on the forecasted volumes and shipping requirements a freight buyer needs over what typically is a twelve month period.

Understand that contract pricing is nothing more than pricing, meaning contract pricing does not guarantee capacity every day.  The pricing agreement says that if the freight provider has freight capacity on the day that it is needed by the shipper than the carrier will pick it up and deliver it at the agreed upon price.

With that in mind, it is our recommendation shippers always have multiple carrier options in their higher volume lanes or back-up the volume requirement on a given day with a trusted logistics provider.

Project

Project freight is similar to contract freight, but for a much shorter period of time.  Sometimes project freight can also be considered surge freight pricing when a shipper has the same volume surge every year. 

Pricing Strategies Used by Freight Companies

pricing strategyPricing strategies is where the rubber begins to hit the road.  The strategies that we are going to walk through help to explain why some freight providers run higher prices than others and why service may be suspect for some.

Entry Price

Much like some retailers, some freight providers have loss leaders.  These are the rates that they use to get in the door to better understand the shippers business and get them to open up on other opportunities.

There are pluses and minuses to this pricing strategy, but it often leaves shippers with a bad thought or two on the providers that do this.

You see, this pricing strategy is a gamble by the freight provider and is typically only done by freight brokers.  Their hope is that they get lucky and the market goes down at the time they bid the business, so it does not turn out to be a loss for them.

Since the freight brokerage companies that do this have commissioned agents on the other end of the phone you are working with they will not accept an extended loss because it impacts their pay with negative commission, so if another piece of freight comes about after being in the doors, the relationship will be short lived.  

The reason for the short lived relationship is the result is the service will be poor and they will begin to reject tenders.

All or Nothing

all or nothing fright pricing strategyThe all or nothing pricing is done by the larger freight providers where they go in with some very aggressive rates on many of the lanes and are competitive and maybe not so competitive on others, but to get the good rates the shipper needs to take the whole package.

For bigger shippers, the freight provider may offer to bring in their own staff and completely take over the work for the shipper.

There are pluses and minuses to this pricing strategy.  It takes away the idea of diversification, but it does give the shipper one group to go to for issues.

Shippers will tend to see this strategy used when the freight market is softening.

The buyer beware section of this pricing method is some freight carriers that exercise this freight pricing strategy have the mode of operation where they boost prices in “peak season” or drop out of the running the following year because they find “better freight” to match up with their overall network.

This can leave the shipper outstanding in their field alone because the shipper will have thrown away the trust it had with its carrier base prior to being ousted.

Lowest Pricing

The lowest price model lies somewhere between entry price and value price strategies.

There are some freight and logistics providers that always seem to fall under the lowest price side of things.  These providers often provide a great service when the freight market is flush with capacity and average when the market begins to heat up.

As long as you know if the group you have contracted your freight business with falls into this bucket, then you’ll be able to do some contingency planning to ensure your company’s loads are covered.

Value Pricing

Under the value price strategy, shippers get a quality service at a fair price.

These providers are always priced in the middle of the pack and they live on providing a high quality service shippers can depend on through the year.  They may struggle when the freight market capacity tightens, but they often have contingency plans in place to ensure they can recover.

Three Party Pricing 

three party freight pricing agreementThree party pricing is essentially cost plus pricing where an intermodal marketing company (IMC) negotiates alongside the shipper on intermodal rates through one of the Class I railroads.

The shippers and IMC are in negotiations together and the shipper pays a transaction fee on each load it moves on their behalf under the three party pricing agreement.

The reason this type of pricing model exists in the intermodal market is because the Class I Railroads do not sell direct to shippers.  They sell their service through an IMC that then handles all the customer interface work from tender through delivery, providing a single invoice for the multi-leg intermodal shipment and reporting.

For more in an IMC, we recommend reading Intermodal Marketing Company (IMC) - Definition, Purpose & Value.

Cost Plus Pricing

There are two cost plus models of pricing.  

The first cost plus model is where a shipper agrees to pay a transaction price or percentage of the sale price to a logistics service provider (LSP) to move the loads.  The positive is there is complete transparency on price and the LSP gets a fair margin to move the load for the shipper.

While a stretch, we also call out managed TMS or managed transportation services programs as a cost plus pricing model.  Under this model, a shipper outsources its freight and logistics activities to an LSP where they handle every part of the shipper’s freight operation from tender to final delivery, perform the freight audit and pay functions, provide all the reporting and analysis and negotiate the carrier rates on the shippers behalf.

All in, this is the most extensive program available to shippers that allows them to push the freight and logistics worries off to a professional team, so they can concentrate on making their business great.  

The reason this program falls under the cost plus pricing model is the carrier rates are direct with the shipper, and the LSP is paid a monthly service fee to manage the entire operation.  The cost is quite a bit less than many expect because of the efficiency an LSP brings to the table because of their knowledge, processes, and TMS technology.

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Proven Methods of Reducing Freight Spend

A logistics team has a two-fold requirement of providing its company the best freight services at the least cost.

With that said, freight cost is always on the minds of the logistics professional and while they have worked through the various methods to reduce freight costs over the years this section is a good reminder for them and some good content for others.

We’ll address ways to keep freight costs down in a bullet point manner, so to quickly cover as many as possible in a short read.

Modal Conversion

Modal conversion is primarily thought of as converting truckload to intermodal, but it is so much more.

At its essence, modal conversion is moving down the freight cost curve by mode.

intermodal trucksThe least expensive to most expensive freight mode, as viewed by the cost per pound is as follows:

Anytime a shipper can move up a level, they save freight costs.

In many instances, the move up also increases the transit time of the delivery, so this is something that needs to be evaluated by situation or addressed in improved forecast and planning and visibility.

Consolidation

LTL Freight ConsolidationFreight consolidation is when a shipper consolidates their LTL shipments delivering to the same region on a single truckload or intermodal load.  The shipments are dropped at a pooling point where the local deliveries will be made.

This same methodology can be reversed to where shipments are consolidated at a pooling point at origin and then the final delivery is made via a truckload or intermodal shipment.

The same type of consolidating work can be done by combining parcel into an LTL shipment.  This process is often called zone skipping when done with parcels.

Freight consolidation often improves transit and reduces damages because of reduced touches in the shipment process. Under LTL and parcel shipping operations, shipments are touched multiple times through their entire transit from origin to destination.

Consolidation is best performed by a robust transportation management software package that can quickly and easily identify the shipments that can be combined to save freight costs.

Update or Improve Technology

freight TMS cloud technologyNot only does today’s transportation management software help with freight consolidations but also other freight saving methods.

Rate & Route Order Planning

Today’s TMS technology easily helps companies save money by identifying those consolidation opportunities, while also tending freight out by the least cost carrier and mode.

Wave Tendering on Rate & Service

The process by which the system tenders the freight out is called wave tendering, which is a freight cost savings method in and of itself because of how the system tenders out freight to the least cost carrier within a shipper’s routing guide, gives the carrier time to accept the load, and if it does not accept, moves to the next carrier in the allotted time.

Review Packaging to Reduce Cube

By reducing the amount of packaging, a company can reduce the cube of its packages, which will allow it to put more units on a truck or reduce possible dimensional charges that are associated with LTL and parcel freight that occurs when a shipment occupies more space than what is “ordinary and customary” or in the industry is called dimensional rate charges.

Take Control of Inbound Freight

Inbound freight is often a company’s last frontier in controlling its supply chain and reducing freight costs.

Inbound freight is full of excess cost, as vendors mark up the cost of their freight and make a profit on their customers’ backs.  The term prepaid and add is another way of saying profit for the vendor.

One would be amazed how costly the inbound freight actually is compared to what the company can buy through its logistics department.

So, for all those shippers still having their vendors tack on the freight costs, now is the time to take control and cut your freight expense.  Quite often we see the inbound freight marked-up as high as 40%.

There are challenges in managing the inbound freight, but when completed and combined with the outbound logistics program under a single TMS platform, a company’s supply chain is elevated to a whole other level that drives a competitive advantage and improves its order-to-cash cycle.

Assemble a Comprehensive Inbound & Outbound Freight Strategy

inbound and outbound freight managementAs was just touched on, by combining a company’s inbound and outbound logistics work under a single TMS platform brings tremendous value.

The value is reduced cost in the inbound side because prepaid and add freight savings, but freight will also be further reduced on the outbound because much of the equipment can be turned at the docks, thus giving the freight carriers a way to be more efficient and pass the savings to you.

Also, by having all the logistics details under one platform, the visibility of all product moves is simplified and much easier to manage the resources required to move the product through the company’s system of processes, making it much quicker and more efficient.

Reposition Freight Network

As mentioned earlier, one of the freight components is associated with distance.  By reducing distance traveled in the supply chain, freight costs will be reduced.

Two ways to do this is to position manufacturing sites closer to the vendors and / or moving distribution sites closer to customers.

These studies can easily be done within the company’s TMS platform.

Negotiate the Best Rates through Timing Market Data

As mentioned earlier, the freight market is cyclical with its ups and downs associated with economic activity.  The best measure of the economic activity is Industrial Production, not GDP, because the service industry is such a large part of the GDP calculation.

In addition to the cyclical nature of business, freight also has a seasonal pattern.  The seasonal pattern is fairly consistent and is freight mode based, as all modes have a slightly different pattern throughout the year.

So, the best time to negotiate rates is when freight is in the declining months, as freight tends to be priced with what people know at the time.

Negotiate the Best Rates through Market Data

negotiate freight prices with market analysisThe larger point to rate negotiations is it is imperative that the negotiations are done based on actual market data, not a cut off prior year actuals from you company.

We have seen too many times, including when we were on the shipper side of the business ourselves, where rate targets were based off prior year actuals versus actual market rates.  Now our history goes back to being on the shipper side of the world well before high quality market data was readily available at a reasonable price.

The data we are speaking of rolls up billions of dollars of actual zip-to-zip data from shippers and logistics companies that participate in the sharing of data and pay a monthly fee to have access.  The data collected within these roll-up of databases do not have shipper, customer or carrier info. They contain only zip-to-zip rates broken down by the various freight components. Also, understand the data is the “real information”, not averages-of-averages, which has been the benchmarks consultants and logistics companies passed off in the past.

All in, this information is invaluable in determining how a company actually sits against market rates and changes the rate negotiation to one where the shipper has as much, if not more, data to drive to the market rates.  And we all have learned data is king.

For more on this topic, we suggest reading “How-to Negotiate & Execute Best Freight Rates: Comprehensive Guide”.

Improve Communication to Reduce Expedited Ground & Air Freight

expedited freight servicesBetter forecasting and internal communication is another great freight savings opportunity, as weaknesses in those two areas increase the likelihood an expedited freight mode will be needed to make the required delivery date or RAD date, which is the term many of us are accustomed to managing to for our customers.

Negotiate Accessorials

Again, the cost of is comprised of the linehaul, fuel surcharge and accessorials.

Recall that accessorial charges are those charges the carrier did not expect to have on a delivery and therefore adds to the cost when the financial settlement is made.  So, if you are a shipper that knows your deliveries will have accessorials associated with them, negotiate them into the base rate.

The savings opportunity by negotiating them in on the front can be tremendous.

Freight Audit & Pay

Freight invoicing is another area for potential freight savings.  The reason is every freight move is a transaction, and with as many transactions as shippers have, there is always the potential for error.

While freight providers do their very best to keep the error rate down, just a 1% error rate could result in a five to six figure number for larger shippers.

There is a reason the freight industry has many large freight audit and payment companies focused squarely on helping shippers pick up these savings, while reducing their own internal support for transacting the business.

Freight Carrier Development

all freight modesThere is always a better mousetrap or another stone that has yet been turned in the freight and logistics industry.  How could there not be with over 700,000 asset freight carriers in the market, plus another 18,000 non-asset logistics companies.

With that said, it is key to constantly comb the horizon for those potential carrier partnerships that will help your business flourish.  It is equally important to keep close to those providers already within your logistics team’s routing guide.

The more you know about the carriers you work with and the more your carriers know your business, the greater opportunity there synergies between the two companies that will drive beneficial operating and cost efficiencies.

Ease of Doing Business - Transparency

Goodness is the word that comes to mind first under this topic.

The second word is trust.

If you do not trust a business partner that is as important as your logistics providers, then find a new one.  Shippers have to believe their providers are on their side to get the most beneficial, long-term relationship that drives cost out of each other’s financial and service equation.

The transparency equation is a two-way, so if the logistics provider is not open and transparent then get them there or get them out of your business.  There is so much available through technology that has exponentially improved the communications to provide the full story, with proof.

Again, if the trust is not there, additional cost savings will never be had with that particular carrier and most likely will increase total cost of doing business because of accessorials and other operational costs.

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Do Third Parties Bring Real Value to Freight Pricing?

The answer is it depends on the third party, as all are not created equally with regards to technology, industry knowledge, industry data and processes to bring it all together.

With that said, investigate before buying whatever fancy sales pitch you receive.

Know there are many cheaper pricing alternatives to getting to the answer than you can imagine.  For example, one of the sales points out there is to share in the savings. When a logistics company offers this pricing model they fully understand there is going to be a savings or they would not do the work.  So, if you do like the percentage basis pricing, which we feel is suspect, put a cap on total savings and how it will be calculated. We have seen too many times where shippers are taken on the calculation and total amount, when they could have negotiated a flat hourly fee.

And on the fee front, just because a company charges a lot does not mean the quality is better.  It just means they have a high price and there will be alternatives.

Where shippers are finding a great deal of logistics savings and improving their supply chain performance is on managed TMS or managed transportation service solutions and transportation management software (TMS).  The cost and quality of the service does vary, but when the “right” provider is found, the savings starts at 10% and increases from there, while also offloading the operations, reporting, analysis and freight payment functions so a company can focus on what makes their business great.

For more on what to expect from a managed TMS program, “How Much Does Managed Transportation Services Cost? A Comprehensive Pricing Guide” is one of our most read articles.

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Final Thoughts

Pricing is the issue companies want to understand when making a buying decision associated with freight and logistics decisions.

Freight pricing also has two other aspects to it that make it a top discussion point:

  1. It can also be the number one issue that causes doubt or mistrust in the business relationship.
  2. It can be the factor that keeps the best freight and logistics solutions to started the supply chain business relationship.

Any misunderstanding in how the pricing is constructed, how it can be improved and a company’s pricing strategy can cause the very best logistics solutions from getting off the ground because we know shippers talk service as their top requirement, but it takes the first well priced load to even get through the door.

We hope all the facets, myths and dynamics of freight pricing unveiled gives you more clarity to pricing to help you find additional freight capacity or supply chain solutions that may have been missed in the past.

We would love the opportunity to be a part of your buying journey in exploring logistics and supply chain solutions for your company, but we do understand there are many options out there, so please visit our website and blog site to learn more about how we can help you and your company.

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