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The modern marketplace hasn’t been kind to shippers. According to The 24th Annual Study of Logistics and Transportation, transportation has been steadily increasing as a percent of sales since 2014, and the result has been enormous pressure to reduce costs. A whopping 75% of shippers cite reducing transportation costs as their top priority.
But the age-old truism applies here as well: “You get what you pay for.” Indeed, the challenge for shippers isn’t merely reducing costs, it’s finding ways to do so without compromising service at the same time. So how can shippers meet their greatest challenges, reduce costs, yet retain or improve service? Here are five ways.
1: Optimize the mix of assets and brokerage.
Return on investment is about value: having the right assets being used at the right time, in the right way. That’s easy to say, but hard to do in practice because it’s like assembling a complex, multi-dimensional puzzle. In general, shippers need flexibility without waste – the ability to have a solution at hand for virtually any shipment.
In general, it’s advisable to have at least some assets available to you from your carriers. “If you don’t have assets, you’re not sitting at the adult table,” XPO Logistics Chairman and CEO Brad Jacobs flat out said on an investor’s call, addressing the phenomenon of carriers who broker all of their shipments. It’s important that carriers have at least some dedicated capacity that they can make available to their clients; that dedicated capacity becomes invaluable as overall market capacity tightens.
But brokerage still has a role to play, regardless of market conditions. Inbound Logistics writes that when capacity is tight, brokers “help shippers find space”; and when markets are soft, brokers “provide freight buyers with leverage to cost compare different lanes.”
2: Cracking the cost equation
Talk about puzzles: the complexity of the cost equation in shipping poses a non-stop challenge to shippers. One aspect of that equation is the cost-to-service ratio. The previous section alluded to this (the best value is the highest service at the lowest cost), but let’s take a closer look.
A study published by the U.S. Department of Transportation (DOT) discussed the difficulty in quantifying economic relationships in freight. The chart below (Exhibit 3 in the study) illustrates some of this complexity.
For our purposes, the “Total Cost” line is the most important. Note the curve: the lowest total cost is in the midrange of the service quality dimension. It’s easy to assume that, if you want to save a few bucks, you just go to the cheapest provider, but that’s not true. The “real” cost of trying out a low-cost carrier is actually quite steep: the lowest level of service actually comes at the highest total cost.
3: Confront the cost savings addiction before it saps service.
So we’ve established that cost reductions can come at the steep price of poor service. So the lesson is to not focus on cost-cutting at all costs (so to speak), right? Unfortunately, The 24th Annual Study of Logistics and Transportation found that shippers aren’t buying it: “When faced with a tradeoff, the majority of companies will choose to focus on cost over service.” In other words, they will willingly sacrifice service quality if it will save them a few bucks. Unfortunately – as discussed in the previous section – the shipper then just ends up paying the highest total costs.
The solution is to put the focus neither squarely on cost nor on service, but on the relationship between the two: long-term value. Logistics Management agrees: “A cure for the ‘cost savings addiction’ is a collaborative partnership that has an aligned, long-term view of mutual success.”
4: Emphasize collaborative shipper-carrier relationships.
In fact, mutual success is key to finding low cost, high service solutions. The 2016 State of Logistics report, developed by A. T. Kearney and published in Logistics Management, recommends that shippers “ratchet up the best practice of working with their carriers on a ‘mutual benefit’ basis, becoming true operational partners.”
A semi-adversarial approach to shipper/carrier relationships, where it’s all about getting as much as you can out of the other party, undermines the willingness and ability of both parties to solve problems and deal with the realities of the marketplace. For example, when capacity is constrained, carriers have no choice but to be selective about how they deploy their assets and work with their customers. Those carriers engaged in a collaborative, communicative relationship are often more willing, and better equipped, to develop solutions that will work for a particular shipper.
Further, as supply chain analytics firm Clear Peak notes, “A deeper understanding of your carrier network allows shippers to separate real operational issues from a general market push for higher rates.”
One way shippers and carriers can better collaborate is in the exchange of data.
5: Use data to drive transportation decisions and management.
Not only is the economic relationship between transportation cost and service inherently complex, it’s also difficult to quantify in the first place. Companies often don’t track the information they need, and/or they don’t get it from their carriers, to be able to evaluate how well they’re being served.
It’s increasingly important for shippers to track the key performance metrics (or to request reporting on them) so that they can effectively monitor carriers’ performance and identify any service gaps. Shippers should request information on their carriers’ FMS to determine what data and reports they’ll be able to provide. Shippers shouldn’t be ashamed to request specific reports of their carriers, including satellite tracking, EDI status updates, and load optimizations reports.
With data at hand, bad service issues can be resolved, and good service can be optimized even further – maximizing capacity, optimizing routes, preventing problems before they arise. With enough data, and a sufficiently sophisticated platform to parse that data, shippers can start to model carrier contracts with hypothetical freight to see what their real costs would be.
Yes, shippers can get low-cost, high-quality service.
Cost savings don’t have to come at the cost of good service. With a flexible mix of assets and brokerage, an emphasis on collaborative partnerships, data-driven decision-making and an eye to value over high-cost cost-savings, shippers can find good service and still save money.