Negotiate With Your Carriers for Freight Savings
06/21/2016
Phillip Riback - Vice President for Development
I recall some years ago spotting a tarnished brass lamp in a marketplace in the Middle East. I was sure that rubbing this lamp would produce a genie who would grant me three wishes. I casually asked the proprietor the cost of said lamp and he responded with a number many times more than my student budget would allow. I realized right away that the wishes were not to be mine and looked at some other items. But he could see that the lamp was really what I wanted. He asked what I would pay for it, but I was too embarrassed to make an offer so much lower than his initial price. I felt it would be insulting to him and left his establishment. After I left the store, the shopkeeper followed me and made an offer within my budget. I was glad to exchange my pittance for the enchanted lamp.
What I didn’t understand was that he was opening the door for negotiation. He knew what he had paid and what he could afford to sell it for to make a profit. I knew how much I could pay. He wanted to sell the lamp and I couldn’t spend a lot. Negotiation is how we satisfied both of our needs.
Open and maintain a dialog – This was my biggest mistake. Negotiation is a two-way street. I would have left without my enchanted lamp and the shopkeeper would have made less money that day. Neither of us would have been content. It was only through his persistence in continuing the conversation that we both ended up satisfied. Unlike the long-term shipper-carrier relationship, we both knew this would be a one-time interaction. The carrier is looking to increase their tonnage and you are looking for on-time, intact delivery. If deliveries are consistently late or damaged, you will be changing carriers no matter how much they discount the price.
Understand your costs up front – This goes for both you as the shipper and for the carrier. We helped a client of ours with an LTL negotiation several years back. The traffic manager gave us an estimate of their LTL freight spend as being somewhere between four and five million dollars annually. For the analysis, he was able to get us about one million dollars worth of clean data from his third-party freight payment company to use. That means we were missing 75-80% of the shipments.
In the past decade, carriers have become very good at figuring out their own costs to move freight. This has enabled carriers’ pricing analysts to fine-tune rates and not have to charge extra on their profitable lanes to make up for losses in less profitable lanes. In the above case however, missing most of the data limited the carriers’ ability to accurately assess their own costs, forcing them to add a little to that calculation so as not to get into a money-losing contract. You can be sure this was passed on to the shipper.
Understand the offers and what they will cost you – This is particularly difficult with LTL rates, hence sophisticated analysis tools become critical. Some shippers require carriers to use a common rate base and FAK and allow carriers to manipulate the floor and discount. This does make the analysis easy, but they lose out on the 4-5% savings realized when carriers use their own rate base. And some carriers can handle lower-density freight better than others. So don’t limit their ability to optimize pricing by insisting on a uniform FAK.
Be willing to walk away – Your leverage comes from the ability to not be forced to engage with a specific carrier or to shift the balance of your freight. Obviously there are other factors that go into carrier selection in addition to cost. But when one is faced with two carriers with roughly equivalent service, cost becomes a more important factor. This has become a common situation with the large parcel carriers, where the services offered, on-time records and damage rates are essentially the same.
If they really want your business, they’ll lower the price, like the shopkeeper did for me. Unfortunately, no matter how much I rub and polish the lamp, I still can’t seem to get the genie to appear to grant me my three wishes.
7/19/2016- Keep an Eye on Your Freight Spend
5/24/2016 - Lower Your Freight Spend by Auditing
