By Gary Girotti, Vice President, Transportation Practice, Chainalytics LLC
Monday, September 28, 2009
The for-hire carrier market is extremely soft, and shippers are taking advantage of it. Just one look at the results from some recent procurement events shows proof (see Figure 1). Shippers are enjoying double-digit rate savings. But at the same time they are reducing their carrier base. Is this near-sighted?
Not really. It’s not only shippers that are altering the relationship, it’s also the carriers. In the shadows of this depressed market, carriers have altered their networks at unprecedented levels. So, shippers’ decisions to bring their freight to market are not solely based on cost (yes, it’s one obvious large objective), they are also based on a need to realign their network of providers to those carriers that align best with their operations.
Reducing the number of carriers you work with can have a number of benefits. By focusing on fewer carriers, you have greater opportunity to build stronger, more focused relationships, enabling you to work with each carrier uniquely. These tighter relationships can theoretically improve service and capture operational efficiencies. For example, with fewer touch points in the delivery network, promotional programs, seasonal fluctuations, and periodic routing changes are more easily managed and efficiently implemented. In addition, appointment setting, yard management, EDI communications, and claims management can all be managed with fewer internal resources.
But you can push it too far. If you’re left with too few carriers, the operational savings won’t offset the potential rate increases you could become vulnerable to when the market stabilizes.
So, how many carriers is enough? The mathematical answer is one less than the number at which an additional carrier does not reduce line-haul costs enough to offset operational costs of managing more carriers. If quantifying the operational costs was easy, the result would be obvious. The reality is that the number will come through experience and some trial and error. To this end, it is a good exercise for shippers to monitor each carrier’s service failures, turndown rates, and shipper interactions by lane. This will provide you a good sense of the balance you’re achieving.
Even if big rate reductions won’t materialize in 2010, it is still a good practice to realign your carrier network to better match the current carrier market and explore opportunities to reduce your carrier base.