Moore on Pricing: Pricing outside the box
January 01, 2012
Faced with a tight domestic transport market that includes labor and fuel pressure on carriers, shippers are inclined to leverage volume and go for extensions of past rate agreements. I would like to encourage shippers to start thinking outside the box.
There are opportunities for carriers to optimize for improved margins without blunt-force price increases. In the meantime, shippers need to be actively helping carriers improve operating ratios.
To make this happen, there are three questions that carriers need to ask themselves about each shipper:
1) Where is the variable cost level and at what point am I not even covering my variable or out of pocket cost?
2) What is my breakeven point from a contribution standpoint? This is where the carrier is getting some contribution from an account, but not enough based on the volume of business to cover fixed cost and overhead.
3) At what point do I know I have covered my variable and fixed cost and I am making money on an account?
These questions look at each account holistically and factor in some bad lanes and some goods lanes for each shipper. Carriers then tend to make across-the-board price increases attractive as a simple solution to a customer’s profitability using averages for risks.
Another smaller set of questions focuses on the details that make each transaction a “contributor” or a “loss” for the carrier. Elements of the carrier’s cost were captured in the recently conducted 2011 Transportation Payment Benchmark Study. The study states that the majority of shippers (59 percent) experience at least a 5 percent error rate in carrier billings.
These errors are not all carrier errors. The study found that descriptions, service needs, or weights are often the cause of error. Improving accuracy in manual and digital descriptions would certainly help carriers, while aligning TMS rating engines through shared or mirrored rate tables would reduce mistakes in calculations.
This same report indicates that carriers spend over $10 generating and collecting invoices 40 percent of the time. Further, 60 percent of invoices take more than one day to generate. These numbers are high, so I would suggest you take a look under the hood of your carrier’s operations and your own accounts payable departments. If you are not automatically and electronically settling with carriers, then you need to look into doing so. This might mean a change in internal processes or even going with a new carrier.
Again, shippers need to examine whether the business they’re giving their carriers has lanes that have no capacity or lanes that just aren’t profitable. Focus on fixing the exceptions to improve margins and help the carrier hold down rates while increasing profit margins.
Thinking outside the box means engaging in a dialog about the elements of the shipper/carrier contract that are having a negative effect on carrier margins. The carrier is under real pressure in labor costs, equipment, and fuel. Creative and collaborative leaders are investing time and effort in beating the inflationary cost curve with strategies outside the traditional contract box.
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