Subscribe to our free, weekly email newsletter!

Moore on Pricing: Pricing outside the box

By Peter Moore, Adjunct Professor of Supply Chain
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.

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).

Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Seasonally-adjusted (SA) for-hire truck tonnage in October at 135.7 (2000=100) was up 1.9 percent compared to September’s 133.1, and the ATA’s not seasonally-adjusted (NSA) index, which represents the change in tonnage actually hauled by fleets before any seasonal adjustment was 139.8 in October, which was 0.9 percent ahead of September.

The average price per gallon of diesel gasoline fell 3.7 cents to $2.445 per gallon, according to data issued today by the Department of Energy’s Energy Information Administration (EIA). This marks the lowest weekly price for diesel since June 1, 2009, when it was at $2.352 per gallon.

In its report, entitled “Grey is the new Black,” JLL takes a close look at supply chain-related trends that can influence retailers’ approaches to Black Friday.

This year, it's all about the digital supply network. In this virtual conference, we will define the challenges currently facing supply chain organizations and offer solutions designed to transform linear operations into dynamic, automated networks that offer seamless communication, visibility, and the ability to respond and optimize processes at any given time.

In his opening comments assessing the economy at last week’s RailTrends conference hosted by Progressive Railroading magazine and independent railroad analyst Tony Hatch, FTR Senior analyst Larry Gross said the economy continues to slog ahead at a relatively tepid pace, coupled with some volatility in terms of overall GDP growth. And amid that slogging, Gross said there is currently an economic hand-off occurring between the industrial sector and the consumer sector.


Post a comment
Commenting is not available in this channel entry.

© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA