Moore on Pricing: Truckload pricing and your TMS
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It’s become commonplace for shippers to “benchmark” truckload rates with the market either through a consultancy or by accessing one of several web sites with a listing of origin-destination (OD) pairs and a recent market price.
While this is a relatively quick process, and may give shippers a reference point for what you’re paying, it falls well short of what you could do with real “optimization” using a modern, web-accessible transportation management system (TMS) and some smart negotiating.
In the quest to make rate reference tables simple in a TMS, the majority of shippers I’ve worked with often have simple mileage or “flat” line-haul rates for truckload. The only mathematical addition is the fuel surcharge calculation. While this makes loading and retrieving rates easy, it doesn’t leverage the power of a modern TMS—nor does it help shippers to manipulate the many factors that make up the cost of truckload transport in order to save the carrier and the shipper some money.
The first group of costs, often reflected in carrier rate schedules, includes items such as: minimum charges; stop-off; detention; and load cancellation. These items are less dynamic and can be negotiated as standards for all loads in a contract period. Be advised that carriers do try to maintain a margin in these accessorial charges, so be sharp about learning the carrier’s labor rates and operating ratio (profitability) so that a fair price is arrived at in advance.
A second group of costs are more dynamic. They assume that the TMS is interfacing with a sophisticated rate engine with capabilities to deal with transactions as unique events with one-time cost variables. If both the shipper and carrier systems are capable of dealing with unique transaction pricing then several dynamic pricing scenarios emerge.
First, we look at day-of-shipment “capacity sale” pricing.
Conversely, the shipper makes additional freight available in a reverse bid for rates on a given day for a given lane or set of lanes. To make this manageable, the two companies interact at the machine level, and offers and responses are made online via the web. The rate tables for both parties record a new agreed rate that is good for a limited time and for limited usage.
Second, an inbound backhaul is arranged and the Incoterms state that the supplier is covering the cargo through to the destination despite the fact that the receiver is arranging for and paying the carrier. If the load is covered for loss by the supplier, then the shipper should get a break for both the volume of backhaul and the reduction of liability for the carrier.
The third has to do with the problem of over coverage of cargo insurance. Too much insurance often results when a shipper insists on high levels of insurance for all loads when they have a percentage of low-value loads (e.g. return packaging). Often I hear that the shipper’s TMS doesn’t distinguish cargo insurance needs and coverage.
For more than one carrier the excess in premiums to shippers is a profit maker that they would rather not discuss. For the shipper, savings in this area can cover that new TMS you’ve been thinking about.
Despite the many years the industry has been buying and shipping truckload freight, there is always something new to learn. Keep your people and yourself in learning mode, revise processes to enable more dynamic pricing, and identify and acquire the best TMS technology for moving freight efficiently and effectively.
About the AuthorPeter Moore Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, 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 [email protected]
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