Moore on Pricing: Re-imagining the shipper-carrier relationship
February 01, 2013 - LM Editorial
I recently had the honor of facilitating workshops for large shippers and their current and prospective carriers in the midst of major contract RFPs and renewals.
It was terrific to see private conferences where a shipper and multiple carriers openly discussed the shipper’s business and really thought through how best to find a solution. These types of events enable the selection of “best fit” partners based upon complementary networks and business cultures.
For companies that are serious about sustainability and creating “mutual incentive,” an ideal solution is to change to a new contract model that makes cost transparent and establishes a minimum base margin and incentives for innovation. This, of course, means ripping up the old procurement-driven methods, killing reverse auctions, and investing time in learning new partnership-building methods.
Kate Vitasek at the University of Tennessee has multiple books out on “vested outsourcing” and the “vested way” of contracting. I recently spoke to Kate about “vested transportation” as a concept and she agreed that this area really needs a new model.
She shared stories of shippers who burned out their top carriers by beating them up on price and later found themselves seeking service from second-tier service providers. According to Vitasek, what would enable a mutual partnership arrangement is the ability for carriers and shippers to flex in their daily transaction prices—even on a shipment level—to reward innovation and creativity in capacity utilization.
This means throwing out the fixed-rate tables in our TMS tools and having machines and people interact much like the airlines systems do on capacity-available pricing. These types of models and web-based tools are coming to market.
Imagine a service provider having shipping forecasts from the shipper so equipment location and capacity could be planned. Imagine the carrier flexing pricing to react to capacity shifts. Image a single source for the shipment price as we have in passenger air and parcel—this would reduce pre- and post-auditing expense and allow for faster settlement.
Or image the carrier knowing the cube of pick-ups so routing and final delivery can be planned even as the products are being picked up. In fact, carriers continue to tell me that better information in these areas saves them money.
Shippers need to step up their game to help the carriers with information that in turn can provide information on transit and delivery. And as lead times shrink and performance metrics make the difference for buyers in evaluating suppliers, those who rely on carriers to have flawless operations need confirming data—these are the shippers who will be most competitive in the market.
They need carrier partners in executing their strategy; thus, the planning workshops with full network disclosure and transparency in target areas such as service, safety, and cost act as a first step in building new, long-term, more dynamic contracts. These agreements are designed to flex with the changes in either the shipper’s or the carrier’s networks.
Breaking the cycle of reverse auctions and arms-length “commodity buying” will be tough. However, other areas of logistics, such as warehousing, technology, and value-added services are blazing the trail.
I believe we can envision this change for the huge transportation services market, starting with dedicated carriage and then with truckload and less-than-truckload eventually following suit. I look forward to encouraging this trend.
Subscribe to Logistics Management magazine
entire logistics operation. Start your FREE subscription today!