Last week we looked at some of the flaws in performance benchmarks that transportation professionals need to watch out for when applying these important management tools. In this week’s post we explore how benchmarks can lead to misunderstandings about the performance of freight networks and, ultimately, to wrong management decisions.
As an indicator of how your network stacks up against those of your competitors, benchmarks play a key role in setting performance expectations. This is fine as long as the data is sound and interpreted correctly. Unfortunately, this is not always the case and can be a flaw leading to undesired outcomes.
Take, for example, the assumption that a lane-level benchmark can be applied across the network. The thinking might be that rates should be more or less in line with the benchmark on all lanes. But this is may be misleading. The rate per mile can vary widely from lane to lane based on length of haul and the actual origin and destination of the load.
Also, there is no guarantee that a sizeable transportation budget will give enough leverage to secure the benchmark rate. Freight density in a lane has more influence on the rate than size of spend. Thousands of loads may be moving from St. Louis to Boston, for example, but capacity could be in short supply because carriers are not overly excited about moves that rack up deadhead miles on the return leg.
In many ways these faulty assumptions relate to misunderstandings about the truckload market. Managers need to interpret benchmarks in terms of the market dynamics that drive performance, and not just their own operational agendas.
This is covered in more detail in a CSCMP Explores document (Deriving Strategic Advantage from Truckload Procurement), which explains why the truckload market is unique. This uniqueness can cause some professionals – notably procurement managers who are not familiar with the intricacies of buying freight transportation – to misjudge the market.
As the report explains, the concept of a “perfect market” is well documented in economic textbooks but in the real world is a rarity. However, the truckload market is about as near as you can get to this theoretical standard.
For instance, one of the distinguishing characteristics of a “perfect market” is that buyers and sellers are so numerous that they do not individually influence the market price. This is a feature of the highly fragmented truckload market where it is difficult for individual shippers – even those with large transportation budgets – to sway market prices.
Another telltale of “perfect markets” is the absence of economies of scale. When procuring truckload transportation purchasers might attempt to use economies of scale to lower the cost of goods and services. Again, the extreme fragmentation of the business means that this tactic is not as effective as in more traditional markets.
Fundamental misunderstandings like these can cause uninformed buyers to misapply a benchmark. They might assume, say, that their market muscle enables them to enforce a benchmark rate. It likely does not.
Some of the confusion may arise from gaps in the information used in the benchmarking model. Consider a company that ships every load the same day that it tenders the freight. In this case, the shipper will pay a premium for the same-day service, and this could be reflected in the market rate. But the pricing nuance and purchasing behavior may or may not be part of the benchmark analysis.
Benchmarking is an essential part of the freight manager’s toolbox, and used properly, can be an extremely valuable performance yardstick. But transportation professionals need to understand what market data underpins these services, what assumptions are built into them, and how to interpret the data according to the rigors of the freight business.