When bargaining over freight rates, many shippers and carriers are involved in the wrong negotiations without being aware of their mistake. It has nothing to do with where they are physically located or the identity of the trading partners across the table. The oversight has everything to do with not discussing the rates that really matter.
For shippers, it is easy to become fixated on hammering out a lower rate and to neglect the deeper reasons for carrier pricing strategies. As a result, the annual transportation procurement exercise strays off track before it has even begun.
For example, if there is a wide spread between the rates submitted by carriers then the objective for the shipper might be to secure the price at the lower end of the scale. However, if the shipper fails to determine whether or not the carrier with low rates has a compatible strategy it is in for a big disappointment.
Let’s look at an example of a shipper who is committed to a core carrier concept and wants only carriers that can handle a significant volume in a lane from, say, Chicago to Dallas. If the low-cost carrier is offering a very attractive rate because it doesn’t ship to Chicago on a regular basis and is willing to move the occasional truck out of that city at a below market rate, then the two parties are not aligned. Some shippers only want to discuss price and neglect to check whether or not they are aligned with the carrier’s network. As a result, they have missed the boat on what terms they should be negotiating.
On the other hand, if this carrier has a significant amount of capacity in the Chicago market, and its below market rate in the Chicago-to-Dallas lane is intended to feed trucks to the Dallas market to service other customers, there is potential for a great fit for both the shipper and carrier.
The point is that each carrier has a different need, and a negotiation done well is one that compares rates to needs and arrives at a satisfactory deal for both buyer and seller. In other words, find the carriers that closely match your freight needs in particular lanes first, then look for low rates within this subset of carriers. Of course the chosen partner might also be the most economic, but that should not be the only criteria for awarding business.
Equally, carriers can become overly obsessed with price. For instance, a service provider might bid a low rate because it wants the loads without having a long-term commitment to the business.
How can shippers develop a balanced approach to negotiations? Treat carriers like employees rather than adversaries. Negotiations should be a two-way process of give and take. Shippers need to talk about more than just rates; they need to be willing to collaborate with carriers and figure out how they can make their freight attractive to each carrier.
If you want a stable relationship with partners, develop a long-range mindset. That means doing your rate negotiations on a fixed cycle so carriers can plan their network around your freight.
You can also smooth the way by making sure that the right team is participating in rate negotiation. Include the people who are going to be on the hook for the operational budget involved, and give them an incentive to be cost effective. Although the procurement exercise might be managed centrally, ensure that all relevant managers have an input and hence a sense of ownership.
A transportation management system that supplies the market intelligence and analytics you need to make sound decisions is also invaluable. Without the right information, it is much more difficult to identify the right partners.
Finally, keep in mind that negotiating with service providers as if they are employees is not altruistic; it makes good business sense if you want to secure agreements with carriers that meet your tactical and strategic goals.