Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

Transportation Procurement Events: More Than a Necessary Evil

Freight Procurement

Last week I explained why carriers don’t tend to welcome transportation procurement events with open arms.

Now let’s consider the more upbeat side of these exercises.

In my experience there are compelling reasons for shippers to stage procurement events on a regular basis. But there’s no need to take my word for it; check out the Stale Rates Research that provides convincing quantitative evidence in support of the pro-transportation procurement event argument (you might also want to take a look at our blog post Fresh Procurement Insights from Stale Rates Study).

Here are some positives for shippers.

Long overdue updates happen. Transportation procurement events force you to refresh your understanding of how your network is changing and to communicate this knowledge to carriers. Your network view can become outdated surprisingly quickly.

A vehicle for strategic updates. In addition to the tactical adjustments mentioned above, procurement events can be a logical consequence of strategic reviews such as modeling exercises that reveal network misalignments (for more on this see Signs That It’s Time for a Network Modeling Exercise).

Top experts get involved. A procurement event gives you access to the highest level of pricing expertise on the carrier side.  Day-to-day operational folks usually have little leeway to stray outside the provider’s basic matrix. A formal procurement event, on the other hand, involves individuals who have the authority to negotiate non-standard price increases or decreases.

You can open the toolbox. That shiny, sophisticated constraint-based bidding tool you’ve been itching to use can be put to good use. Wielding it to minimize your risk for given price levels is just one application. Managing the level of change is another.

Fewer budget surprises. Price increases become part of a managed budgeting exercise, rather than potential ad hoc hikes that are more of a shock to the system and tougher to explain.

A clearer rates picture. There is no denying that transportation procurement events can require a lot of effort and are by no means free. However, they are a much better way to compare market rates than sporadic reviews. Remember, rates change with or without these events, so why not make the discovery process systematic and a lot more insightful with a carefully managed procurement program.

By now service providers can be forgiven for feeling left out of the party. Service providers benefit too. I’m not suggesting that the prospect of a transportation procurement event should make carriers jump for joy. But there are gains for them and recognizing this might, at the very least, make these events less onerous.

Procurement events enable carriers to adjust their pricing models in line with changes to their networks. As a result, they maintain profitability and can avoid having to refuse loads or renege on contracts; actions that can be disruptive and, in the long run, damage their market reputation.

Another plus is that procurement events give structure to the pricing relationship, particularly if the events are staged on a regular basis such as annually. In an uncertain world, being able to anticipate contract negotiations is a definite advantage.

As the Stale Rates Research referenced earlier concludes, “predictability gives service providers a better sense for how long they are expected to hold contract rates that may or may not be attractive. A more arbitrary cycle tends to make rate setting more erratic, which is less to conducive to strategic planning.” (Iowa State University et al. “Stale Rates Research: Benefits of Frequent Transportation Bids,” page 11).

In addition, transportation procurement events expose shippers to the current realities of market prices. These doses of reality make it less likely that shippers will set impractical cost goals for transportation. Realistic pricing streamlines negotiations and fosters a constructive relationship with carriers.

Every healthy relationship needs to be recalibrated at some stage, and for that reason alone surely procurement events are, on balance, a positive influence in freight transportation.

Comments

Joe Lombardo

While subscribing to various benchmarking services can help establish where a shipper's rates are versus the market, the best way to know the market is to conduct bidding events are a regular cycle. I agree with the blogger, properly constructed and managed RFP's should be strategic, not just a rate shopping/race to the bottom exercise.

3.15.13

Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*