In last week’s Managed TMS blog (Avoiding the Two-Year Contract Pitfall), Kevin McCarthy explained how unpredictable freight rates can make it difficult for shippers to maintain long-term contracts with carriers. This week, we take a look at one of the unwanted outcomes of carriers jumping ship in a volatile market: unforeseen budget variances.
Budgeting for transportation is an inexact science, but that is cold comfort for shippers hit by a sudden rise in the cost of moving freight. In an uncertain market, such increases can be substantial. Take, for example, the 100% rate hike incurred recently by one large shipper on a lane from New Jersey to Florida. Having to explain a bloated transportation budget is not the only indignity managers suffer in these situations. All too often a corollary of rising transportation costs is a decline in customer service.
Knowing why freight budgets get derailed does not take away the pain. However, understanding the causes and effects helps managers to develop strategies for keeping freight costs under control in a rollercoaster market. Here are some typical reasons for abrupt drops into the red.
As Kevin McCarthy pointed out in his blog, from a carrier perspective the commercial viability of lanes shifts with changing market conditions. When a lane becomes unprofitable and core carriers move elsewhere the network can be thrown into disarray. Your first reaction might be to delve deeper into the route guide to find alternative providers. The search probably yields other carriers, but in all likelihood they will be more expensive and not provide the same level of service; there are reasons why you assigned these operators a lower ranking. For instance, a third-tier carrier is unaware that not calling the customer to explain that a delivery will be missed carries a fine which adds to your costs. You might even be forced into more desperate measures such as resorting to the spot market to find capacity, further inflating your transportation budget.
Unscheduled network changes such as sourcing materials from a different location or the introduction of another production facility to the network can redraw your distribution map. If the result is the loss of carriers because the new configuration has a very different revenue profile than the original network, then you may be shunted into the scenario described above.
Customers can and do change their minds about what they want delivered where and by whom. Here is a real-life example. A retailer decided that it did not want to pick up 20 loads and switched the responsibility to its supplier. The change was executed on a Saturday and the loads had to be shipped the following day in time for a special promotion. The expedited shipments were very costly. This is an extreme example, but such demands are not uncommon especially on lanes that become troublesome for the customer.
Carriers make a detour around some types of business. Examples include user-unfriendly receivers that force drivers to offload at multiple docks and make them wait for hours in between stops. The new Comprehensive Safety Analysis 2010 regulations that cover driver hours make such delays even more unpalatable (you can download a free copy of C.H. Robinson’s CSA 2010 whitepaper here…). When carriers decide these awkward receivers are more trouble than they are worth, the job of finding providers to carry your freight becomes much tougher and probably more expensive.
There are a number of ways in which these problems can be avoided, or at least offset. First and foremost is securing access to the detailed reports and market intelligence that only a robust transportation management system (TMS) can supply. Here are a few examples of the critical information and support that a TMS can provide when transportation costs threaten to break through your budgetary limits.
- Market feedback that keeps you abreast of developments such freight rate movements on key lanes and spot market prices. Armed with this information you can at least anticipate capacity shortfalls and cost increases, and compare mitigation strategies. For example, the deployment of drop trailers or another modal mix might ease a capacity crunch.
- When plumbing the route guide for alternative carriers you need timely, detailed information on the cost and performance of lower-tier providers to make the right selections.
- Help with managing demand, a key task in a volatile market particularly at the end of the month when there might be a rush of orders to meet sales targets.
- Transportation costs can escalate quickly in an unpredictable business environment. A TMS helps you to closely monitor irregular expenses such as the cost of expedited freight movements. It might be necessary to review and report these costs more frequently.
- A comprehensive TMS helps you to monitor carrier acceptance rates and to work with providers to prevent sudden capacity losses. This might require extra work such as more benchmarking and scorecarding, and the use of tools such as percentage-based tendering that are part of the TMS service.
Other strategies include working closely with manufacturing to ensure that production decisions do not unnecessarily inflate transportation costs, and regular review meetings with carriers to keep the relationships on a firm footing.
Of course, such practices should be part of any sound transportation management program. But in a fickle market these mitigation measures also help to eliminate nasty budget surprises.