NEGOTIATING SHIPPERS’ NEEDS for Meaningful Freight Rates

Co-Authored with NEXTEL

 

 

Introduction

The inherent wealth of renewable data and information that continually flows from freight transportation is one of the richest corporate information assets.  The transportation and logistics professionals that harvest this renewable resource, applying their knowledge and experience, add significantly more value to this already enriched information resource.  The data contained in this corporate repository is more than sufficient, at the very least, to support all corporate research, planning, and negotiations.  Its limitations are based solely on our knowledge, skill, experience, and imagination. 

 

Exchanging ideas and information significantly increases the depth of our knowledge and the breadth of our experience.  Sharing information with our more than 50,000 worldwide white paper readers, who represent companies in the private and public sectors, governments and universities; through their questions, comments, and suggestions, provide a continuous flow of timely transportation and logistics ideas.  Interaction with TransportGistics’ readers has created a “logistics forum for the exchange of ideas and information”, and is the driving force for TransportGistics’ white papers.  The opportunity to answer our readers’ questions provides TransportGistics with a constantly refreshed, global view of the ever changing transportation, distribution, and logistics dynamics; and provides the energy that fuels our white papers.

 

Our recent white paper, “Knowledge Based Freight Transportation Negotiations” elicited a wide-ranging reader response.  A broad cross section of their comments, questions, and suggestions were well represented by Nextel.  Essentially, our readers recognized the importance of the “Knowledge Based” paper, but suggested that “drilling down” to the “distinct shippers’ needs” by addressing the daily transportation, distribution and logistics challenges we face would offer yet another important dimension for effective treatment of this subject.

 

About the Authors

Mindee Trudell began her transportation career more than eight (8) years ago with Nextel Communications in New York.  She completed her formal education at Mount Saint Mary College in Newburgh, NY where she earned a BA in English along with her teaching certificate.  Ms. Trudell continued her education, studying at Georgia Tech earning a Continuing Education Certificate in Transportation Management in 2000.  Mindee relocated from New York to Reston, VA in 1996 and today holds the position of Domestic Traffic Manager for Nextel Communications.  She is an active board member of the Council of Logistics Management – National Capital Area Roundtable.

 

The TransportGistics’ team of authors is comprised of members from its Convergence Consulting Practice and therefore represents like and disparate business disciplines.  The “Convergence Practice Methodology” (CPM) was created and developed by TransportGistics, Inc. as an “inclusive” method of approach, aligning the client and the consultants on one team.  As a combined resource, the team’s abilities and capabilities are maximized, focusing its intellectual capital on defining the situation; identifying areas of opportunity; problem resolution; and realistic, achievable recommendations.[1] 

 

As Nextel’s Domestic Traffic Manager, Ms. Trudell is a key member of the logistics team.  This team recently consolidated more than thirty (30) warehouses into four (4) strategically located “Nextel Logistics Centers” and one (1) Retrofit and Refurbishment Center.  The team developed a comprehensive inbound vendor routing program, and renegotiated several key transportation contracts resulting in cost savings that exceeded several million dollars.

Nextel, a FORTUNE 200 company based in Reston, Va., is a leading provider of fully integrated wireless communications services and has built the largest guaranteed all-digital wireless network in the country covering thousands of communities across the United States.  Today 95 percent of FORTUNE 500 companies are Nextel customers.  Nextel and Nextel Partners, Inc. currently serve 293 of the top 300 U.S. markets where approximately 250 million people live or work.

 

TransportGistics, Inc. is the global, multi-products and services company that provides market leading, simple, incremental, and integrateable solutions for logistics, and transportation functions within the supply chain.  Its rich history in micrologistics solutions and macrologistics strategies is the fuel that drives its “total supply chain visibility and control” services and products development.  Offering superior customer service together with the combined power of TransportGistics’ TMS products, it’s “simpler is better method of approach” and its commitment to “total supply chain visibility and control” makes it the transportation and logistics solutions provider of choice for many of the world’s leading corporations.  TransportGistics commitment to education: is acknowledged by its more than 50,000 active, white paper readers representing companies in the private and public sectors, universities and governments, worldwide; and is portrayed as a founder partner of the Center for Excellence at SUNY-Stony Brook.[2]

 

Executive Summary

“Freight transportation negotiations” is a multidimensional subject with broad meaning and is focus driven by our corporate requirements, individual experiences, and perspectives.  TransportGistics’ white paper, “Knowledge Based Freight Transportation Negotiations” addressed the difference between, “cost and service driven negotiations” on the one hand and on the other, “freight transportation negotiations”.  The experiences of that paper’s co-author, Jeff Nielsen, Director of Global Logistics & Compliance at MPC Computers, demonstrated the need to achieve that elusive “balance” between shipper and carrier.  Attention was also given to the importance of attaining “mutual advantage” through negotiations.  That white paper also examined some of the negotiations issues, service needs, practices, and processes of MPC Computers.

 

This white paper presents some of the specific service requirements or “distinct shippers’ needs” that Nextel brings to the “negotiating table”.  By analyzing Nextel’s experience we can understand and appreciate the “needs” value proposition.  Although every company has its own character, philosophy, and operating style, the “shippers’ needs” that are discussed in this white paper are generally applicable to most companies.  In fact, they are some of the same “distinct shippers’ needs” presented as standard items in TransportGistics’ “Specimen Contract Carriage Agreement”[3].

 

Methods for Identifying Shippers’ Needs

Shippers must identify their needs as a condition precedent to freight transportation negotiations.  Identification of the shippers’ needs is required to enable carriers to deliver the freight consistent with the shippers’ character, objectives, and purpose.  With this as a basis, one method that can be used to determine those needs is to develop an understanding of the shippers’ philosophy; product nature and type as well as the integrity of the packaged product to withstand the normal hazards of transportation. 

 

Some shippers recognize and appreciate the fact that carriers are their representative at the customers’ doors.  This recognition could be translated into the following shippers’ needs:  advertising, and uniformed drivers that are product educated.  These stated needs once mutually understood can be priced and negotiated.  Once established as a contractual need, appropriate methods and procedures would be designed in order to properly monitor performance thereby assuring the parties that what they negotiated is, in fact, being performed; thus qualifying for the agreed to payment.    

 

Other shippers may offer their customers a twenty-four (24) hour “turn around time”.  The shipper may understand this internally to mean that customer orders will be delivered within three (3) days of order receipt.  If this “understanding” is not effectively articulated, the necessary mutuality of understanding will not be achieved.  This failure will manifest itself in a repetition of customer complaints and perhaps short or no payment to the carrier.  On the other hand, if the mutuality of understanding is achieved, the transit distances may be incapable of achieving this shipper need.  A solution for the time in transit requirement might be “expedited service” and as such become one of the shipper’s needs.

 

While there are similarities amongst all companies; it is the finite differences in performance requirements, philosophy, product and process that will meaningfully identify the specific service items or shippers’ needs.   The similarities, unless definitively expressed as finite “needs”, will probably fall victim to the exigencies identified above.  As an example, to simply identify items such as:  pickup, inside delivery and notification will only exacerbate the problem. Consider inside delivery, some might think that this requirement is for delivery on any floor and at any location within a floor; while others would understand this to mean “level delivery within twenty (20) feet of the tailgate. Therefore, every “need” must be fully described and articulated in order to achieve a mutuality of understanding.  Specificity at the earliest possible time will facilitate the identification, with the ensuing negotiations process resulting in meaningful expectations and deliverables.

 

A successful method for avoiding a lengthy and potentially problematic process for identifying “shippers’ needs” can be found in the “transportation purchasing profile”.  Several of TransportGistics’ white papers have spoken about the “transportation purchasing profile” and it is this document that should be used to identify the service and cost items.  The “profile” is the corporate expression of its character, operating style, requirements and philosophy.  It contains the necessary input from the various corporate operating areas as well as the respective signoffs.  The shippers’ needs and service descriptions will be found in the “profile”.  The inclusive process employed by the “profile” significantly improves the chances for a mutuality of understanding; after all it has already codified the shippers description.  The “profile” establishes the “continuity of purpose” within the shipper and therefore can be better articulated.  Conveying the expressed corporate interests that the profile contains, will allow the resultant negotiations to reflect the corporate philosophy and intentions thereby improving the chances for carrier understanding.  Absent this, we deny the fact that the carriers are the shippers’ representative at the customers’ door; thus obviating this most important negotiations objective.  If you accept this notion, the true meaning of each service item or shippers’ needs will be understood and the ability to satisfy their intention will have a better chance of succeeding. 

 

Costs Are Relative

Presuming that the freight is delivered to the carrier in a condition to withstand the normal hazards of transportation, shipper and carrier must focus their attention   together, on the associated requirements. Customer delivery satisfaction is another general indicator of those shippers’ needs that must be articulated in order to achieve a mutuality of understanding between carrier and shipper.  It is this mutuality of understanding that allows the identified needs to be performed properly.  Through this process the relative cost can be established.  Once the shippers’ needs and their respective costs are placed on the table, the parties can negotiate.  Once negotiated the shippers’ contractual needs can be monitored for performance and effectively audited

 

By identifying both the shippers’ needs and their relative value simultaneously, allows the value proposition to surface rapidly.  Effectively articulated, the value propositions are not only mission critical requirements, they establish the character of the negotiations.  All of the above factors come into play when determining costs.  The value proposition establishes both the “shippers’ needs” and the associated carrier costs and it is at this point that the parties can effectively negotiate. 

 

Nextel’s Method of Approach and Considerations

While methods of approach differ from company to company, most would agree that the principles and objectives generally applicable to negotiations apply equally to “freight transportation negotiations”.  Above, we have described two (2) alternative approaches, common to both is the demand to identify “shippers needs” and to do so early on in the process.  The first alternative relies on, what appears to be a random determination of shippers needs based upon shipping experiences.  The second method considers the importance of codifying and documenting a “transportation purchasing profile” which in addition to specifically identifying the shippers needs, it associates them with the shipper’s character and philosophy.  Nextel takes a team approach and employs the experiences and knowledge of its “logistics team”. 

 

Recognition of the activities associated with transportation, operations, and controls influences Nextel’s pursuit and identification of their “needs” and simultaneously achieves the necessary “needs” specificity required to satisfy the “mutuality of understanding”.

 

Four key areas of interest drive Nextel’s process for identifying and discussing their needs:   Service Levels; Cost Structures; Length of Contract; and Technology. 

 

Service Levels – Set the expectation during negotiations and position the carrier to better understand those deliverables.  Nextel lets their carriers know that Nextel “always want to be treated like a new customer” and not taken for granted.

Transit Schedules – Understanding and provisioning for “worse case scenarios” regarding weight and mileage allows manipulation flexibility in the planning process while maintaining the ability to meet end users’ and customers’ needs.

Claims Ratios – Loss and Damage claims are inevitable.  The entire process must be documented, including but not limited to: acceptable levels and resolution time as well as the formula of damages.

On time deliveries – Establish the reasonable and achievable expectation of on-time delivery performance; using a percentage of shipments for the metric. Customer Service – Proactive communication is the key to understanding customer delivery expectations; absent this, it is impossible to consider their needs and wishes.

Discounts for failing to meet service levels – Collaborate with your carrier partners to determine metrics for evaluating their service.  Because freight rates and charges are based upon agreed to performance, failure should be recognized.  Freight cost deductions for carrier failure are an appropriate mechanism for enforcement.  Deductions are best taken at an influential frequency, that is, when will they be best respected.  Nextel encourages their consignee customers to recognize and report carrier performance, both good and bad.

 

Cost Structures – Reasonable people recognize reasonable value, Ms. Trudell says, “you get what you pay for, so the lowest cost isn’t necessarily the best”.  On the other hand, your market cost knowledge must be current in order to assure fair treatment.

Tariffs – Identification of the governing tariffs, that is, the tariffs that will be used to calculate the freight charge must be identified together with the method of supplement and revision. 

Surcharges – From time to time surcharges may be imposed; recognizing and treating this contingency is tantamount to controlling your freight costs. Develop a method that respects the carriers cost increases as well as the shipper’s need to be competitive. One method that has been successful for Nextel is to share the increase with their carriers.  As an example, have the carrier absorb the first 3% of the increase. 

Accessorials – Ms. Trudell cautions us to be aware of the “accessorial”.  Experience has taught her that this may be a device that can eliminate hard won pricing concessions; “Carriers may discount tariffs heavily and then nickel and dime the shipper for additional line item costs”.  On time pick ups and deliveries, additional labor and de-skidding of product are examples of accessorial charges she has experienced.  On the other hand, there are additional services that will occur from time to time and they must be negotiated and documented in the contract.

Audit – Auditing the service is the effective solution for assuring that what was agreed to is in fact being performed.  Ms Trudell suggests that customers should be encouraged to participate in the audit process.  “Customer found over-charges should be brought to carriers’ attention and debited off of a following remittance”.

 

Length of Contract – Frequency of negotiations, like cost and service have a relative value.  There are costs associated with contract negotiations; in order to minimize those costs by reducing the frequency, consideration should be given to a review process rather than renegotiating.  Ms. Trudell has found it worthwhile to, “get it right the first time”.  “Set the contract up for a long period with an option for renegotiating halfway through, and cap the increase so there will be no surprises.”  Negotiating lengthy contractual periods require appropriately timed reviews.  Nextel incorporates a volume incentive to take advantage of the lower unit costs associated with volumes greater than could be anticipated at the time of negotiation.  Approximately every eighteen (18) months, consistent with the volume increase, Nextel receives a rebate from the carriers.  This method protects the interest of all parties and supports the longevity philosophy.

 

Technology – Learn about your carrier partners’ technology capabilities, Ms. Trudell says, “Yes, there is technology in transportation!”

Reporting – Understand your carrier partners’ capabilities and define your reporting needs.  Carrier reporting can be used as an adjunct for reports from other sources.

Paperless Invoices – Eliminating paper is advantageous to all.  Freight bills can be issued via EDI or part of an automated Bill of Lading process. Products such as InsourceAudit and BLgen are inexpensive and highly effective.  

      Equipment – Properly maintained trucks, not only perform safely, they make a good appearance.

 

Conclusion

Properly managed transportation and distribution can be the difference between profit and loss.  Their influence is not only felt throughout the entire supply chain, but transportation and distribution are the essence of the supply chain; without transportation, there is no supply chain.  Every component of transportation and distribution is critically important to commerce and industry.  Freight transportation negotiations therefore require the necessary skills, expertise, experience, knowledge and imagination to develop the relationship that will properly respect the “corporate life blood” to the marketplace. In our white paper, “Knowledge Based Freight Transportation Negotiations” we treated those areas of this subject that concern the “relationship” between carrier and shipper; and stressed the importance of achieving “mutual advantage”.  Today’s white paper addressed the importance of the distinct shippers’ needs, and some of the methods used to develop those needs.  Clearly, freight transportation negotiations are complex and demand the necessary attention, because how we negotiate will influence customer satisfaction, corporate performance, and success. 

 

Get Information

To learn more about the “Convergence Consulting Practice”, and how it can harness the intellectual resources at your company and drive corporate performance and success, please contact jwest@transportgistics.com. 

 

Continuation

Please consider this white paper as a continuum in this subject area; succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any relevant questions or comments to papers@transportgistics.com.

 

Disclaimer

The information presented herein represents the opinion(s) of the author(s), but not necessarily the opinion of TransportGistics, Inc.  This white paper is not presented as a legal position or opinion.

 

TransportGistics,

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