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How Many Times Can You Squeeze the Lemon?

By Chris Jones | 06/28/2013 | 7:48 AM

There is a saying that goes something like “you can squeeze the lemon one more time and get a little more juice out.” I have heard it used as metaphor for taking out costs and it appears to be well adopted by a number of large shippers (manufacturers, retailer and distributors) who have joined various transportation benchmarking consortia. My concern for these companies is that if their focus is only on rates, the cost savings will not be sustainable. Instead, greater emphasis should be placed on collaborative transportation strategies and practices to drive down costs and keep them low.

While comparing costs across companies to see who has the lowest rates can quickly yield cost savings, it is nothing but arbitrage. Basic economic theory says that arbitrage mostly benefits the early adopters for some period of time. After that, as many others attempt the same form of arbitrage, the market corrects itself. For transportation this means that costs will flatten out or in fact go up. Here’s why.

Carriers are just like any other enterprise. They don’t exist unless they can make money. If you evaluate the financial performance of truckload and many LTL carriers, they aren’t exactly “knocking it out of park” from a profitability perspective. At some point, nothing but pressure on rates either drives carriers out of that market or out of business. If you need an example of how this works, look at the domestic automotive market and the number of suppliers that went out of business because the “Big 3” OEMs just focused on cost. In the end, the OEMs had to provide financial assistance to a number of their suppliers because of the situation they created. Transportation capacity is already tight and cost-focused rate benchmarking will only continue to squeeze it. When the remaining carriers say “enough”, the cost reduction game is over. If you read a recent post on Logistics Viewpoints by Adrian Gonzalez, you can see it is already happening at ABF (www.logisticsviewpoints.com/2013/06/19/what-is-the-future-of-truckload-transportation).

For transportation costs to go down and stay there, shippers need to consider how their strategies and processes lower the carrier’s costs. To lower costs, the carrier needs to plan and execute collaboratively with the parties shipping and receiving the goods. A shipper sharing forecasted freight volumes with its carriers is an understood concept and will help the carrier lower costs because of greater predictability.

However, greater visibility doesn’t change the basic processes for moving freight. Carriers make money moving, not sitting. While there can be demurrage charges, they don’t make up for the lost productivity. For example, how are you helping them minimize load/unload times and dwell times? Are you using technology such as dock appointment scheduling to make sure that trucks are not lined up waiting for an open dock?

Cash flow can be a killer for carriers and there is a cost to them for “floating” your business. How fast are you paying carriers? How many invoices are stuck in dispute because of assessorial charges? What have you done to streamline and automate the freight payment process? To shorten the payment timeline and reduce disputes, leading shippers are using TMS solutions to determine either to eliminate the invoice process through payment based upon contracted rate calculation or accepting electronic filing of invoices. Portal based carrier management systems even allow smaller carriers to electronically file or update accessorial charges just like the larger carriers.

Driver retention is also critical, especially in these days of tight capacity. Driver turnover impacts productivity, capacity and service levels. Drivers want predictable hours and reasonable routes. How are you working with carriers on constructing routes that allow drivers to have regular hours, be home every night and steady income. For example, one logistics company worked with a shipper to create a hand-off strategy so drivers could complete runs during a day to significantly reduce driver turn over. While it’ss very hard for an individual shipper to make this happen, collaboration between shippers can make this more of a reality.

If you’re the company paying for the freight, what are your trading partners – the folks on the other end of the movement of goods - doing to make transportation more efficient? The sad fact is that many trading partners do not care, because it isn’t perceived as “their” problem. What metrics do you have in place to measure trading partner performance with carriers? You need to apply the same rigor to your trading partners to ensure that they are just as efficient when your carriers arrive to maximize end-to end carrier productivity.

Benchmarking carrier rates is an enticing way to drive down costs, but that “lemon has been squeezed a number of times already”. Without evaluating how to help carriers systematically lower costs, rates won’t continue to decrease.

How is your company helping to reduce carrier costs? Let me know.



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The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Chris Jones

Chris Jones

Chris Jones is Executive Vice President of Marketing and Services at Descartes Systems. Jones has spent more than 30 years working with manufacturers, retailers, distributors, and logistics providers to improve their supply chain operations. One of his primary missions is to identify and leverage new and counter intuitive activities that make a difference in the business. Jones has held senior positions at Kraft Foods, Descartes, and Gartner. He has a B.S. degree in Electrical Engineering from Lehigh University.


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