As the economy improves and capacity tightens, conversations between carriers and shippers will inevitably shift to rate increases. But sophisticated shippers are not likely to agree to increases before they've exhausted every opportunity to...
As the economy improves and capacity tightens, conversations between carriers and shippers will inevitably shift to rate increases. But sophisticated shippers are not likely to agree to increases before they’ve exhausted every opportunity to remove costs from the supply chain. That was the message from manufacturers and retailers at the recent Transportation Workshop hosted by Motortruck Fleet Executive and Dan Goodwill & Associates.
“In the past couple of years, my carriers have come to the table about rate increases and in most cases what I’ve asked them to do is to look equally at what my organization can do, what my store network can do and to look inside their own operation and find what I’m doing that’s causing some work increases,” said Heather Felbel, vice-president, supply chain, with Indigo Books & Music. “Come forward with ideas on how we can improve processes versus coming forward with price increases, because we’re willing to uncover any rock. We really want to challenge our own folks on their practices and our stores on their practices and I’m willing to do anything to take the cost out.”
Felbel said shippers and carriers alike must rethink their approach to transportation and unearth efficiencies that will keep costs in check, rather than simply hiking rates. And for the most part, Felbel said, carriers are responding. She cited the example of Canada Post, which has traditionally been a high-priced carrier and has recently begun sending engineers to Indigo’s facilities to better understand the company’s ever-changing transportation-related challenges.
“They have come to the table and brought engineers in to look at my organization, look at how they’re handling things and they’re challenging themselves,” she said. “They’re coming back to the table with a different face because they realize they have to think differently about how they approach the business. The fact of the matter is, you can’t afford to be coming to the table without thinking through every component of your business and neither can I.”
While rate increases may seem well-deserved following two years of intense pricing pressure, it seems carriers may be forced to work hard to justify those increases.
“I ask my carriers to come to the table in a very educated way,” Felbel said. “I had one carrier recently that said ‘Here’s the price increase,’ and I went ‘No, thank you, unless you can tell me what this is for and justify it, right back atcha.’ We need to know what is this price increase for? What do you need it to accommodate? Let’s get to the nut of it. We ended up at a different place than what they came in at and that shouldn’t be a negotiation because quite frankly, it looks like they were fishing.”
Brian Springer, vice-president of transportation at Loblaw Companies, agreed that carriers will not be awarded rate increases unless they can clearly show why they’re needed.
“One of the frustrating things as a shipper, is the conversation with a carrier around wanting an increase without us understanding what’s driving the increase. Quite often those arguments are presented without facts and without data,” Springer said. “We really have to let our guards down on both sides and engage in some meaningful conversations in understanding carrier costs, depreciation and labour, showing what their overheads are. We want you to make a margin, because any carrier that isn’t making any margin doesn’t do us any good – it’s a short-term scenario.”
Springer said he relies on his carriers to identify inefficiencies and to offer solutions rather than rate adjustments.
“The approach of ‘I just need’ really doesn’t go very far, unless as a shipper I understand what it is you need and what I am doing as a shipper that’s driving that cost up over the baseline that made you profitable previously,” he said.
That message was echoed by manufacturing shippers. Mike Owens, vice-president of physical logistics with Nestle Canada, said manufacturers are facing the same cost pressures that carriers are.
“Every input into our product is going out of sight,” he said. “I can’t go to the consumer and say we have a sugar index so we’re going to charge you more for a Kit Kat this week, so we really have a lot of pressure brought to bear on our margins. But saying that, we want to make sure we’re whole. So come to the table with facts and let’s have an open discussion about what we are doing that’s raising costs for you.”
While shippers may seem resistant to rate increases, the good news is, they seem more willing to take a collaborative approach to working with carriers to remove inefficiencies. Ginnie Vensolvaitis, director of transportation operations with Hudson’s Bay Company, said she’s all ears when it comes to hearing about “stupid” things her company is doing that are driving up transportation costs.
“There is no way I can know everything that is happening across the country with all my stores and all my distribution centres,” she said. “That’s where you rely on your carriers to have frank conversations with yourself, listening to what the carriers’ problems are and why it is driving more costs.”
That message was echoed by Nestle’s Owens: “Tell me what I’m doing wrong, don’t come to me with a price increase. If we’re doing something at the other end to hold you up, let us know. Sometimes you think we know but we don’t.”
Carriers in attendance countered that rates have nowhere to go but up, but they did agree that it’s up to them to justify the increases.
“Rates are going to be increasing, that’s something that’s going to take place. It’s a necessity in our industry. We’ve had wage freezes in place for a number of years now,” said Michelle Arseneau, managing partner, GX Transportation. “But we need to justify it. We need to sit down with our customers and have open and honest conversations. I’m not opposed to sharing our costing models with our customers, saying ‘This is exactly what it is costing, this is what we’re paying our people, this is what our equipment costs and this is our profit margin. At the end of the day, we want to stay profitable and you want us to stay profitable.’ It really comes down to having those frank conversations.”
And Mike McCarron, managing partner with MSM Transportation, agreed that carriers that try to impose blanket rate increases on their customers aren’t doing themselves – or the industry – any favours.
“I believe as an industry, we have created most of our own problems,” McCarron said. “These blanket ‘Our rates are going up 5%’ are laughable. I wouldn’t accept that as a traffic manager. One of the founding principles of any good relationship is open trust. If our industry wants to get its act together, we need to get away from 35% fuel surcharges based on $1.20 a gallon and blanket rate increases that in many cases go out as form letters.”