Managing freight costs: The breakdown
MISSISSAUGA, Ont.—A session dedicated to freight rate pricing at this year’s Surface Transportation Summit October 15 offered shippers and carriers the chance to look at their costing models and find areas where base prices and accessorial fees could be reduced.
Shippers can contribute in many ways towards managing and controlling freight costs, noted Kevin Taylor, VP and General Manager, DTA Services.
“To me it breaks down into performing an internal needs analysis, identifying partners and ultimately reducing, managing and recovering costs. The first step is understanding the organization’s needs, and the service commitments it has made to its customer base-are these expectations realistic or should they be qualified? What transport modes will meet those qualified expectations? Base rates only tell a portion of the story,” he said.
Accessorial charges are becoming a significant component of the freight invoice. Costs can be hidden in penalties for late deliveries or missed appointments, appointment delivery fees and escalating fuel surcharges.
“It’s important not to just look at the top line for the basics, as unit cost varies by location, time period, and other criteria, so every shipment is different,” said Kenneth Manning, President, Transportation Costing Group.
The same LTL that goes in a full trailer will cost differently from that going in a half-empty trailer because of capacity utilization, he noted.
As shipment cross-subsidies can be very large, it’s important to get your model or your calculations right so you can properly cost the high priced freight.
“Shipment level costing is the idea and what we try and develop in our models. It’s about the specifics in every shipment and the environment in which they move. We want to avoid the averages.
In both LTL and TL, the only thing in common is the driver and the truck. They are both subject to the same principles of costing. LTL networks operate on fixed terminal networks, and truckload from one fixed point to disparate points. The cost of all the loads in a round trip determines the cost of LTL vs. truckload,” he said.
You don’t buy miles from your drivers-you buy round trips, Manning said.
“If you’re not making money on the round trips run to serve a customer you’re not making money on that customer,” he said.
Beyond line haul costs, there are many factors specific to these activities, such as pickup and delivery accessorials, for example.
“When numbering pallets, it’s important to just plain count the pallets, recording arrival and departure times-this has been made easier with the advent of telematics,” he said.
Fuel consumption telematics providers are now able to pull data off the EGR on fuel consumption from point to point.
“We hope to use that data,” Manning said, adding that there is more and more data that can be captured digitally, and the quality of the data has improved as well.
“That means more specificity and better pricing of freight, and better productivity as a result,” he said.
“It should not come as a surprise if your carrier has not had a raise in a few years, (that they may be asking for one),” Taylor said.
Errors can result in service failures and have a serious impact on costs of lost or damaged shipments, he added.
During the carrier selection process he advocated considering an RFP to aid in the selection of cost-effective carriers.
“Standardize the fees and the fuel surcharge matrix and include a request for on-time performance and claims ratio,” he said.
Also consider a carrier’s CVOR and any green initiatives in which the carrier is involved.
“Look for multi-year deals to bring consistency and stability into your costs,” Taylor said.
What can the shipper do?
Reducing airspace in packaging, order consolidation, carrier consolidation, and pallet configuration are all tactics that can contribute to cost reduction for all parties.
“Stay organized-don’t make your carriers wait. Pay your bills within the terms, and communicate with your carrier and with your customers. Do they have all the information they need to get the delivery right the first time? Consider a TMS to manage your internal compliance,” Taylor added.
“A great way to understand carrier costs is to collaborate with the carrier. Small changes on your side may yield significant benefits for you,” said Kris McBride, Vice President of Transportation, Metro Supply Chain Group.
For example, how efficient are your pickups? What pre-alerts do you send to the carrier in advance to help them plan their line haul capacity? Can you schedule pickups at non-standard times?
Do you use the same carriers on the inbound that you do on the outbound? How much time is spent at the pickup location?
These are some of the questions you should be asking.
McBride also suggests when loading outbound trailers, have the carrier’s perspective in mind.
“Can you segregate the freight? Understanding how the carrier physically moves the freight can help remove cost,” he said.
Line haul costs are largely impacted by the length of the haul. If building loads to a destination, maximize your space utilization. Assemble loads based on the carrier terminal points, and use dunnage where appropriate.
“Can you provide the carrier with a due date but let them set the actual delivery time, which will hopefully allow them to consolidate across multiple shippers to the same consignee? Do you have a core carrier program? You need to focus on a core group and push as much volume as you can through them because they have (previously) met your service criteria,” he said.
Finally, how easy do you make it for your carriers to do business with you? McBride asked.
“If your carriers are long-term, steady partners, this stability allows them to invest in the relationship,” he said.
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