Trucking Economics, OR, Understanding Your Customers' Sophisticated Approach to Transportation Spend, and How Easy You've Made it for them to Take Advantage of You.

Formulate Detailed Sourcing Strategies

In the mid ‘90s, when strategic sourcing practices became widely accepted across industries, many shippers attempted to apply these same practices to transportation, instead of developing transportation specific sourcing strategies and identifying alternative savings levers.

Shippers combined their spends by mode and simply took it to market. They often paid little attention to their service requirements and failed to distinguish between highly leverageable spends and spends requiring development of carrier relationships.

The results were devastating for many shippers. Deals with new carriers frequently failed and relationships with incumbent providers were significantly strained. In the end, shippers usually returned to their incumbents, accepted rate increases, and claimed that strategic sourcing simply didn't work for transportation.

An approach to strategic transportation sourcing ensures that market forces are leveraged appropriately, while keeping the focus on service at the right price.

First, assess existing transportation management practices by applying a comprehensive Transportation Management Framework, which includes four stages of maturity. This assessment will help identify potential opportunities in internal operations for improving service levels and reducing costs or rates. Next, perform detailed analysis of lane-level spends to determine service requirements. Lastly, assess the carrier marketplace to identify alternative modes or services. Then use these analyses to develop a detailed sourcing strategy and identify alternative savings levers.

The purpose of developing a sourcing strategy is to ensure that all savings opportunities are fully realized without disrupting service. The sourcing strategy creates customized action plans for multiple groups of lanes based on required service levels and the current transportation market for those lanes. It recognizes that many shippers' lanes require specialized service, other lanes are near commodities, and still other lanes are somewhere in the middle.

The first step in defining a sourcing strategy is to determine which services can be sourced. We recommend a thorough evaluation of spends before deciding not to source a particular service. However, as a general rule, services that may be excluded from sourcing include long-term agreements, use of minority-owned providers, and smaller spends with significant value added services. Once the services to be sourced have been identified, individual lanes need to be classified into one of four categories based on lane complexity and carrier market status.

1. The highest savings opportunity is in “open spend,” which includes lanes with low complexity and a supplier's market. These near-commodity lanes should attract a high ratio of new carriers to drive cost reductions.
2. The next highest savings opportunities are “bottleneck spend,” which contains lanes with low complexity and a carrier's market. Sourcing of these lanes should be focused on assessing the market and the possible use of regional and niche providers.
3. The third area of opportunity is “leverageable spend,” representing lanes with high complexity and a shipper's market. With incumbent providers, these lanes are focused on ensuring a fair rate for the services provided. With new providers, requirements must be clearly communicated. In addition, the shipper must have a thorough understanding of the carrier's network and experience managing the required service levels.
4. The last area of opportunity is “protected spend,” which comprises lanes with high complexity and a carrier's market. These lanes should be focused on ensuring service levels and maintaining incumbent providers where possible. The most common mistake in strategic transportation sourcing occurs in this area. Rather than focusing on development of existing carriers and highly qualified new providers, shippers frequently find large savings opportunities with unqualified providers and select price over service. When the new carriers fail, shippers return to their incumbents in an attempt to repair their past relationships. But these attempts often end in rate increases and the loss of negotiations leverage with the carrier.