Editor’s Note: In 2012, Kevin McCarthy, Chris Brady, and Steve Raetz contributed to a blog post for the TMC Blog. We’re sharing their original post here on Transportfolio because procurement and cost savings are always relevant topics. Please share your thoughts and read the blog post, Fresh Procurement Insights from Stale Rates Study.
Should your freight business be put out to bid regularly or on an ad hoc basis? There are arguments for and against both approaches but not much in the way of hard data–until now.
Some new market research provides much needed facts and figures on this long running industry debate, and the findings clearly favor the “regular” strategy in the form of significant cost savings and network efficiencies.
Sponsored by C. H. Robinson and carried out by the Department of Supply Chain and Information Systems, Iowa State University, Iowa, the research is described in a white paper published this month by C.H. Robinson*. We have argued for some time in this blog that shippers should perform regular (often annual) procurement exercises, where carriers bid for their loads in a lane or set of lanes. In addition to updating contract rates, these events offer an opportunity to realign respective networks, which have almost certainly drifted out of alignment since the last adjustment (see Avoiding the Two Year Carrier Pitfall).
At the same time, we recognize that some shippers prefer to stage these bidding events sporadically or not at all. They argue that it is difficult to recoup the cost of frequent procurement exercises. Also, rebidding freight at regular intervals is not needed because contract rates are continuously being adjusted in line with changing market conditions.
Key to deciding which of these views has the most merit is what happens to freight rates between procurement exercises; to what extent are they influenced by regularly staged rebids as opposed to day-to-day, market-driven changes? To find out, the Iowa State researchers carried out a detailed analysis of U.S. domestic truckload shipments.
The research team looked at rate information on contract TL loads hauled 250 miles or more and tendered during the years 2008 to 2010. The data cover about 700,000 records in all. Every move was processed by the same transportation management system (TMS) to ensure an apples-to-apples comparison in the analysis.
The results are striking. Shippers in the study that regularly rebid their freight (once a year) achieved a rate reduction of about $25.17 per load compared to those that seldom or never use this buying method. The average rate for an individual load in the data was roughly $907.00, so this rate decrease represented a 2.78% saving in transportation costs (See Figure 1 below).
In addition, the findings suggest that shippers can capture lower rates by virtue of a procurement exercise – regardless of how frequent these events are. The researchers calculated the benefit as $15.27 per load.
These two savings add up to $40.44 per load, as noted in Figure 1 above. Again, if the average load price is $907.00, shippers in the study that consistently repeat procurement events can expect to lower their freight costs by 4.46%, a sizeable gain.
Other important takeaways from the study include:
- Shippers that support regular procurement exercises tend to adjust their rates more often than infrequent procurers, and this helps them to maintain alignment with provider networks.
- Following a procurement event, effective lane costs tend to increase in response to depth of tender and load acceptance issues for a period of 328 days, and then moderate. The result underlines the need to keep an eye on freight rate movements.
- The assumption that procuring transportation sporadically is less work than a more regular, systematic approach appears to be flawed. Regardless of which approach you take, contracts still have to be renegotiated and there is less certainty when this process is ad hoc.
- The argument in favor of regular rebids could become even more convincing, because the researchers suggest that it is possible to derive even more benefits from this approach by pinpointing the optimum frequency of these events.
In light of this important research you may want to review the commonly accepted pros and cons of regular rebids, and revisit your transportation procurement strategy.
*The Stale Rates Research: Benefits of Frequent Transportation Bids white paper can be downloaded here.