So, if “Old School” procurement practices should be migrating to “New School,” what does that look like? There are endless variations on how to manage freight, but robust and accurate data usage should be foundational in any approach.
Interested in learning more about the history of procurement and how we got to this “new-school” approach? Read more here.
A key element in sourcing transportation is compliance management, yet it is seldom rigorously or effectively practiced. The shipper runs a bid, demonstrates some measure of savings, presuming they can actually calculate it, declares victory, and goes back to operating their day-to-day network.
The practical reality of these situations makes this approach particularly ineffective, simply by virtue of the dynamic nature of transportation networks. If you are a shipper, you have new suppliers onboarding and old ones falling away. You have new customers being acquired and existing ones being lost. You may be opening new facilities and closing existing ones as market demand shifts. These factors all lead to volume volatility and shifting lanes. If you are a carrier, you have similar issues with customers and capacity needs and a constantly changing network to manage.
The bottom line is there are so many dynamic, rapidly moving parts, that the standard output of a bid—the infamous routing guide—becomes outdated practically the moment it is published. So, what’s to be done about it?
Using Compliance Management to Measure Success
Compliance management—or, as many new-school thinkers classify it, strategy performance management or just performance management—is a strong first step. This is simply measuring actual performance against the plan on a regularly scheduled basis, which is common enough in financial circles (e.g., the annual budget process and the subsequent reviews and adjustments made throughout the year).
Yet, the process of compliance and performance management frequently seems elusive in supply chain organizations. This is a vital step in successfully managing complex, enterprise-wide networks. It generates business intelligence and allows for decision-making that will correct issues or redesign ineffective processes.
The Fallacy of Annual Transportation Procurement Cycles
Freight is typically secured through service contracts, frequently on an annual basis. The fallacy in this approach has several key elements:
- Shippers don’t like to commit volume
- Carriers don’t like to commit capacity
- Shippers want guaranteed pricing
- Carriers want flexibility in rates
Transportation contracts essentially represent a trade: shipper volume for carrier capacity. The sticking point has historically always been price. Shippers want stability and predictability, so they are motivated to lock down rates. Carriers do not want to be trapped with low rates if the market rises.
This historical model fails the endurance test. When capacity gets tight and spot-market rates jump up, carriers frequently abandon contract rates in favor of harvesting maximum value from the market-based prices. When this happens, shippers have no option but to go to the spot market to cover loads, which can wreak havoc on budgets.
How to Use Data to Create Routing Guide Stability
In the “old world,” shippers have often been constrained on how they approached inviting carriers to their bids. It usually consisted of the usual incumbents and a handful of new carriers and brokers that happened to weave their way into the minds of the transportation and procurement teams. In most cases, the incumbents understood the operational needs of the freight. There may be some minor shuffling of volumes and often “challenger carriers” would apply just enough pressure to give a few pennies of negotiating power to the shipper.
This typically results in relatively little network change, which is usually a “win” for a shipper looking to create stability. If they were able to contract for a lesser price than the year before, or take a rate increase slightly below whichever industry data inputs they used as a basis for “market conditions,” you could consider it a success.
The “new school” shipper is still focused on valuing the long-time relationships built with incumbents, but also understands that their networks may have changed in ways that are not favorable for those partners. The new school shipper will leverage vast sets of carrier data to determine specifically which new carriers should be introduced and for which specific lanes. This practice gives both the shipper and carrier equal footing to focus more on what it takes to service the freight, and most often, at a nearly unbeatable price.
Ask your team questions like:
- What do supply and demand look like in my markets?
- What external factors will affect it, and when?
- Is my freight attractive for carriers, easy to load and unload?
- How much variance would pre-loading place on a rate?
These questions, among others, put the new-school shipper in a position to make smarter choices, but the most important question of them all is whether this carrier’s network fits with the lane in question. No matter how tenured the relationship may be, synchronizing natural freight flows between shippers and carriers will lead to better outcomes when you circle back to monitor performance.
In a World with Better Data, Create Better Strategies
The much wider availability of data, along with improved ways of digesting and turning it into usable business intelligence, tells us it is time to turn away from legacy ways of procuring and managing capacity. With vast carrier data at your fingertips, shippers can make better decisions that lend themselves to a more agile routing guide. Routing guides that are top-heavy with primary carriers are destined to produce service and performance problems. A robust set of secondary and tertiary carriers to help support the ebbs and flows of the network is critical.
Learn more about Breakthrough’s Network Intelligence solutions and how they support more agile supply chain strategies, here.