The 5 major pitfalls when purchasing transport services

With a transport tender, a lot can go wrong. Together with Stan La Haye of Logistics Consultancy firm Chainalytics, we put the five key points in a row. 

Transportation Rates

In order not to pay too much for transportation services, it is a matter to tender and re-negotiate contracts/freight rates on a regular basis. When executing a freight tender, a lot of things can get messy.  Think of delays (later implementation of tariffs = less cost savings and a lower return on investment), high internal workload (a regular tender process can easily chew up 400 hours of your personnel) And a disturbed working relationship between shipper and carrier. That last point is often forgotten or underestimated, but don’t be fooled. With (truck) capacity tightening and ocean freight rates skyrocketing, carrier relationships are worth more than meets the eye.

 

The 5 major pitfalls when purchasing transport services

Research conducted by Chainalytics shows that there are five major pitfalls to be distinguished when purchasing transport services:
1. Running tenders without indication of the savings potential
2. No reliable baseline
3. Insufficient time, no expertise and not the right tools
4. No equal opportunities for all participants
5. Insufficient priority and long response times

1.  Tenders without indication of the savings potential

How do you know if there is a saving potential with respect to your current transport rates? Do you use available industry benchmarks to determine your competitive position? Or is it still a “gut feeling” that says it’s time to tender? If cost reduction is the intention of the tender, advanced insight into the high-value-added savings potential. Consider all lost time and resources if no cost reduction has been achieved after the tender has ended. a possible solution could be the service of a Freight Rate Calculator that compares transport rates with those of similar companies, which indicate the saving potential at the transport-lane level. By giving this insight, the choice can be made to renegotiate only a limited number of transport lanes or to complete a full tender with sufficient savings potential.

2. Using an unreliable baseline

A reliable baseline is a realistic reflection of the actual tender profile and forms the basis of a tender. Use historical data over a representative period and, if necessary, apply it for future changes to the sending profile. A good baseline is crucial for a clear insight into current transport costs, but also to appoint the transport lanes and to set up a tariff sheet. The baseline is also used to reflect the new rates, thus calculating the final savings and the success of the tender. Unreliable baselines cause the wrong focus on the tender and the lack of the savings indication.

3. Insufficient time, no expertise and not the right tools

Often, a tender will be performed by one of the logistic planners or managers in addition to the regular scope of work. Keep in mind that the execution of extended transport tendering guarantees extreme peak load: the use of 400 hours (almost a full FTE!) In a 3 month period is no exception. Therefore, performing a tender is difficult to combine with daily work. In addition, there is often not enough expertise available to draw up good tender documentation (baseline) and model transport scenarios based on new offers. This always results in process delay and a lower return on investment. By (partially) outsourcing the procurement process, the internal organization is relieved to achieve maximum financial results in a short period of time. Earlier implementation of lower transport rates ensures more savings!

4. Lack of equal opportunities for all participants

Objectivity in a transportation tender is very important to find the best fit between carrier and shipper. The best fit consists of a combination of price setting, corporate culture, quality of service and service requirements. Through an independent review of all offers on the right weighting criteria (quantitative and qualitative), targeted negotiations can be conducted with a select number of providers.

5. Insufficient priority and long response times

When selecting carriers, make the balance between the number, location and geographical coverage of carriers. Many different carriers may cause higher savings, but increase the pressure on the internal organization (think of audits, business reviews, invoices, contact points, etc.). Insufficient carriers increase the risk that there is no capacity available within the requested response time and that a solution needs to be found in the spot market. Often a combination of ‘local heroes’ and European/Global players (asset-based carriers and forwarders) leads sufficient local availability, short response time and sharp rates. Per transport lane 1 carrier has been contracted as the main carrier, but at the same time, a backup carrier is also designated. This backup carrier comes from the total “main carriers” pool to limit the total number of contracted carriers, yet ensures sufficient coverage and availability.

Pieter Kinds

Pieter Kinds

CEO Freightender.com

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