LTL Sourcing: Success for Buyers In A Seller's Market

How can you beat the trends and lower your less-than-truckload costs, even in a seller's market? Here's a guide to help you get started.

How can you beat the trends and lower your less-than-truckload costs, even in a seller's market? Here's a guide to help you get started.

As the saying goes, "the only constant is change," and the transportation industry seems to be no exception. Continued changes in the less-than-truckload (LTL) market due to bankruptcies, mergers, and rising fuel and insurance costs are all combining to make LTL sourcing a greater challenge than ever before.

In this uncertain environment, traditional sourcing techniques are losing their effectiveness, leaving shippers with little or no ability to protect themselves from rising costs. However, it is not enough to just understand the impact these changes may have on a shipper's business, but rather to employ creative new approaches and technologies to sourcing freight that allow the shipper to control costs and enhance service levels in such a challenging environment.

Changes Continue To Reinforce Seller's Market

An economic slowdown in recent years has had an industry-wide impact. When the economy was weak and available capacity exceeded demand, drivers reverted back to other lines of work. Now that the economy has shown improvement, drivers need to be recruited back, and this takes time. The lag causes a driver shortage that is translating to cost pressure and load coverage pressure for shippers. Driver shortages affect all over-the-road modes but not necessarily simultaneously. LTL carriers tend to maintain certain infrastructure even when demand fluctuates. For LTL carriers it is difficult to do a partial scale-down and maintain service levels in this model.

Other changes like the cost of fuel and insurance affect the entire industry as well. But while in the truckload (TL) business these cost components may vary widely lane to lane, in the LTL business these costs are more predictable when spread over an established infrastructure.

There are many other changes that could have a significant impact on a particular shipper's business. For example, consider the hours of service legislation:

* A shipper that has historically done a good job assembling many shipments into a multi-stop truckload may be seeing escalating stop-off charges. More complex delivery schedules tend to push drivers beyond the new service time allotment.

* On the other hand, a shipper with single-stop, drop-and-hook freight might be able to negotiate better pricing as its freight has now become more desirable within this regulation.

* However, even in the first instance, depending on the number and size of the shipments and the distance the shipment is moving in the multi-stop, revamping the load optimization might redirect a considerable number of small or large shipments into the LTL mode.

* Finally, to add to the confusion, just as some shippers were getting a handle on their load optimization parameters, the legislation was repealed.

Regardless of how well a shipper can interpret individual events and evaluate the impact on his business, one thing is clear: A variety of influences have come together to shift the environment dramatically from a buyer's to a seller's market. Uncertainty and change will continue to make LTL a seller's market for the foreseeable future. And in this market, regardless of mode, sourcing techniques that simply exploit volume leverage and carrier rationalization opportunity are rendered ineffective and obsolete.

The Other C's: Collaboration, Creativity and Compliance

This environment demands that shippers be able to nimbly draw from the marketplace carrier proposals that reflect their current interests and capabilities, re-evaluate the breakpoints between modes, and provide load optimization software with an accurate picture of where the market is operating. And then be ready to re-evaluate as conditions change.

Particularly in LTL, this shift in focus from sheer volume leverage and aggressive price negotiations to a concentration on fit, capability and interest continues to yield reliable relationships, solid service and remarkable cost improvement ... even in this seller's marketplace.

Here's a practical plan to help guide your LTL sourcing efforts:

Collaborate with Your Carrier Base

* Do not disguise your business  During the sourcing process provide carriers with an accurate reflection of your business. Clarity begets confidence, and confidence eliminates hedging:
a.) Provide actual shipment history data along with meaningful summary statistics on seasonality and weight breaks
b.) Give insight into actual class
c.) Exactly describe both difficult and desirable or driver-friendly freight
d.) Accurately depict your vendor's operations for inbound freight and your customers operations for outbound freight

* Promote creativity  Don't pigeonhole carriers into your mindset. Allow carriers to propose from their own point of view and solicit their input on creative options.
a.) Bid out predefined lots if desired, but let carriers provide bundles as well. They will find the best way to use your volume to correct inefficiencies within their network.
b.) Allow carriers to define regions that make sense to them. Let the carriers see how your freight fits into their service regions.

* Challenge historical paradigms  Use a strategic event to study legacy assumptions.
a.) FAK (freight all kinds) design and fit
b.) Handling of accessorial charges
c.) Insurance and release values
d.) Opportunities traditionally considered beyond the scope of transportation sourcing

Improve Your Technique

* Expand your influence  Keep working to convert your inbound freight to collect. Not only does this generally create substantial savings, but it also improves the asset utilization of the carriers servicing your facilities

* Reduce carrier-quoting risk  Use a tiered FAK structure that fairly reflects your business with huge cross-subsidization. In addition, employ a rate base familiar to the carriers.

* Use advanced sourcing tools  Use a proposal collection technology specifically designed for the nuances of LTL freight. Use optimization-based scenario generation technology to fully evaluate service, capability and interest in your negotiating and award process.

* Balance the cost drivers  Don't overplay the base rate, FAK, discount or minimum to the detriment of the others

* Reserve the right to "re-optimize"  Leave yourself some flexibility to modify carrier awards when your business requirements or the marketplace dramatically changes.

Track and Measure Compliance

* Be vigilant with category management with an eye on your requirements over time  Be ready to fine-tune your solution to include new lanes, increasing volumes and shifting mix. Establish formal loss and damage claims programs to keep service levels up, and you'll get a tangible payback from carriers when they drop.

* Drive routing compliance  Track vendor compliance on inbound and install an inbound routing service if necessary. Ensure outbound routing is performed correctly within your own organization. Simplify routing instructions, keep up-to-date via Web communication, and make sure expedited shipment requests get adequate consideration. Hold carriers accountable when they ignore your instructions.

About the Author: Jeff Ryan is senior vice president of Advanced Sourcing at Verticalnet, a provider of strategic sourcing and supply management solutions. He is a widely recognized expert in transportation sourcing and logistics management.