Not since deregulation has such significant, prolonged pricing pressure been placed on truckload carriers. Industry sources estimated in 2009 that supply exceeded demand by 20%-25% and the financial impact has been severe. The Bureau of Labor Statistics Truckload Produce Price Index (TL-PPI), published monthly, has shown in the last ten years only 26 year-over-year decreases in the TL-PPI -- thirteen of those occurred between December 2008 and December 2009.
As a result of historically soft markets, 2009 saw an abundance of shippers seeking renegotiated freight rates. Through the course of these bid events many shippers left significant opportunities on the table. Across the industry, shippers did not take advantage of all the opportunity presented. In the face of +20% savings opportunities many shippers achieved only half of the presented opportunities.
Many shippers stress aggressive savings opportunities were ignored to preserve relationships. The expectation of maintaining preferential consideration in the face of future inevitable tightening of capacity was an important consideration along with inherent service needs that an incumbent carrier could provide.
Despite buyers of truckload freight holding most of the leverage in recent rate negotiations, in light of extreme price pressure on carriers, shippers value the future benefit of a relationship and expressed this preference their freight budgets. While carriers felt significant pressure, it was not as relentless as the market is offered in terms of alternative options to shippers. Perhaps many shippers tempered their aggressiveness on price to preserve rational players in an irrational situation.
As expected, the transportation industry has reached its "relationship trough" caused by extreme pricing. The value of shipper-carrier relationships will only increase in coming years as supply and demand find, or overshoot, corrective equilibrium. There are several ways companies can develop, maintain and create economically sound relationships where price is not the only consideration.
Negotiations and Relationships
Establishing effective truckload freight contracts is one of the most complex purchasing activities found in business. The effort required to renegotiate multiple-millions in annual freight contracts can range from 1000-5000 man-hours over 2 to 4 months.
History proves that outcomes can be disastrous when relationships are completely ignored over price. An aggressive focus on price combined with a lack of regard for established relationships can lead to a high level of carrier churn resulting in an unraveling situation post-negotiation, including reduced capacity, declining service, increased costs and significant dock backups.
Shippers and carriers cannot commit freight or capacity with exacting certainty -- shippers generally cannot forecast freight flows accurately, and carriers cannot tell you with precision where their fleets will be over the course of a year to match any request. Supply and demand fluctuations can strain commitments and place a significant emphasis on the nature of relationships, which are typically either strengthened or damaged during negotiations, but often entrenched during execution over the life of an agreement.
A Sense of Trust Takes Time
A sense of trust is a necessary condition for relationship-based negotiations. Without it, mistrust and a fear of manipulation increase, effectively stalling value-focused communication. Negotiations in their simplest form are about resolving differences between multiple parties which can be addressed much more efficiently with a strong understanding of what each side needs at a broader level.
A sense of trust is defined by what each party perceives as the nature of the relationship and is developed by a history of:
- Integrity and credibility through consistent fulfillment of promises
- Sharing important or sensitive information
- Willingness and openness to be influenced for mutual gains
- Minimizing the influence power in face of vulnerabilities
- Common cultures, understanding, visions and values
Trust is also based on future expectations. The relationship's future value is real and anticipated. If either side is too opportunistic now, the future value is in question. Additionally, future privileges are expected and each side realizes that benefits should be reciprocated. In short, relationships are valued because of future expectations are supported by past action.
However, relationships between individuals cannot be ignored as they directly influence the level of trust. Carrier sales personnel rarely change careers, but do change organizations. As such, a large number of buyer/seller relationships in transportation exist between two individuals, not necessarily the companies. However, the nature of the relationship must extend beyond two individuals. One-to-one relationships with a long history are driven significantly by a historical sense of trust, but this approach has limited growth and partnership potential for both the carrier and the shipper. Establishing trust with new parties, especially executive level personnel is of key interest for all parties.
Adopting Change
Shippers must understand how to take proposals for greater mutual benefit seriously. Both sides of a negotiation take calculated risks in adopting and considering new processes or innovations, establishing the foundation of lasting relationship. If expectations of future value drive the development of a relationship as a primary objective, then creating, conveying and understanding potential solutions are critical in developing new solutions. Expressing a desire to add more value carries little impact when feasible actions are not developed in support of the stated desire. In scenarios where trust has been established, custom needs from both sides can be met and mutual benefit is achieved.
Trust has to start somewhere, and it typically resides with innovative thinking and thoughtful communication structured to create a compelling case for moving forward.
Shipper Needs: How Carriers Can Get Above the Fold
Carriers can take a number of actions that enable a trusting relationship and put negotiations more in the realm of mutual benefit versus price, including:
- Establishing a Strong Desire to Perform in the Absence of a Previous Relationship
Non-incumbent carriers lack the previous commitment to drive a vision of future performance. To offset this lack of performance shippers can offer the opportunity to present a focused business case justifying their competitive position after rates are submitted as a means to establish trust. This forum offers carriers the ability to develop trust. Shippers should consider this approach and allow the time and resources necessary to build this environment. This is especially important when dealing with non-incumbents as a way of differentiating unique strengths and forging new partnerships. - Field Knowledge
Carriers that have established working relationships in the field with suppliers, customers or specific site processes and expectations add significant value, particularly when the processes and relationships are not easily adopted by newcomers. An operational understanding of customer requirements, on-time service and administrative efficiency is the key focus in these areas and can limit a price sensitive approach when critical processes or customers require strong field knowledge. - Dedicated Trailers and Fleets
Shippers often rely on trailer pools for many reasons. Providing trailers at the necessary time can improve a carrier's loading efficiency and opens the door for additional business so future negotiations are conducted with a sense of trust. Dedicated fleets for specific markets are a growing industry trend and will be driven by greater capacity uncertainty or higher costs of energy. - Service, Flexibility & Efficiency
A carrier's ability to handle short lead-times can be highly strategic as needs range from short notice accept to same-day pickups. Carriers that can increase their inventory of power units to focus on short lead-time needs can further offset that requirement with additional freight. Performance in this realm leads to top-line benefits for the shipper and are difficult to duplicate. - Smart Personnel Assignments
Although difficult to measure, the value of personnel can make a significant impact on operations and when carriers ensure consistency in talent, shippers will take notice. Carriers make personnel commitments ranging from highest performing drivers to onsite personnel. Acquiring and aligning the best and brightest talent will significantly impact how shippers view freight services. - Per-Event Incentives
Some shippers receive incentives for special consideration toward carrier efficiency. Examples include establishing a simple process that rewards shippers for turning assets quickly leads to mutual benefits and drives the discussion toward win-win scenarios. - Aligning Capabilities with Product Value
Carriers that offer a high degree of security and insurance coverage separate themselves from the pack substantially. Trust is a huge factor for product value multi-million dollar loads where security risk is high, hence a premium on capacity. - Significant Minimum Volume Commitments
Sometimes, shippers can make minimum commitments and expect reciprocity. Minimum volume commitments are important because they simplify the carrier base for shippers and allow them better focus in managing highly variable freight flows.
As prices dropped in the 2009 market, not all shippers fully capitalized on that unique market and many maintained an eye toward the future -- recognizing and respecting the past efforts of carrier partnerships. Good relationships, however intangible, are valuable and have a direct benefit of providing a damping effect that directly mitigates highly attractive present-day opportunities for both sides in the peaks and the troughs in the marketplace. Recognition of trusted partners, the depth and breadth of organizational relationships, and the means by which opportunities are presented can lead to more rational behavior between partners and lead to future benefits for both sides.
George A. Abernathy is Executive Vice President & Chief Operating Officer of Transplace. Kyle Alexander is General Manager of the Strategic Carrier Development Group for Transplace, which is a a non-asset based third party logistics (3PL) provider.
Interested in information related to this topic? Subscribe to our weekly Value-chain eNewsletter.
