A common sense strategy for minimizing freight costs is to aggregate spend across a company and use the increased purchasing power to negotiate the best possible agreement with your carriers. This is a win-win scenario for carriers seeking cost synergies from added volume and shippers seeking lower rates.
However, after the negotiations are completed, the resulting carrier selections are usually communicated to those in the company making shipping decisions via a Static Routing Guide. The problem is that “Static” or paper/spreadsheet routing guides have built in efficiencies that can cost shippers significant amounts of money.
1. Arbitrary Decision Rules
Static Routing Guides typically determine the choice of carrier based on the origin-destination pair, and the weight (or size) of the shipment. The problem is that the weight factor used will almost always be incorrect.
For example, if a routing guide stipulates that shipments less than 100 lbs should be routed via a small package carrier, it will only be by coincidence that 100 lbs is the weight at which parcel carriers become more cost effective than LTL carriers. The actual weight at which a Parcel carrier becomes more cost effective might in fact be 86 lbs, or just as easily 167 lbs. And it might be a different weight for every market.
In reality a Static Routing Guide, and its users, could never accommodate the level of complexity involved in optimizing the correct cut-off points, so as a necessity arbitrary rules are used.
Unfortunately these rules cost more than you think. In a recent study of a large small parcel user it was discovered that simply using the right carrier for each individual shipment weight would result in a savings of almost 5%. While this may not seem like a lot, when your shipping bill is in the millions it really adds up.
2. Limited Carrier Choices
Again, concerns with how well a Static Routing Guide might be followed result in shippers over-simplifying their networks, limiting their carrier choices and as a result increasing their costs.
The fact is that there are a number of carriers that service smaller territories across Canada that offer extremely good service at very competitive rate levels. As an example, your most cost effective solution might be to use two different carriers to service a province; splitting the business either geographically, or maybe giving one carrier lighter shipments and another the heavier shipments. Either way, many Transportation Managers would be concerned about those selecting carriers “getting it right”, and the impact on costs or service if they got it wrong. So a common decision is to use one carrier instead of two, tolerate the additional cost and keep it simple.
Sure, the cost impact might be in the 2-4% range, but again – for shippers with large spends this can really start to add up.
It is one thing for a Transportation Manager to aggregate their company’s spend to negotiate an agreement, and a completely different thing to ensure this gets implemented properly.
It is very common for shippers to stray from the routing guide, for a variety of reasons. These could range from issues like a simple mistake, or perhaps a carrier being tendered another carrier’s shipments because they were at the dock and it was just easier to give it to them rather than wait for the right carrier. Or from more complex issues when shipping locations engage in maverick spending which dilutes the company’s buying power and makes it more difficult to meet the volume commitments made to carriers.
The first step in controlling compliance is having the ability to measure it, and quantify the impact of the non-compliant spend. Not just by carrier, but by “decision” – meaning given the weight and destination was the right carrier selected.? The latter is an important step in having the ability to quantify the cost impact of these decisions. With this information, each shipping location can fully understand the impact of their actions and modify them accordingly.
The Solution – A Dynamic vs. Static Routing Guide
The only way to address the inefficiencies associated with a Static Routing Guide solution is to use a rating engine to power a Dynamic Routing Guide. A rating engine that is typically found in a TMS will enable a shipper to:
- Increase the sophistication of their transportation network to use the best carriers to service each area they deliver to. Cost competitive carriers will not need to be eliminated as the TMS will be able to identify the best carrier for each shipment, based on total cost and delivery requirement.
- Eliminate arbitrary rules for selecting carriers. The ability to determine the lowest cost carrier for each individual shipment, based on weight, destination, and all accessorial charges will ensure the lowest overall cost is achieved. The inherent inefficiencies caused by using arbitrary rules to select carriers will be completely eliminated.
- Monitor or enforce carrier compliance. A TMS set-up can either be “open” which allows for non-compliant carriers to be used, or “closed” meaning only the system-selected carrier is to be used. Either way, the incidence and cost impact associated with using a non-compliant carrier can be easily monitored, reported and reduced.
While these may seem like small areas of inefficiency, the availability of easily acquired TMS applications, and their potentially high ROI’s now make this the low hanging fruit for any Transportation Manager seeking to reduce costs in their organization.
Nulogx has a hosted service that is well positioned to deliver these efficiency improvements, without the need to purchase software or hardware, or learn how to use or maintain it. Ask us today for more information on how we can help you improve your transportation processes.