Ukrainian Christmas?
My wife’s family is Ukrainian Orthodox, and thus Christmas is celebrated on January 7. In that faith, they tell the kids that the first Christmas is for Santa Claus, and the second is for Jesus. For those of us in Logistics, ‘Tis the season for carrier negotiations. Let’s discuss some strategies and tactics that will give you FAITH in the outcome, as opposed to the ‘mystery gift’ that a network will perform as promised. And you thought the Gift Giving season was over!
The Basic Process
The reality is that there are many ways to go about negotiating with carriers. Every company will use a different set of tactics. This guide is simply a framework to help you maximize your process. Outlined below is a basic process and key questions to be considered. For clarity and brevity, only a few of the points are discussed in detail. If you have questions about a specific item, please contact jim.matcham@beiglobal.com or kyle.alexander@beiglobal.com .
- Data evaluation
- Preparation/selection of bid technology
- Carrier nominations
- Setting up negotiations
- Analyzing final proposals and outcomes
- Carrier selection
- The number line – Leadership communications
- Implementation technology
- Playing fair / playing smart
- Continuous improvement
Start with preparation
It is shocking how many people jump into carrier negotiations without preparing. Very few people stop by a car lot, pick a random vehicle, write a check and drive off. Understanding what you need versus what you want is powerful. It all starts with understanding your customer service requirements, current network, carrier base, costs and benchmarks. For reference, I usually give my team about a month to prepare in earnest, prior to the official bid being released to the market. Here are a list of issues to consider to get your preparations started.
- Data
- Terms, conditions, contracts
- Key Customer and internal operations requirements
- Benchmarking
- Technology for Bid Execution and Evaluation
- Team of SME’s and negotiators
- Carrier Strategy
- Company Strategy
- Integrated Strategy, Goals and/or Outcome
Selecting the carriers
This may seem like the simplest question. However, there are 100,000 truck load carriers representing 2 million tractor trailers in the United States. Even the largest shippers will use fewer than 1,000 carriers. Some large shippers might use fewer than 100 carriers in any given year. How do you decide which carriers to invite to your bid? Most companies use a mix of incumbents, new carriers and professional recommendations. My team actively recruits carriers for lanes that have been difficult during the year. Another method to identify new carrier candidates is operational scouting. Go to the areas you are shipping to and observe and document what drop trailers are at those local stores, DC’s, production facilities, and at the weigh stations in that vicinity; then and only then can you ask and answer the next set of key questions below.
- What carriers will be invited?
- How many carriers can be handled with the technology being used to analyze the results?
- What is the ideal number of carriers for the company’s supply chain?
- What are the quality measures employed?
- Will any incumbents be excluded?
Setting up the negotiations
The key to any negotiation is knowledge, since we all know knowledge is power. Your negotiating team needs a real understanding of the company’s goals. Your corporate culture may dictate the people who participate in the negotiations but at a minimum you need a seasoned negotiator to orchestrate and provide guidance. This team should also include: the decision maker, the subject matter expert, the analyst and the person that has to live with the outcome. All of these folks need to be at the table or at least meaningfully involved in the final carrier selection.
Develop The Team
- Who are your negotiators?
- Who on the team has completed professional negotiations training?
- Who is the lead communicator?
- Who are your analysts?
- Who has authority to enter into the agreement?
- Who plays the good guy and the bad guy?
You also want to provide guidance to the carrier about who should participate in the communication with the team above. This is every bit as important as the shipper’s team discussed above. If you don’t have the carrier’s operational experts and decision makers at the table, you risk wasting time, energy, leverage and “buy-in”.
Determining Outcomes
To effectively do this, you must first understand the negotiation goals, budget and service requirements. You must also understand how the carrier’s strategy integrates with the company’s go-to-market strategy; then and only then can you define your goals and articulate your Most Desirable Outcome (MDO), your Least Acceptable Alternative (LAA), and your Best Alternative to No Agreement (BATNA) to the negotiating team.
Analyzing the results
- What is the impact of a $0.01 cent change in the per mile rate?
- Does the carrier have the capacity?
- What is the likelihood that the carrier will be able to provide the capacity?
- Can they commit to the Service Level Agreement / Sign off on that document?
Once these questions are answered you can then finalize the results and prepare top line communication before carrier communications or lane awards.
The number line – leadership communications
I use a concept called “the number line” to help the team organize the results, and communicate to leadership through the process. To create the number line you will need the following data points: (numbers below are for demonstration)
- Current spend $24MM
- Current spend benchmark $26MM
- Theoretical highest and lowest spend from the initial bid $15MM – $40MM
- Realistic high and low potential spend from the bid $23 – 32MM
- Spend when using only incumbents: $28MM
- After each round of negotiations, how close is the potential spend to the realistic low potential spend?
This process allows the team to communicate to leadership using the data. For example, our current spend is $24MM. We average 8% below benchmark, so the benchmark total spend is $26MM. The market is rising 3% per year, so the adjusted benchmark is $26.6MM. If we used the lowest bid rate our spend would be $23MM, and if we used the highest bid rate we would spend $32MM. Our goal is to be in the lower quadrant of the realistic spend.
The realistic range is $23-32MM. So the range is $9MM, so the bottom quadrant is $2.25MM + $23MM = $25.25MM. So the goal is to have final negotiations put us at $25.25MM or less. Assuming the team landed at $25MM, how do you tell the company that you negotiated very hard, and will spend $1MM more?
The talk track to leadership goes like this: Our current spend is $24MM, 8% below market benchmark. When adjusting for capacity, proven capability, equipment etc, the team was able to capture 75% of potential savings from the market rate benchmark of $32MM . Note that the new spend estimation is still below last year’s market benchmark by $1MM. This also represents a reduction of $3MM had we only used incumbents.
Technology
Make sure the technology is appropriate for the complexity and requirements of the bid. It may even require a bid process to select the correct Bid Proposal and Evaluation Software or other technology. This may be determined by budget, timeline, business demands or staff capability.
- Will you use technology to prepare the network bid and design the lanes?
- Will software or technology be used to help organize and analyze the results?
- Will carrier participation and/or award be live/real time or static?
- What technology will be used to tender, accept, audit and pay for the transaction during the year?
Playing fair / playing smart
Our team has always been a proponent of keeping this a professional, fair and a very well-communicated set of interactions. Professional conduct along these lines to develop and execute the negotiations need to be integrated throughout your negotiation team.
Be wary of structuring negotiations in a hostile or combative style with quid pro quo leverage favoring the buyer. This will generally backfire, as carriers have options, and will move to alternative shippers as soon as they can. In this world of carriers and relatively small number of supply chain professionals, you will likely interact again. Shippers that do not play fair will carry that reputation for a long time to come. Remember, carrier negotiations are a long term, relationship-based interaction. You will be well-served to act accordingly. If you bring well-designed opportunities to the table and encourage the carriers to innovate and look for network efficiencies, that is playing it smart and the outcome will be more successful for all parties involved. It might even lead to more savings than the competitive aspect of the reduction in rate per mile costs.
Key Questions to Answer
- Are you asking the carrier to perform at a level that is below their cost?
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- What is the incentive for the carrier?
- Are their specific lanes that the carrier must have to make the network successful or make a profit overall?
- Do you have a consistent measurement of quality and well communicated service metrics?
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- Do these vary throughout the year or due to product seasonality?
- Do you share those measures with your carriers in a meaningful way?
- Are you paying your bills on time and working to resolve conflicts reasonably?
Continuous improvement
During the negotiations, you likely learned about ways to adapt to carrier needs that could reduce your total cost. For example, reducing delays in loading, or turning equipment more rapidly. You probably also had meaningful dialogues around load acceptance, damage and other quality measures. 30-45 days after the negotiations are complete is a great time to pull the team together to ask the following questions:
- What worked well?
- Did we have the right team?
- Are there skill sets that would have improved the outcome?
- Did the technology work well?
- How can our quality measure be improved?
- Are the Carrier lanes, services and understanding of our requirements effective?
A common mistake is to neglect to write down the key points that come out of the implementation review.
Faith Journey or Mystery Gift?
Have your carrier negotiations provided faith in the outcome or a mystery gift? Will your negotiations team celebrate Christmas with Santa Claus and wonder all year about how your carriers will perform, or will the team celebrate Ukrainian Orthodox Christmas and have faith in the outcome? Nothing is perfect, but hopefully this outline provides a framework to reinforce your faith in the outcome. …. ‘Tis the season!
About BEI Global
BEI Global is a Supply Chain and Logistics consulting firm focused on implementing solutions that drive improved value and profit. Learn more at www.BEIGlobal.com . If you have a response to this blog, please let us know what you think by e mailing: