After 15+ years in the 3PL and trucking industry, I still find it interesting that some shippers shop out their lanes every single year in an effort to save money. But do these regular freight contract RFPs (requests for proposal) really reduce costs? I have my doubts.
Essentially, shippers who embrace this strategy are committing themselves to a cycle of perpetual dating, never fully committing to a long-term relationship. The RFP isn’t really an invitation to partner, it’s an invitation to speed date – with the promise of repeating the exercise a year later.
Now don’t get me wrong. I’m not preaching carrier monogamy. It’s important for shippers to leverage the unique strengths of different carriers in terms of service, lane, etc.
What I am saying is that shippers who dutifully manage a yearly RFP process for every lane and proudly count the “savings” when the process is over are actually leaving money on the table. There is a distinct financial advantage to forging long-term relationships with a select group of carriers, despite the widespread belief to the contrary.
The Financial Advantage of Forging More Strategic Carrier Relationships
When shippers develop more strategic, longer-term carrier relationships, they create transportation management advantages that have bottom line implications. Here’s what the speed daters are missing.
Longer term contracts give the carrier time to mine for customers in the area to create a more efficient network with minimal deadhead miles. Carrier costs for empty miles can range from $2 to $3 per mile. This inefficiency has to be baked into the rate. Shippers who never allow carriers to build network efficiency never see the positive cost impact of this efficiency.
When you work with the same carriers, even the same drivers, over a long period of time, relationships develop with consignees. Carriers understand how they like to receive freight, and personal relationships develop that can mitigate problems. For instance, better service can result in fewer late-delivery fines, or a retailer might expedite the receiving process for a known carrier before detention charges kick in.
That’s right, I said better rates – without the yearly freight contract RFP. Typically if it’s a 3-year deal, let’s say, the rates are locked in for the contract period. And smart carriers may even reduce rates as they build lane density in order to solidify the partnership.
It may require investment to install technology, such as putting communication devices in trucks to provide real time access to drivers and delivery status. For strategic customers, carriers are much more likely to make this investment, giving the shipper timely information to keep their customers informed and allowing their own teams to make faster, better decisions.
Cost of on-boarding
It takes time, and some growing pains, before a carrier and its drivers are up to speed on the procedures of a new account. Sometimes drivers will need to go through training. Freight RFP coordinators, as they crunch the numbers during the carrier selection process, are not factoring in these costs. They are simply comparing rate numbers on a spreadsheet.
You remember the customer, right? Those are the people on the other end of the phone who are working with the carrier’s customer service reps on delivery issues. They appreciate reps who know their product and their procedures. What’s the value of a happy customer? Wouldn’t you prefer your customer contacts to be interacting with experienced carrier reps who serve as knowledgeable extensions of your team?
From Speed Dating to Second Base
Different companies have different rationales for issuing a yearly freight contract proposal. At some companies it’s simply policy, often driven by purchasing. Others feel that rapidly fluctuating freight costs require regular rate comparison exercises in order to capitalize on the most current rates.
There are many other reasons for engaging in an annual freight RFP process. But in the end it comes down to this: some shippers are simply unwilling to commit to long-term deals with carriers. We think it’s a strategy worth reconsidering – for some very bottom-line reasons.
Instead of playing the speed dating game with a succession of short-term, tactical partners, the financially smart play for shippers might be to allow a carrier the opportunity to get to second base.