A BRIEF GUIDE TO AVOID GENERAL RATE INCREASES IN TRANSPORTATION
At the end of every year, motor freight carriers apply general rate increases (GRIs) to keep profits steady, and every year, shippers try to find ways to get out of paying the additional cost. The transportation industry faces numerous problems, so carrier’s operating costs continue to go up and GRIs are an annual occurrence. The problem for shippers is that you won’t bend a carrier’s will into giving you a discount. Carriers have the leverage in rate negotiations. There are some things shippers can do to receive shipping discounts, but a carrier must award this discount to you, which means you must accommodate their needs first.
PREFERRED SHIPPER PHENOMENON
A preferred shipper is a company that a carrier chooses to work with because they help a carrier improve overall efficiency. There are certain characteristics a trucking company looks for in a shipper. Typically a carrier wants you to:
- Provide backhaul opportunities
- Have easy-to-reach origin and destination points
- Optimize dock procedures to reduce dwell time
- Treat truck drivers with respect
- Help improve carrier network utilization
- Be connected, share data, and collaborate on new solutions
UNDERSTANDING THE STATE OF THE INDUSTRY
Why are there GRIs every year? Why do shippers have to accommodate a carrier’s needs? Basically, carriers have had razor-thin margins for years and expect operating costs to continue to climb in the foreseeable future. The industry is short 48,000 drivers as of the end of 2015, but this number will rise exponentially, as the average age of a truck driver is 55 and many will start retiring soon. Drivers are a scarce commodity, and therefore more expensive to recruit and retain; this raises operating costs for carriers, and shipping costs for shippers. Carriers implement GRIs every year to keep profit margins steady, in order to combat rising operating costs. More importantly, these industry trends make truck capacity a scarce commodity, and shippers must compete to secure capacity, giving carriers the opportunity to choose who they work with.
4 TIPS FOR CONTRACT NEGOTIATIONS
A motor carrier’s pricing system is immensely complex and it can be difficult to find cost saving opportunities. Follow one or all of these tips during contract negotiations and discover significant savings on transportation spend or even the reduction or elimination of a GRI.
USE THE CZARLITE BENCHMARK BASE RATE
The CzarLite tariff is independent of any trucking company and is considered the transportation industry standard. It is the most up-to-date base rate and most accurately reflects the current market. Most carriers develop their own tariff and encourage you to use it, but that’s done to convince you to pay more than you should. For example, a carrier may offer you an 85% reduction on fuel surcharges if you use their base rate, which sounds great, but their base rate will likely end up costing more than the savings. Carriers usually reserve the right to automatically update the rates to their own tariffs, sometimes without your knowledge or permission. Using a CzarLite base rate mandates a negotiation between shipper and carrier, allowing you to confirm long-term rates. The CzarLite tariff levels the negotiating playing field by giving you more visibility into true costs.
PAY FOR THE ACCESSORIALS YOU’LL USE THE MOST
Many shippers approach a carrier and claim they will not pay for any accessorial charges, and are happy to hear the carrier agree to “free” accessorials. The fact is that you’ll pay for accessorial charges no matter what – because carriers have such a complex pricing system, they’ll find a way to put in those extra costs. It seems counter-intuitive, but the best thing to do is to assess which accessorials you will be charged for the most, and say you will pay for those charges. At least in this situation, you will be able to negotiate a lower price for the accessorials that you’ll use, rather than paying the full “free” cost that carriers would otherwise implement for you. Alternatively, you could pay their desired price for the accessorials you choose to pay and then negotiate a lower base rate or decreased GRI.
UTILIZE GUARANTEED FREIGHT SERVICES
Using guaranteed freight services is a great way to negotiate lower base rates or GRIs. Guaranteed freight is when a carrier makes a commitment to an agreed upon service level. This service initially costs more for the shipper and is never used for all freight, but carriers prefer to operate these services – it keeps their equipment and drivers moving without delay. With guaranteed freight, a shipper immediately spends less time on administrative track and trace. By paying for a service that carriers want to perform, you gain preference and can then leverage lower rates on standard shipments, fuel surcharges or GRIs.
HIGHLIGHT ATTRACTIVE FREIGHT BUT DON’T HIDE UNATTRACTIVE FREIGHT
You want to highlight attractive freight during rate negotiations. Carrier-friendly freight, in general, is something that allows carriers to utilize their truck space effectively. Dense, small, and stackable freight that fits properly on a pallet will be easy and efficient for a carrier to haul. Highlighting attractive freight increases the likelihood that a carrier will want to work with you and extend discounts in exchange for the gained efficiency. What’s just as important, however, is disclosing information ahead of time about freight that will be difficult or inefficient to haul. This would include light, fragile or over-dimensional items that don’t allow trailer space to be used effectively or require specialized equipment. Eliminate any surprise charges in the future and keep the carrier compliant with all state and safety regulations. Carriers are rated by a Compliance, Safety, and Accountability (CSA) system by the Department of Transportation. Losing rank in CSA due to compliance issues the carrier was not notified about can hurt their chances of getting new business. You can be sure a carrier will not want to work with you, and certainly won’t give you a discount, if you cause their CSA score to drop
4 TIPS FOR NEGOTIATION LEVERAGE
LEVERAGE ALL FREIGHT SPEND
When calculating freight spend for bids, avoid shopping around freight spend per location. Local level pricing will not give you much leverage in a negotiation. Carriers want as much business as they can get, so lump all freight spend under one umbrella. Consolidating freight spend will make trucking companies want your business over others. Large freight volume could lead carriers to offer discounts in exchange for the gained market LEVERAGE ALL FREIGHT SPEND share you provide them. You can later use the large freight spend to leverage lower base rates and find customized services; ,not to mention, when carriers have a lot of resources invested in your freight, chances are you will receive better service and which means you can provide better service to your customers – an added bonus of leveraging large freight volumes.
LIMIT CARRIER BASE
When deciding which carriers you want for an RFP, keep the carrier base small. Conventional wisdom states that you should make as many carriers as possible compete each other to drive prices down as low as possible, and then choose the carriers with the lowest prices to haul your freight. If you limit your carrier base for the RFP process, each will see the potential for more freight spend and will lower rates in an effort to gain market share and freight volume. Competition will actually be tougher between a few RFP applicants who directly compete for shares of freight spend. Then you will be able to negotiate low base rates, fuel surcharges, accessorials or GRI reductions.
GATHER ACCURATE DATA
Before you try to negotiate rates with a carrier, you’ll need to gather detailed and accurate data to convince them you deserve lower rates. Information about your product packaging will be crucial. You can show a carrier photos of your freight and packaging, along with the exact weight and dimensions. Trucking companies need to protect themselves and avoid any compliance issues. It is also useful to provide data on average dwell times at your facilities, average time in transit for routine routes, and your average incidence of claims. To go the extra mile, show a documented process that directs drivers around your facility to reduce their waiting time. Carriers appreciate this transparency and see that you are eager to help them increase efficiency and reduce operating costs. This will lead a carrier to be more lenient in rate negotiations because they know they will be able to save money and keep their drivers happy working with your business.
USE A 3PL AND TMS
Using a 3PL with a proper transportation management system (TMS) is like hitting the ‘easy’ button. A 3PL can run any and all of your transportation functions, leaving you to focus on core business competencies. A powerful, cloud-based TMS connects you directly to carriers. Most trucking companies prefer to work with a shipper who is technologically-connected because it makes communication faster and the data is more accurate. Carrier connectivity allows instant load tendering, automatic bill of lading completion and automated payment and invoicing. Most of all, trucking companies want to work with connected shippers because data is shared between companies, and this shared data allows carriers to optimize the use of their fleet network. If you’re using a cloud-based TMS, carriers will want to work with you and will extend offers for lower rates or reduced GRIs.
All of a carrier’s decisions will be based on improving the efficiency of their fleet and protecting their most valuable asset–their drivers. Help carriers drive efficiency and provide a good driver experience. If you do, carriers will start to choose your freight over the competition’s freight.