Negotiating Skills a Must for Logistics Buyers
by David Hannon, Senior Editor
The current corporate emphasis on cost control and reduction has had two pronounced impacts on the logistics and transportation spend: There’s a greater emphasis today on getting the best total cost in all areas, including logistics, and overall staff reductions have many procurement professionals wearing new hats, including the logistics buyer hat.
All of which creates an interesting paradox. That is, at a time when freight buyers are being asked to improve their cost structures, those ultimately responsible for the logistics and transportation spend may have little or no experience in sourcing and contracting logistics and transportation services.
“We see virtually every company downsizing and asking people who were not involved in managing freight contracts to manage those contracts,” says Tom Dromey, partner with PWC Logistics in Plymouth, Mass. “But it’s a tough transition to make [and] it’s hard to learn on the run. The market for freight and freight pricing is almost constantly changing due to changes in capacity, demand, and the overall economic setting. Freight is not a commodity and purchasing professionals need to remember that.”
Keep in touch
To reap big benefits come contract time, it helps to keep in close contact with carriers and logistics service providers. Why? Carriers may have a new capacity or even a new service available that may fit in well with a shipper’s needs, but if a shipper is not in touch with the carrier, they may never know about it. In addition, carriers are more likely to push new services, lanes or discounts out to shippers they are in close contact with, while putting others further down on that list.
Besides, if the only time a shipper contacts its carrier is to tell them it is time to put their business up for bid, the carrier is much more likely to see the negotiation as a confrontation, says Gregory Bunn, a senior commodity manager with Florence, Ky.-based KeyMRO (now a division of IBM) and chair of the Institute of Supply Management’s Logistics and Transportation Group.
“Shippers should be talking with carriers about reengineering processes, gain-sharing programs or other mutually beneficial projects,” such as service levels to help create a win-win relationship instead of an us/them relationship, says Bunn. “If the only time you talk to them is when the business is up for bid and you tell them their business is on the block again, they won’t value your business much, which will come back to haunt you at negotiation time.”
Of course, being too cozy with carriers can backfire at the negotiation table as well. Brett Febus, a consultant with Insource of Hilliard, Ohio, occasionally hears shippers in the small-parcel market say they have a great relationship with the drivers and local representatives and are hesitant to chase steeper discounts for fear of hurting that relationship. And some carriers capitalize on those relationships by having local reps telling customers, “If you ask my boss for bigger discounts, I could get in big trouble.”
Febus says communication is a good way to bridge this gap. Simply asking for more information on discount programs, rates and services can alert the carrier that you are thinking of looking for a better deal without actually telling them you are shopping around.
“The carrier may notice you [if] all of a sudden you talk to your local representative about things you never talked about before, requesting monthly reports, detailed shipping data about areas, and detailed costs reports,” says Febus. “In some cases, the carrier rep will take notice of that and may even start proactively offering you better deals—if you are a customer they want to keep.”
In addition, such informal communication with carriers can even lead to contract negotiations well before the contract is up. Febus encourages shippers to negotiate in the middle of a contract instead of waiting for the end. “If you really want to stay with your existing carrier, keep talking to them and negotiate when the time is right instead of when the contract dictates. Waiting until the end of the contract and then talking to other carriers may put you in a bad position with the incumbent carrier.”
Communication is also critical when you draft statements requesting bids and will go a long way towards getting accurate bids and streamlining the negotiations process. Instead of requiring that shipments be made “on time,” freight buyers should define what timeframe is acceptable and what isn’t and the corresponding actions. As Bunn puts it, shippers will get the level of service they contract for, but not much more. “Pricing is very specific and definable, and service needs to be specific also. That quite often takes a good knowledge of the process.”
Don’t get fired
Before going into negotiations, it’s also important that logistics and transportation buyers know how valuable their business is to a carrier or service provider, especially in the current environment of short capacity. The reason? Larger carriers today are firing some customers if their business is not profitable enough—and that goes well beyond rates.
Shippers with lanes that are attractive to carriers have a distinct advantage and those that are easy to do business with also make the top of the carriers’ lists.
However, shippers that require carriers to have extra shifts or to expedite shipments last-minute because of forecasting errors are more prone to being let go by carriers in this market. Bunn says carriers want customers that require less resources to manage. If a shipper just concentrates on price, the major carriers may not be interested in that business and they have the advantage in times of tight capacity.
How do you know if you are on a carrier’s good or bad list? The value of a shipper’s business depends on several issues. According to Febus, location in the country, location in relation to the carriers’ hubs, and the capacity of those hubs all contribute to how a carrier evaluates a shipper’s business. Bunn says if you think your carrier is bad, the odds are they think you are a bad customer as well. And if the carrier is mandating steep rate increases without offering to negotiate with a shipper, that is also a sign that the shipper is not on the high end of their business.
PWC Logistics’ Dromey says crafty shippers will sell their freight to carriers to make them want it more. “You want to entice carriers and to do that, you have to know what the carriers are looking for in terms of class rate, average weight, distance, claims issues, etc. If your freight is susceptible to claims, you don’t want to publicize that in negotiations.”
- Know the base rates. It sounds simple, but many buyers get wooed by steep discounts from certain carriers and don’t realize the base rates are significantly higher to start and that the overall price is not that good.
- Know how you stack up. Before you begin to negotiate your logistics or freight contract, have a good idea of how important your business is to the carrier. That will give you an idea of how much negotiating you should do. Benchmarking either internally or with an outside consultant can often provide areas of focus or give you an idea of how your current rates stack up.
- Know how the carrier stacks up. Do an in-depth analysis of your carriers’ performance before negotiating, so when they start pitching out service statistics, you’ll know if they are accurate or not.
- It’s about more than rates. When negotiating contracts with carriers, know which add-on costs are negotiable and which services you can add or lose for leverage.
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