Search
« Top ten tips for effective buying | Main | "If it ain't broke, FIX IT!" »
Friday
Jun222012

Price and flexibility are key factors for transport buyers 

Garry Mansell,  Chief Executive Officer, Trade Extensions


American Shipper magazine recently carried out a Transportation Procurement Benchmark Study and the report provides some interesting insights into attitudes to sourcing and techniques currently being used.  The sub-title of the report – “Rate Fixation Strikes Back” – tells its own story and highlights shippers’ key concern but the report also discusses the more nuanced aspects of sourcing transport and gives a good indication of ‘best practice’ in the transport sector.

Trade Extensions has a great deal of expertise in sourcing transportation so I thought I would share some observations on the report regarding how shippers are using technology and how they are using sourcing more strategically. 

The report surveyed around 275 transportation buyers and transport providers and compares the responses of the star performers, or ‘winners’ in the report’s terminology, with the more average buyers.  To be classified as a ‘winner’ for the report, the shippers in question would not have seen an increase in contract rates during 2011; they implemented awarded contracts quickly i.e. within two months and they considered multiple criteria, including environmental factors, during the bid analysis phase.

It’s an interesting concept since by identifying best practice in this way it suggests the direction buying strategies are moving in – if one makes the assumption that the ‘average’ buyers will migrate to use techniques currently employed by the ‘winners’.

...it is clear that buying is a critical business function and shippers allocate sufficient resources to manage the process in a professional manner.

One overall observation from the report is that all buyers are becoming more sophisticated in their sourcing techniques and all respondents surveyed used multiple rounds of bidding.  A more professional approach is also suggested by the fact that only 14% of respondents run procurement events on an ad-hoc basis when “resources are available”.  This percentage is even lower at 7% within the ‘winners’ group of shippers so it is clear that buying is a critical business function and shippers allocate sufficient resources to manage the process in a professional manner.

As sourcing becomes more sophisticated you would expect the use of technology and new sourcing tools to become more widespread and this is true to a degree.  While 23% of shippers are using a completely systems-based approach, 40% of shippers use spreadsheets to manage their buying.  This is roughly the same as in previous reports but interestingly there seems to be a change afoot with 25% of respondents reporting that they have budgeted to move to automated systems in the next two years.

...over the next few years cloud based solutions will become the norm and installed software less commonplace.

This would seem to support our experience inasmuch that the use of technology has become more widespread over time but also as it has developed it has removed barriers to entry such as the need for expensive infrastructure so smaller shippers are able to use sourcing platforms that are hosted entirely in the ‘cloud’.  The survey reports that currently one quarter of shippers are using cloud based Software as a Service or On Demand software and one third are using software that is installed on their own systems. This is one area where it is likely there will be a reversal over the next few years as cloud based solutions become the norm and installed software becomes less commonplace.

Regarding the move to automation, over 40% of shippers said they would automate ‘truckload’ sourcing with only 19% identifying less than truckload. This is interesting since it mirrors our early experience with shippers who felt more comfortable running tenders for full truck loads.  This is changing and in reality there is no difference in automating the buying process for full trucks or less than truckload.  The key in all successful buying processes is specifying the need and having the correct tools to collect, manage and analyse the data.  We are seeing all types of transport requirements being sourced and it will be interesting if American Shipper repeat this survey in a few years’ time to see if there is a more even distribution.

...small shippers can benefit as much as large shippers

It will also be interesting to see if the prediction for smaller shippers is correct as well.  The report suggests that small shippers cannot benefit as much as large shippers from automated systems since they have less complex supply chains.  This may be true to an extent but the best processes work just as well on smaller projects – the principles are the same and the key is to collect the correct information and analyse it in a way that identifies the best solution for your needs.

Clearly for sourcing technology to be effective it needs to be beneficial to both buyers and sellers and the report makes some interesting observations regarding carriers’ abilities to respond to online bids.  On the face of it, it looks quite critical and only 10% of shippers rate their carriers as ‘very good’ and 40% as ‘fair’ or worse.  The inference being that carriers are at fault and somehow ‘not as good’ as shippers at this sort of thing.   This suggestion is clearly simplistic and our experience of working with both shippers and carriers would suggest that if the question was ‘reversed’  and carriers were asked to rate shippers’ ability to specify online auctions/ tenders, the results would probably be very similar with carriers saying only 10% of shippers were ‘very good’ and 40% ‘fair’ or worse.  In transport tenders, carriers sometimes struggle when they are forced to make bids in a framework that has been designed from the shippers’ understanding of the market as it may not bear much resemblance to the carriers’ outlook.  Historical precedent may have defined lanes and price break points decided arbitrarily so it is difficult for carriers to make effective bids.

...market-informed sourcing is becoming popular since it allows carriers to reflect their strengths

With these types of variables it is better to let carriers indirectly inform shippers, through their bidding behaviour, of more efficient alternatives.   It is for this reason that market-informed sourcing is becoming so popular since it allows carriers to reflect their strengths and group together the lanes that suit them and make their most competitive offers.

This need for flexibile bidding was highlighted as critical functionality for the  best buyers identified in the report,  “winners are clearly focussed on using flexible tools that allow business to be allocated to multiple carriers based on conditional bids.”  This is functionality that Trade Extensions has been at the forefront of delivering and we actually ran the first online combinatorial auction in the early 2000s.

The requirement for flexibility extends to analysis as well and the best buyers consider multiple criteria such as environmental sustainability when awarding contracts.  Cost may still be the ‘driving force’ behind their bid analysis, but for many shippers environmental criteria do influence their decisions to some extent. 

...the size and complexity of sourcing events mean that without any computational assistance it is impossible to analyse the environmental data to any meaningful extent.

According to the report, “systems-based companies are considerably more likely to incorporate environmental sustainability in the procurement process”.  Although it does not offer any explanations why this is, from our experience it is because the size and complexity of sourcing events mean that without any computational assistance it is impossible to analyse the environmental data to any meaningful extent.  Our scenario analysis techniques allow buyers to consider environmental factors so they can analyse a group of options that cost the same financially and identify the solution with the lowest environmental impact.

In addition to some of the tactical approaches to sourcing described above, the report also looked at some more strategic uses for sourcing.  One interesting point the report identifies is that while ‘winners’ generally bought in line with buying seasons, they had enough flexibility to take advantage of positive market conditions, should they occur.  This ties in with the experience of some of our customers who we have advised to run sourcing events ‘out of season’.  Running sourcing events out of season can sometimes be very effective because carriers may have spare capacity and as they aren’t overwhelmed responding to other tenders, they have time to make considered offers.

The report also discusses how sourcing can be used to manage rate volatility and challenges the widely held belief that long-term contracts are the solution. 

...to ensure you are paying the best available rate it is advisable to tender every year

For the average shipper, the survey reports that 16% of its contracts are long-term (three or more years) while for ‘winners’ it is half this number.   Again this supports our experience and generally our advice to shippers is that regular tendering is the best strategy.  Markets change constantly and to ensure you are paying the best available rate it is advisable to tender every year – this way there are ‘no surprises’ and any volatility is managed as efficiently as possible.

Managing as efficiently as possible is something that the ‘winners’ in the report seem to be doing exceptionally well.  The key reasons why seem to be that they use flexible bidding to allow carriers to package bids and make conditional offers; they demand flexible analysis to consider multiple criteria and they use sophisticated technology to provide this flexibility.  Their motivation is clear and the report provides the answer on its cover  - ‘Rate Fixation Strikes Back’ – but as these techniques and others provided by platforms like ours become more widely used, buyers will realise they can do so much more.