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Friday
Jun192015

Collecting bids using ‘native’ air freight pricing models turns complexity into practical value

Trade Extensions, Sales Director - UK & Ireland, Mike Coburn


Allowing carriers to quote using their ‘native’ price models means Procurement Teams can provide shipping administrators with an optimised tariff sheet from which to select the optimum carriers for each consignment.


Summary

Developments in eSourcing and optimisation technology make it possible for carriers taking part in Air/Parcel Freight tenders to quote using their ‘native’ price models and for the procurement teams to compare these offers ‘like for like’ and identify the best rates for each consignment. 

Air freight and parcel carriers work with their own price models that have been refined and costed in detail to provide their most competitive prices for each of a huge variation of consignment sizes, weights and destination location.  Allowing carriers to make offers using their own models has pricing advantages for buyers since carriers are not forced to base offers on approximations, assumptions and interpolation by making their bids fit a standardised price structure imposed by the shipper.

carriers are not forced to base offers on approximations, assumptions and interpolation

Comparing bids from different carriers is complex but the latest sourcing and optimisation technology makes it possible to take historical data and apply each bid to every shipment a carrier is likely to make and give the shipper an accurate reflection of what it can expect to pay using the best available rates. Once bids from carriers are compared in this way and the optimum award scenario is decided, the buying organisation’s shipping administrators can be informed which consignment sizes, weight and locations each carrier should expect to receive during the year for the best overall result. 

Going native

To illustrate how allowing carriers to ‘go native’ works in practice let’s imagine a typical component manufacturer.  Every year, the administrators at this manufacturer’s shipping dock use a selection of Air or Parcel freight carriers to send over 50,000 express shipments that vary widely in weight, cubic volume and destination.  The shipping administrators know that some carriers have specialisms for delivering certain weights of package to certain countries at the best rates, and other suppliers offer best value for their own “sweet spot” of cubic volume package sizes, perhaps to some countries more than others.  Some suppliers even have great tariffs delivering to parts of a country but not the rest of the country, and in the past some suppliers have missed certain deliveries to customers in areas that shouldn’t be allowed to risk happening again. 

The traditional method of collecting quotes in this situation is for the buying organisation to impose a structure on its requirements and invite offers using an RFP.  However, an unforeseen consequence of organising a tender in this way is that it forces carriers to estimate and build in insurance if they are being asked to provide prices that don’t match their pricing models.

However, recent developments in eSourcing and optimisation technology mean it is now possible for shippers to allow carriers the freedom to ‘go native’ and make offers that match their own pricing models.  It makes it much easier for carriers to be competitive and make the best offers and means shippers are getting the best rates for each consignment. 

The first stage is to create a sophisticated yet simple-to-use bid sheet that is modelled to match the air/parcel carrier’s native pricing structure and takes into account pricing, volumetric weight, post code ranges and any other relevant bid parameters.

Pricing

Designing the bid form to mirror this native pricing structure means the carrier workload is significantly simplified and time spent on cumbersome administration is reduced.  For example, if a carrier has a price model that has a fixed price for packages between 20 and 25kg, and another fixed price for packages weighing from 25-30kg, then it is easy for the carrier to provide prices according to these weight ranges.  If the carrier is instead asked for one price for a consignment falling anywhere in the entire range 20-30kg, a new average price has to be calculated by the carrier, who has to first make assumptions about the likely weight profiles of future consignments.

Designing the bid form to mirror this native pricing structure means the carrier workload is significantly simplified

More importantly for the manufacturer, when the native prices can be quoted, there is no need for the carrier to make assumptions and provide biased prices that contain a margin of risk premium in case too many shipments fall into the less profitable extreme of the weight range. 

Volumetric weight

Carriers can only quote using their native pricing model when they are allowed to specify their own “volumetric weight”, that is the density of the consignment at which the cubic volume of the consignment becomes the cost driver rather than its pure weight.  This makes evaluating and comparing bids harder to achieve, but the difficulty is justified by the cost benefit of modelling native pricing.

Post code ranges

The final native component of the bids is the delivery area for which each price range applies.  Again, carriers know their own cost structures best, and so the most accurate quotes can be made if the carriers themselves define the relevant geographic post code delivery coverage.  This can be allowed by asking the carriers to specify a start post code number (e.g. at 2 digit level) and end post code number for which a quoted price model applies, or choose the entire country if appropriate.  For example, Austria post code range 10 through to 17 might attract one quotation, whereas post code range 18 through to 25 might attract a different quotation.  Irregular post codes such as the UK’s alphabetic system can be handled by accepting a separated list of post codes where the bid applies, e.g. “PE, CB, LE”.  A country with compact geography like Luxembourg may well be conveniently quoted by some carriers using one quotation for all possible destinations.

Other bid parameters

Finally, factors which are relevant per quoted lane such as a minimum charge per shipment and transit time need to be captured in a way that is consistent (e.g. all in days or all in hours) and without omissions.

Minimum total volume commitments and Volume discounts may also be captured in the bid sheet or may be negotiated offline where the agreed threshold levels or volume commitments become inputs in the allocation scenarios. 

Bidding process

It is critical that the bids received are fully complete in order to ensure all bids can be properly compared.  This means bid collection has to be efficient, and ideally an automated process should check that all relevant bid fields are completed and contain sensible values.  Since the number of countries and post code ranges can result in a very large bid sheet, the process of identifying any errors and guiding carriers to make corrections needs to be quick and efficient in order to complete the tender in a reasonable timescale. 

Evaluating bids for comparison and feedback

Comparing different carriers’ bids that were provided in different native formats can be complex.  By cross-referencing bids against historical scenarios, bids can be evaluated for shipments with the corresponding parameters, e.g. where there is a matching weight, cubic volume, delivery post code and required transit time.

Using this method, each bid can be evaluated for price and competitiveness for the consignment’s weight, cubic volume, delivery post code and required transit time.  The evaluation ultimately provides the Procurement Team with a set of comparable bids from which an award scenario can be determined. 

Using optimisation for scenario evaluation

For every designated delivery point post code and shipment size there will be one or more a clear lowest price (the ‘cherry pick’ award solution).  However, it is likely that to award all delivery points and sizes to the lowest price carrier would result in most or all carriers winning at least some business, with a potentially unmanageable supplier base where some carriers receive negligible volume. 

In practice there are likely to be business constraints, such as: 

  • Maximum number of total carriers to work with
  • Minimum volume commitments per carrier to ensure the business remains sustainable and attractive to carriers
  • Limitations on the number of suppliers per destination country and/or weight range and/or transit time
  • Limitations on transit time, such as ensuring that transit times are not allowed to increase by more than x%
  • possible specific exceptions based on past experience e.g. Carrier A must not deliver to country X when Transit Time 1 is required.

Using a scenario optimisation tool, these constraints can be simultaneously applied and the resulting awards explored, along with any sensitivity analysis and fine tuning to determine workable outcomes. 

Reporting the allocated scenario to stakeholders

Depending on the balance between realising best value, and maintaining a practical supplier base of carriers, the Procurement Team may opt for a simple tariff matrix, e.g. with one supplier per country regardless of shipment size, or else a more sophisticated decision tree which allows a selection of carriers per country, dependent upon shipment weight, cubic volume, post code and transit time. 

Reports for awarded carriers are produced to formalise their allocated shipment categories and accepted rates, whilst reports indicating the reason for non-awarding to carriers are produced at global, country or more detailed levels.

Benefits realised

Pricing on a full-tender and country level is readily compared to the historic baseline equivalent price, to determine overall savings and on-costs.  In addition, the average transit times can be calculated and compared to historic averages in order to establish an average lead time benefit.  A by-product of this process is that any mis-pricing in historic shipments is highlighted, for example when a carrier didn’t correctly apply a historic tariff price, meaning that quality checks can be built in to future operations to verify pricing is consistent with the accepted rates.

provides shippers with an optimised price matrix from which to identify the most appropriate carrier whatever the consignment. 

Conclusion

Developments in sourcing and optimisation technology mean, for the first time, it is possible to allow carriers to make offers using their own pricing models and for shippers to compare offers on a like-for-like basis. Allowing carriers to make offers in this way reduces their administrative burden and provides shippers with an optimised price matrix from which to identify the most appropriate carrier whatever the consignment. 

 

For more information about using ‘native’ price models in Air/ Parcel Freight Tenders contact Mike Coburn – mike.coburn@tradeext.com