Has your parcel carrier rep ever said that you have the best rates in his/her territory? That they can’t believe their pricing department authorized pricing so low?
Chances are many of you have heard this familiar negotiation tactic. What’s more surprising, however, is that many people actually believe it.
As a former carrier executive and now a consultant, I’ve reviewed numerous carrier pricing agreements over the past 20 years. While it’s true that most shippers achieve some level of discount and other concessions, the reality is that three out of four shippers could improve their discounts by 10% or more.
What’s at issue is that most shippers don’t know how their discounts compare with other shippers’ discounts. Imagine the advantage gained if you learned that your current carrier incentives were in the lower quartile of eligible discounts.
What if the shipper also knew the maximum incentives and specific accessorial discounts for which he was eligible? Now imagine your disadvantage going into a negotiation without that information.
How do you access that type of information? Well, you can get it from a third-party resource, or you can conduct a benchmark study. For many years, logistics managers have applied functional and process benchmarking to quantitative areas such as warehousing, inventory control, order processing and customer service.
More recently, however, logistics managers are increasingly directing benchmarking efforts to transportation rates. Through rate benchmarking, you gain an understanding of best-in-class carrier rate programs, increasing the likelihood of negotiating significant improvements to your own carrier agreements.
BASICS OF BENCHMARKING
Benchmarking is a core component of business improvement programs. The concept is simple: Monitor your company’s internal measurements and compare the data with other leading organizations. Gaps between a company’s actual performance and industry leaders become opportunities and are used to develop improvement plans.
Benchmarking not only includes measuring and improving performance, but also evaluating progress and trends over time to achieve target objectives. Effective benchmarking enables shippers to enjoy an advantage over competitors now and into the future.
There are two types of benchmarking: internal and external.
Internal benchmarking: This type of benchmarking does not require cooperation from partner companies, but rather is achieved exclusively within the organization conducting the study. Data sources include precedents (current and historical carrier agreements/proposals), internal databases (shipment history and management reports) and employee experience from previous jobs.
External benchmarking: The most traditional method of external benchmarking is to identify competitors and best-in-class companies with which you want to benchmark. The value for benchmarking partners, of course, is the same benchmarking information your organization seeks.
A FIVE-STEP PROCESS
Keep in mind that the benchmarking steps that follow can apply to transportation rates or services, or just about anything you’d want to measure and compare with other organizations.
Step One: Planning
Strategic benchmarking should focus on what causes your organization the most trouble or has the greatest value impact on your company. Define the area of study and state your objectives. For many shippers, cost/pricing will be the area of study.
Next, develop your project team, data collection methodologies and other critical success factors. For benchmarking of functional areas of the operation, the particular process to be benchmarked should be documented and flowcharted.
Then, decide what and against whom you will need to benchmark. This will help you identify potential benchmark partners.
Gather internal benchmarking resources and reach out to external sources. Companies of about the same size/revenue and business model, even if direct competitors, are typically effective benchmarking partners.
Securing benchmark partners may require some sales effort. But you’ll find that participation increases when you ensure absolute confidentiality by “blinding” all responses, so no one — including you — has visibility to company-specific responses.
Step Two: Data collection
Data is at the core of effective benchmarking. In order to measure performance, robust internal and external data collection is required.
Internal data: Develop a database of your company’s historical shipments to better understand the impact of rates and charges. The database can later be used to model the impact of benchmarks applied to your actual distribution.
Collect proposals and final contracts from all incumbent carriers. Finally, gather carrier invoices, management reports and service audits.
External data: Create a survey for benchmark partners that solicits rate, service usage and contract information. Use strategies such as ranges and yes-or-no questions to circumvent direct disclosure of rate information.
External resources for benchmarking also include industry associations, networking groups, research studies and white papers, consultants, universities, government data, industry periodicals, libraries and online databases.
Step Three: Analysis
You can’t improve what you can’t measure. Chart your organization’s results against internal and external benchmarks. Like any other measurement, rate programs can be compared and mapped within upper, lower and middle quadrants.
Consider shortcomings as both opportunities for improvement indicators of objectives for which to continuously aim. Measurements in which you lead the benchmark group validate your position as best-in-class.
Benchmark specific aspects of contract pricing, including rates, service usage and contract terms.
Transportation rates: Benchmark incentives by service level, zone and weight. Industry benchmarks should include your competition, especially if volumes and expenditures are similar. Moreover, benchmark accessorial and oversize charges, fuel surcharges, guaranteed service refunds, bonus weight, rebates, earned discounts and other carrier incentive programs.
Service usage and performance: Benchmark weight, delivery density, parcel dimensions, commercial/residential mix, air/ground percentages, as well as inbound/outbound and third-party percentages. Benchmark companies that single source as well as those that multisource. Benchmark on-time deliveries, damaged/lost shipments and other performance measurements.
Contract terms: Areas to benchmark include revenue bands, rolling averages, minimum shipment charges, contract length and payment terms.
Step Four: Recommendation/implementation
Once you’ve identified realistic opportunities for improvement, implement the action plans with the greatest impact.
Your analysis may have identified a gap between your contract term (one year) and those of your benchmark partners (average 2.5 years). Other gaps might include specific base incentives and accessorial concessions.
Armed with benchmarking information, you are now prepared to request similar incentives and terms from your carrier. It is the ability to target a carrier’s rate response that makes benchmarking so valuable.
Step Five: Monitoring
Monitoring entails the ongoing evaluation of the benchmarking processes undertaken and the results of the improvements against objectives. In the case of transportation rates, quantify the savings realized as well as the savings potential if a gap still exists with best-in-class programs.
Benchmarking can be a lengthy process. Involve senior management early on to ensure that you have the resources and ongoing commitment required to execute strategic benchmarking programs. Be careful not to spend too much time on one part of the process at the expense of other key parts.
Moreover, do not expect to find benchmarking partners comparable in all respects to your organization. Use benchmarking results wisely by implementing the improvement programs that make the most sense for your company.
Rob Martinez (email@example.com) is president/CEO of supply chain consulting firm Transult.