How-to Negotiate & Execute Best Freight Rates: Comprehensive Guide
April 3, 2019 •Rick LaGore
The days of throwing out percentage reductions or using a “solve-to-equation within Excel” to determine the spend for next year is a time tested process that needs to be challenged. While freight is thought of as a commodity, there is more to it, and the Excel spreadsheet RFP driven down from the top misses the target before the arrow is even pulled from the quiver.
Today's dynamic logistics and supply chain environment requires strategic planning; execution to the strategy; measurements to the goals; analysis against industry benchmarks; and continuous improvement.
In this article, we will outline keys to executing a successful RFP in the new era, along with providing methods to get the greatest results from your freight RFP once the process is complete. While this is about a request for proposal (RFP), these steps hold true for one-off lane quotes also.
Key Components of a Great Freight RFP Process
The best RFP has three components: 1) actual market rates on the lanes your business operates within; 2) actual data; and 3) inclusion of quality freight providers.
The importance of these three items cannot be over stress, so let’s cover each in detail.
1. Negotiating with Yourself and Benchmark Against Market
If a shipper picks only one of our suggestions, please let this be the one. What is meant by “stop negotiating with yourself” is stop driving reduction targets by what was spent last year.
In the time of big data and transparency, shippers need to know they have the ability to tap into the same market data that carriers and logistics companies have at their fingertips through various rate indexes available in the market. These comprehensive indexes are based on lane, region, spot, contract, mode type, tender acceptance level, etc. etc. etc.
Employing just this step into your RFP process is a game changer in any shipper's RFP process. It moves the shipper to the point position in the RFP process. By employing the many rate indexes, shippers can identify the "real" potential they have in rate negotiations. What we have seen happen for some shippers is they find they have been shooting way too low on their targets because of basing their targets on the prior year spend.
Other shippers have found they are right on or below market rates, which is exactly the information required to provide the C-suite the knowledge that their logistics team is outperforming the market and their competition. Shippers can either purchase the indexes themselves,r hire a logistics consulting team to do the analysis, or assist in executing the shipper's RFP process.
2. Data, Data and Data
Rest assured that if a shipper does not have data, the carriers they do business with do. The issue with data is the same: more information the better. More data produces conversations that are more than “what is the rate,” but instead, “how can we get to a better value of quality service?”
The data to use for an RFP should be at least six months, if not twelve months.
The data should include actual pickup and delivery addresses, the freight characteristics of the freight in each lane, plus any origin and destination requirements that provide details on how a carrier will need to operate at the locations for success.
The information should be actual data, not averages of averages because carriers will hedge their risk on general information. Any stretching of the details tend to backfire.
An example of this is when we see shippers pump up the numbers to make volumes look larger than they actually are.
Freight providers’ bids depend on the information to optimize their network, so if the volumes don’t meet expectations, pricing will change or the carrier will just reject the tenders. You may also miss out on other carriers because they did not want to fail at the higher volumes, so they will pass on the lane.
Freight Characteristics to be Included in the Data
- Origin/Destination Zip Codes
- Spot, Contract or Special Project Rates
- Fuel costs
- Accessorial Charges
- NMFC for LTL
- Transit Requirement
3. Buy Better Capacity
With the above data in hand, motor carriers and logistics service providers will survey their market data to review market capacity, seasonality and review the benefits of adding the shipper’s freight into its network to evaluate whether it will improve its yield, which then determines the ultimate price they will offer.
Remember, there is not a one-size-fits-all solution when it comes to freight; the freight rating process has to be a win for both the shipper and the freight provider. With that said, shippers need to diversify their carrier and logistics service provider base.
Bring in both large freight providers and augment them with smaller hungry freight providers wanting to make a difference on service, price and value. Also, look at alternative modes or solutions the logistics providers may bring to the table for solutions, such as adding 53' intermodal capacity or more complex routing suggestions for volume LTL shippers the logistics service providers (LSP's) can bring through their technology. Bigger is not always better when discussing freight providers, but more choices and diversity is.
The Freight RFP Process
Finding and calculating freight rates is not an easy process, so take your time to find the best fit for your company.
When working through the RFP, keep in mind your competition is everyone that ships products in the lanes your business operates. To make the point on the magnitude of “everyone is your competition” means you must consider the US census data lists 6.0 million companies are in business today. There is roughly 13.0 billion square feet of industrial space, 900 million acres of farmland, hundreds of infrastructure projects, etc. that are wanting the same capacity your company is after.
So, to get to the top, understand carriers build their routes based on coverage required for their capacity on committed shippers first, then work on a somewhat first-come-first-serve basis that optimizes their assets for their rate contracted business, while serving the greatest numbers of shipper requests.
With all that said, a freight buy is not like a commodity buy that so many try to plug it into. You have a guaranteed price and quantity, and to ensure your business gets to the front of the line, you’ll need to make it a part of your RFP process to find those carriers that best fit your business requirements.
So, with the some of those thoughts in your head, let’s get started working the details.
Have a Discerning RFP Process
Shippers should have a formal process by which they invite freight providers (both asset and non-asset) into their bid process. Not every carrier that shows up should be brought into the inner circle of bidding.
It is Not All About Price
Shippers and freight providers often find themselves jumping into the price game, then stumble out of the gate or never perform to the needs of the shipper because a price is quoted before gaining a thorough understanding of what the shipper requires.
The reality is the very best price comes through a mutual evaluation process with freight providers and shippers opening up about their strengths, weaknesses and requirements.
Vet the freight providers in a subjective manner before inviting them to submit rates. Before a freight company is included in the bid, the shipper needs to figure out how to best vet the group of freight providers they want to participate in the process.
Our suggestion is the initial vetting would be both written and verbal.
Examples of questions to ask would revolve around the following topics: capacity, reliability, insurance, licensing, technology, security, financial strength, references and any other shipper critical items.
Each item’s importance varies by shipper and should be assigned a weight. As the freight provider answers the questions, they should be written down and later measured against the weight of importance to remove subjectivity in the selection process of the carriers to participate in submitting rates.
As the shipper goes through the initial vetting step, they need to open up and share what is critical and what keeps them up at night. There may be additional solutions the freight company can add into the process that will significantly improve the flow and efficiency of freight in the shipper’s supply chain.
If, at this step, the shipper does not see carriers step away, then there probably is not enough information being shared.
Not every freight company is right for every shipper, and not every shipper is right for the freight service provider.
Learn All There is to Know About the Carrier’s Operations
As part of the vetting process, shippers need to learn as much about the carriers’ operations they invite into the rate bid process. There needs to be an understanding how their freight can fit into the freight provider’s operational patterns. There may be days during a week; particular weeks in a month; or particular months in a year where a carrier may not have the capacity at the price the shipper needs. By cherry picking what is best for the freight provider, the shipper will gain the needed capacity at the most competitive price. For time critical shipments, there may be intermodal lanes that have the same transits as truck options with a significant savings.
A shipper needs to consider how the freight providers they include provide capacity throughout the year, particularly in peak season.
Freight providers like to talk about their strengths, but understand they have weaknesses too and have them talk about what those are. Learn how the carrier handles problems and resolves issues. The more that is known about the individual freight companies before the rates are brought into the equation the better.
Evaluate Freight Providers’ Fit
Remember this is not all about price, so do not short change the process. Only invite the freight providers that qualified to participate in the rate submission step and evaluation.
Understand the Market Characteristics of Your Lanes
When evaluating the lanes, understand there are lanes where a shipper is better to play the spot market and other lanes the shipper needs to be under a guaranteed price and capacity agreement. The price may be higher at certain times of year on a guaranteed contract, but at the peak times, the price will be significantly lower at the required capacity.
Hedge Bets on Critical and High Volume Lanes
A lane may be critical, but not high volume. There may also be some lanes that are high volume and critical. In either case, the shipper needs to know that when it comes to key lanes that failure is not an option and to hedge the bets by awarding the lane to multiple providers. In the hedging process, remember the earlier steps in understanding a carrier’s operational strengths, so hedge the weaknesses.
Shippers not involved with intermodal need to jump in with both feet and bring IMC’s (intermodal marketing companies) into the equation to help hedge the capacity bet. If a shipper is not sure where intermodal could potentially fit, then they can hand over all the lanes and have the IMC come back with what are good lanes for their network.
Know Fuel Schedules and Accessorials
Accessorial charges need to be understood and negotiated. These additional charges are often found at the end of the agreement or referenced to a website within the agreement. You need to understand when these charges come into play, and if the shipper is not prepared to honor the accessorials, then negotiate them out or walk away. It is not fair to the freight provider to short pay on costs the freight provider themselves had to incur to service the lane.
On the fuel side of the equation, we recommend shippers assemble their fuel schedule they want all their carriers to use.
Be Willing to Compromise
An added reason for identifying the critical items a shipper requires and then weighing them out creates a list that becomes the basis for meaningful negotiations.
A give and take negotiation will create agreements that are win-win. The key in negotiations is for the shipper to deliver what is committed, and then it is reasonable to expect the same from the carrier.
Evaluating the Freight RFP Response & Service Options
Again, this is not a one-size fits all process, so you need to have a discerning bid process that takes the emotion out of it and drives value and quality questions.
Whatever you do, don’t make the RFP decisions based upon the “sort” function within your Excel spreadsheet. You have spent way too much time pulling the details of the strengths and weaknesses of the freight providers to take the easy way out. Keep up the good fight and push on to determine what mix of carriers will bring the best value to your company’s logistics and supply chain strategies.
Look for creative solutions within the carrier base you are evaluating. Find those carriers that put the same kind of effort into the quote that you did. Many times you will look back on a bad freight provider decision, and you will recall they were the quickest responses by a number of days, meaning they did not do their homework to ensure your business was a good fit for them.
As we said earlier, there is far more to freight rates than the linehaul rates themselves. Some things to think about in your evaluation are:
- What can be done to optimize the rating to fit your freight for what would actually be a lower cost?
- An example would be if you have “heavy” freight, can you go with a truckload provider that runs lighter equipment that will allow you to put another 5,000 pounds of freight onto the truck for an actual cost per pound improvement?
- What freight characteristics does your business have that fits well with carriers to drive savings for both the shipper and the carrier because these will be the lanes that will be best served.
- If you pay a little more in the base rate, will other benefits come reduced accessorials, damage or retail chargebacks because of late or early deliveries.
- Modal conversion from truckload to intermodal would make sense.
- Possible LTL consolidation or two stop truckload was suggested.
- A freight provider that specializes in your product mix that had ways to reduce damage.
- Which freight providers would negotiate on accessorial charges?
- What were the proposed rate structures and volume commitments?
- Will the carriers you are evaluating accept your standardized fuel matrix?
- Are there logistics service providers in the bids that offer additional services that will take time and people out of your freight process?
- For example, do they offer a managed services program that takes out numerous steps in your freight execution process.
With the above in mind and the RFP response data in hand, it is time to evaluate the responses to solve your cost and service components with each respondent.
Make this evaluation process a give and take compromise where you ask questions to ensure you fully understand the service offer. If there are providers at the high end of the cost spectrum, ask for details as to why; at the same time, do the same thing for the ones at the very bottom. The bottom prices may be saying they missed something.
As part of it, also see where your incumbent freight providers came in at against the new entrants in your bid. The incumbents have far more information on the characteristics of your freight and the behavior of both the shipping and receiving docks that will be telling you something about your freight that could be improved for better pricing.
An example of where the incumbent may be telling you your freight is expensive to run is in lead time. Lead time is an often overlooked factor in delivering freight on-time and on-budget, yet it can be the difference between a shipper riding on their contracted rates versus the elevated spot market for capacity.
The importance of managing lead times increases exponentially in a capacity constrained market, even if the shipper has a contract with the carrier base it utilizes.
So, if you are running short lead times, you are essentially asking your carrier to operate an expedited shipping program for you, which is expensive for them and for you. It also opens up your supply chain for more service failures because what is being run as a “typical” truckload freight program may in practice be an expedited program.
Executing the Awarded Freight RFP Lanes
So, now you have made the decision on which carriers are the best fit and will provide the best value to your logistics equation. The next step is to execute the freight bid awards into your logistics strategy.
This step should be well thought out and process oriented. If not, service failures and costs overruns could be in the cards. If you are moving out some of the incumbents, then make sure there aren’t any additional charges to teardown a trailer or container pool they have built up.
If there is a pool that needs to be torn down, then tender freight to the pool carrier to have them pull the trailers and / or containers out with freight on them and not to replenish the pool when they come in for pick-up. This way there will be no cost to tear the pool down because you will do it through “normal” course of business.
Educate the Users
As we tell our clients: rate is a rate is a rate. It is what one does and executes with the carrier capacity and rates it has negotiated that counts. With that said, logistics teams need to educate the users within their company on what drives freight rates up, which there are plenty. A few topics that come to mind on the education front include: short-lead time, expedites and next day air.
Be a Shipper of Choice
Shipper of choice is often thought of as just a phrase and carries little weight, but we can attest this is not the case. There have been enough instances we have seen with new shippers where carriers refuse to move their freight because of various issues related to wait times, lead times, communication, facilities, loading process, etc. Not being a shipper of choice increases costs and reduces capacity.
Measure Performance against RFP and Market Indexes
The RFP should not be an annual event, but a continuous process where the freight providers are measured against rates, service and the market indexes. The reason for this is the freight market is in constant flux along the supply and demand curve and the carrier service performance lines.
Just think of it this way: How many carriers went to their shippers in various years telling them the market has changed and they were required by their operations team to increase the rates or risk losing the capacity?
Now think of how many times a current carrier in the routing guide has come to a shipper and told them the market has changed and it was time to reduce the rates.
While the latter does happen, it certainly does not happen as much as the former. So, if the market changes in February and there appears to be economic conditions that are drawing down the demand for freight, then a shipper could be paying in excess of market rates until the next RFP and getting a lesser service.
This is about efficiency, execution excellence, data and analysis. We continue to find companies of all sizes operating their critical supply chain work on outdated TMS technology, Excel spreadsheets or Access databases. We are here to say shippers have options.
With the price of technology dropping and functionality is expanding exponentially, the decision to move to a top tier TMS technology continues to look easy because the ROI hurdles are under twelve months and implementation can be anywhere between 30 to 60 days.
The cost of the technology itself is roughly $4 a shipment, plus or minus a dollar depending on the size of the shipper.
Another alternative on the technology front is to outsource the freight process from tender to freight audit & pay to an LSP. In these programs, shippers get the technology, industry expertise, executional excellence and all the analysis to take their supply chains to another level, while they focus on their core business offering to the market. Like the cost of the technology itself, costs are far less than many think ranging anywhere between $15 to $25 a shipment. Pricing depends on the complexity and volume of the program and like technology a managed freight program make for a quick ROI.
Data & Information
In today's complex supply chains, information is often more important than the shipment itself. Today's technology easily turns shipment data into actionable information to execute better and manage to better KPI's in the future. The benefit that is often missed when thinking about a TMS platform is the amount of data it houses and what that data will do to improve the strategic direction of a company's supply chain.
When a TMS is further out on the decision tree, outsourcing the freight audit and pay function can bring a great deal of data for visibility into freight costs and other important shipping data that can be bumped against market pricing. Again, a full TMS is the best option because it is more than a cost analysis tool. A TMS brings efficiency to the operation and gives real-time visibility for internal and external customers for daily optimization management of cost and service.
Analyze and Improve
The key to technology and data is to keep up with performance analysis against budget, market data and service, so changes can be made for continuous improvement. Without the measurement and the tools to find the problems that are holding back improvement, the RFP process will be just a document to dust off once a year and the power of what it can bring to an organization is lost.
As part of evaluating every angle to bring costs down, establish relationships with a core base of carriers that will help you along the way. The more you treat the carrier as a partner, the more opportunities there are for win-win opportunities that bring the carrier's costs down, which will then be passed to your bottom line.
Provide your transportation partners with as much information as possible and as early as possible. As you can see, a lot goes into determining a freight rate. If you provide details upfront, less back-and-forth communication will be required, orders can be handled quicker, and quotes will be more accurate and often cheaper.
Calculating a single freight rate is hard – considerably more so when doing it with multiple carriers and mode options. Leveraging logistics partners and technology are the best ways to make sure shipments are being optimized for cost and service.
Believe and be patient in the process because taking these elements into the RFP process can help both shippers and freight providers enter into a business partnership that leads to a long-term relationship of wins for both.
Also, keep in mind this article is all about negotiating contract rates. Spot rates can often play well into a shippers program, when used in moderation, but more on the topic of spot versus contract recommend reading Freight Contract Rates vs Spot Rates - Comprehensive Guide.
If you're ready to take the next step, at InTek Freight & Logistics, we can help. Just tell us what you need and we'll discuss how our expertise can help with the unique shipping challenges your business faces. Rather do a bit more research first? View our Freight Guides for comprehensive articles and eBooks on all things freight and logistics.