How to Negotiate & Manage a Competitive Freight Rate RFP
September 24, 2019 •Rick LaGore
CFO's are demanding better performance after watching their freight budgets balloon to all-time highs.
A freight RFP is one of the least favorite, although one that needs to be discussed and improved by many shippers to obtain the best results.
The days of throwing out percentage reductions or using a solve to equation 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 pull from the quiver. Today's dynamic freight and logistics cost and pricing environment requires strategic planning; execution to the strategy; measurements to the goals; analysis against industry benchmarks; and continuous improvement.
Over the next few paragraphs, we will outline a keys to executing a successful RFP in the new era, along with providing methods to manage to the RFP once the process is complete.
RFP Process Suggestions
Stop Negotiating with Yourself and Benchmark Against Market
Data, Data and Data
Buy Better Capacity
There is not a one size fits all solution when it comes to freight. Shippers should diversify their carrier and logistics service provider base. Bring in both large freight providers and augment them with smaller hungry freight providers wanting make a difference on service, price and value. Also, look at alternative modes or solutions logistics providers may bring to the table for solutions, such as adding 53' intermodal capacity or more complex routing suggestions for volume LTL shippers 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.
Considerations for the RFP Process Itself
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, 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 years 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.
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.
Evaluate Freight Providers Fit
Understand the Market Characteristics of the 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 the key lanes that failure is not an option and 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. The needs 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.
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.
Executing the RFP Awards
Educate the Users
Be a Shipper of Choice
Measure Performance against RFP and Market Indexes
Requirements for Both the Bid Process and Executing the Freight after the Bid
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, while 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
Analyze and Improve
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.
Additional articles to read for more details on negotiating the best freight rates include:
- How-to Negotiate & Execute Best Freight Rates: Comprehensive Guide
- 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.
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