Effective freight contract negotiations and securing good rates takes a strategy. And contrary to what many people assume, it can’t be based on simply beating up carriers.
This is not to say that getting the best rates is not still the goal – it is. But, low rates with constant carrier turnover and poor service has costs that need to be considered too. That’s the downside of such an approach.
There is always a balance of cost and service shippers need to find with their carrier partners. Unfortunately, many shippers make the mistake of trying to always get the lowest possible rate no matter what. The truth is bad things happen when you push carriers too hard on rates, one being you end up working with the wrong types of carriers. Rock bottom rate carriers never stick around for long because the business is not sustainable for them.
Of course, in the short-term, there’s always a small benefit to saving a few dollars on a shipment. But the long terms costs usually get overlooked. Carrier turnover comes at a big cost to your logistics operation because when you push carriers too hard on rates its inevitable the relationship will not work out.
Carriers are to blame too. They usually offer below market rates thinking over time they’ll be able to raise rates and take on other, more profitable business from the shipper. The truth is it rarely works out that way, and the service you get suffers as a result.
So, why is it a bad strategy to always go with the low-cost carrier and just deal with the turnover as it happens?
The primary reason is there’s a lot of cost in bringing on new carriers. Shippers tend to overlook the time that’s invested in creating an RFP and negotiations. New carriers also have to learn about how your logistics process works and the communication flow between your team and their dispatchers.
This time and effort are big investments for both sides. And, a lot of work wasted once it becomes obvious the service levels won’t be there. Or, you don’t get the capacity you need because the carrier can get a better rate with “your” trucks by serving another customer. It’s also common for accessorials start piling up because the carrier is trying to recoup the low or negative margin they’re getting on your business.
When you contract with carriers the right way, you are building reliability and consistency into your operation, all while getting the lowest sustainable rates ANY company can secure. But this takes special knowledge to know how to do it right. It’s based on understanding carrier’s costs.
For example, LTL pricing is a complicated calculation of distance, weight, class, charges – not to mention the labor behind the linehaul and final delivery costs. When you understand these costs, you can understand how low you can negotiate price.
This is a process we’ve pioneered at First Flight Solutions. We help shippers negotiate ‘costed’ pricing that is based on what we know carrier’s costs are, and the minimum they can accept as a margin. This approach ensures you are getting the lowest rates you can and the service to go along with it.