Shippers today more than ever need to become “Educated Consumers” when it comes to doing business with any transportation service provider. The main reason is that all freight carriers, regardless of mode of transportation are free to publish rates and charges they deem necessary and appropriate to meet their internal revenue requirements. This is done to assure the carrier covers its cost of doing business plus ensure they make a profit. Making a profit is not only a good thing for the carrier, but it is also good for the shippers’ utilizing these carriers to ensure the carrier’s viability, profitability and future growth. The question is how much profit is “reasonable.”
To ensure these profit margins are met, carriers will resort to a variety of pricing provisions that often come as a surprise to the shippers. Many of these ever-changing pricing provisions fall outside of what has been the “acceptable norm”, (whatever that is.) Here is an example of what we are talking about.
In performing an audit for a client, we recently came across a new pricing provision for a major motor carrier that adds a significant “up-charge” to the carrier’s base rate when certain invoicing provisions apply. In this case, when a shipper tenders a shipment to this motor carrier on a “freight collect” basis, or has the shipment billed to a “Third Party” payer of freight charges and neither party has any established pricing with the motor carrier, the following provisions apply.
The carrier will apply the discount that the shipper has in place, however, this carrier now states that it will apply the shipper’s discount ONLY after it increases the carrier’s base rate by a whopping 25%. To put this into perspective, a shipment that would normally cost $500.00 will now cost $625.00 under the aforementioned invoicing provisions.
So with this carrier’s new pricing provision a shipper’s customer will now see their freight costs increased by 25% without any knowledge that this provision has been published by the freight carrier. The only true way to know these provisions exist is to request a complete copy of a carrier’s pricing publication for every freight carrier utilized and to read through it section by section to make sure a shipper understands all of the pricing provisions the freight carrier can and will charge.
If a company does not have anyone on staff that has the technical expertise to read through, digest and make prudent business decisions based on the carrier’s published rates, charges and pricing provisions, it should seek outside consultative services to assist in negotiating its rates and contract pricing provisions. A shipper needs to allow their carriers to make a reasonable profit, but one which will not be financially detrimental to the shipper or its customers.
In fact, all shippers would be well served to have all of their freight rates benchmarked by an outside consultant to make sure the rates they are paying are in fact competitive in today’s marketplace. It’s not a matter of how good a negotiator someone is, but more importantly, if a shipper does not negotiate from a position of strength, (that is knowing every carriers’ cost structure), a shipper will almost always pay more than they should. This will certainly have a negative impact on their bottom line results.
How can a third party consultant greatly enhance a shipper’s profitability?
- They analyze and benchmark transportation cost structures from an “insider’s” point of view
- They understand carrier profit models and internal rate approval processes
- They understand transportation contracts, terms and conditions and what can and cannot be negotiated
- They have the ability to consider all sourcing alternatives to ensure “Best in Class” results
Unfortunately, many companies are content with the status quo; they are afraid to even look at opportunities that may improve their bottom line results. They remain in a “Decision Paralysis Mode”, as they have been for several years now. However, what they fail to realize is that aggressive competitors will soon be “eating their lunch” because they HAVE made a decision to engage Third Party Consultants to improve their bottom lines.
To add insult to injury, shippers are being told by their freight carriers, and specifically the major parcel carriers, that they cannot use Third Party Consultants to negotiate their pricing agreements. What better way for the parcel carriers to ensure they make huge profits.
We would ask however, would you enter into a house purchase and mortgage agreement without having an attorney review the documents before signing? Obviously not, so why would a company sign freight carrier pricing agreements without having a Third Party Consultant who thoroughly understands all the pricing aspects of such agreements? Your guess is as good as ours.
All shippers must be sure their company is not being penalized by any “extreme” pricing provisions that will obviously wreak havoc on their freight budgets. The real question however is, how many really will?