SHIPPING: External rate benchmarking

Abstract

Despite what your parcel carrier representative tells you, you could probably be getting better pricing. How can you be certain your rates are truly best in class? Try benchmarking your carrier rates and services against other shippers. It works. For instance, your carrier contract negotiations might go a little differently if you knew you were getting the worst incentives in the area. Or you might have more leverage if you know that three-quarters of peer companies had negotiated a discount on a surcharge - the same surcharge the carrier rep told you is never discounted. Most shippers could improve their transportation discounts; rate benchmarking helps you understand what's truly possible and how your rates stack up against others. So how do you start a benchmarking program? Benchmarking is simple: Monitor your company's internal measurements and compare this data with other top organizations. The gaps between your actual performance and that of industry leaders are where you need to improve. You need to evaluate progress and trends over time to achieve your target objectives.

Despite what your parcel carrier representative tells you, you could probably be getting better pricing. How can you be certain your rates are truly best in class?

Try benchmarking your carrier rates and services against other shippers. It works. For instance, your carrier contract negotiations might go a little differently if you knew you were getting the worst incentives in the area.

Or you might have more leverage if you know that three-quarters of peer companies had negotiated a discount on a surcharge - the same surcharge the carrier rep told you is never discounted.

Most shippers could improve their transportation discounts; rate benchmarking helps you understand what's truly possible and how your rates stack up against others. So how do you start a benchmarking program?

As we discussed in the article "Benchmarking transportation rates and services" (February issue), benchmarking is simple: Monitor your company's internal measurements and compare this data with other top organizations.

The gaps between your actual performance and that of industry leaders are where you need to improve. You need to evaluate progress and trends over time to achieve your target objectives.

Effective use of benchmarking enables shippers to enjoy an advantage over competitors now and into the future. Here are five steps to an external benchmarking program.

STEP 1.

DECIDE WHAT TO BENCHMARK

You need to start by deciding what aspects you need to benchmark before you determine against whom you'll benchmark.

There are many free or low cost online tools to compile data and survey benchmark partners. Select a tool, then develop a survey 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.

Develop questions regarding incentives by service level and weight breaks. Moreover, benchmark questions should seek to identify specific accessorial concessions, rebates, earned discounts, fuel surcharge discounts, guaranteed service refunds or performance threshold incentives, bonus weight (a.k.a. unlimited weight letter) programs, caps to annual rate increases and other carrier incentive programs.

The survey should include questions about package characteristics and/or distribution patterns. Benchmark metrics such as zone, weight, delivery density, parcel dimensions, common package dimensions, commercial/residential mix, express/ground percentages as well as inbound/outbound percentages.

Establish carrier mix to better understand the impact of single sourcing vs. sourcing with multiple carriers. (For more on this, see "Single vs. multisource parcel carrier services" in the April issue.)

The survey should also identify annual expenditures, revenue bands, rolling averages, contract length, payment terms and any other important factors for consideration.

Before finalizing survey questions, seek the input of potential benchmark partners. They might identify survey questions that you missed that can enhance the value of the benchmark data.

Other resources include industry associations, networking groups, research studies and white papers, consultants, universities, government data, industry periodicals, libraries and online databases.

STEP 2.

IDENTIFY BENCHMARK PARTNERS

Now that you know what you'll need to benchmark, identify other organizations within and outside your industry as potential benchmark partners. This may take several conversations and multiple levels of approval to gain commitment from benchmark partners.

The value for benchmarking partners, of course, is access to the same benchmarking information your organization seeks. Guarantee that all data will be kept anonymous, and that all benchmark partners will receive comprehensive results at the conclusion of the study.

Share the survey questions with potential partners whether or not they commit to participating. Well-designed questions that elicit responses in wide areas of rate and service benchmarking should inspire participation amongst your peers within each benchmark organization. If not, thank them for their consideration and politely move on to the next potential partner.

With so many unique organizational variables to transportation rates - most notably wide variance in package characteristics, volumes and carrier mix - don't expect to find benchmarking partners comparable in all respects to your firm. You're not likely to find a "perfect" partner.

But don't worry: If you get enough partners to participate, the data will reveal opportunities to improve your program.

STEP 3.

DATA MAPPING

Compile and map data for each survey question to identify mean and median values. It is often helpful to chart the data within quadrants. Lower quadrants reveal companies below the market; middle quadrants reflect market averages; and upper quadrants demonstrate best-in-class components.

Segment the data to enhance comparability of peer groups. For example, shipment volume and expenditures have a significant impact on carrier incentives. In general, volume shippers have better rates than infrequent shippers.

Apart from volume, package characteristics can widely affect carrier pricing. Segregate data for benchmark partners reporting similar package characteristics - like residential shippers - to enhance the value of the survey results.

Be sure to forward benchmark results to partner organizations. Data anomalies or conflicting information may require additional discussion.

STEP 4.

RECOMMENDATIONS/IMPLEMENTATION

Your analysis may have identified a gap between your ground service incentives and those of your benchmarks. Other gaps might include contract terms and specific accessorial concessions.

Once you've identified tangible opportunities for program improvement - those areas in which your company's results are well below comparable benchmark partners - develop a plan to pursue the contract components that will provide the greatest positive financial impact to your shipping costs.

This benchmarking information better prepares you to negotiate similar discounts and terms from the carrier. The ability to target a carrier's rate response is what makes benchmarking so invaluable.

Consider shortcomings as both opportunities for improvement an as watermarks for which to continuously aim. Measurements in which you lead the benchmark group validate your position as best in class.

STEP 5.

ONGOING EVALUATION

You have to keep evaluating the benchmarking processes undertaken and the results of the improvements against objectives. It's important to document success criteria, plus overall efficiency and effectiveness, in order to accurately gauge whether your company is, indeed, obtaining its objectives.

In the case of transportation rates, quantify cost reductions realized as well as the savings potential if a gap still exists with best-in-class programs. Best-in-class programs evolve over time. Work with your carriers to establish ongoing rate improvement goals, and include the non-incumbent carriers to promote market-based competition.

As with any benchmarking, involve senior management early on to ensure that you can afford and are committed to executing strategic benchmarking programs. Use benchmarking results wisely by implementing the improvement programs that make the most economic sense to your company.

Shippers within all pricing quadrants benefit from solid transportation rate benchmarks. Those in the lower quadrants should significantly improve their carrier pricing, while shippers with best-in-class pricing programs can focus on other areas of their operations, knowing they have secured the best transportation rates available.

Rob Martinez ( [email protected] ) is president/CEO of supply chain consulting firm Transult.