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Research & Surveys

Transportation Sourcing: Best Practices

Author(s):

RaeAnn Slaybaugh


November/December 2011, eSide Supply Management Vol. 4, No. 6

A new study hones in on the characteristics best-in-class transportation procurement organizations have in common.

The third annual American Shipper study on transportation procurement practices shows that shippers are starting to look at more than just price when they select carriers to move their freight, according to Jim Blaeser, publisher.

Produced in cooperation with the Retail Industry Leaders Association (RILA), the resulting report — Transportation Procurement Benchmark Study: In Search of Value — gauges the responses of 325 transportation buyers and sellers to a 40-question questionnaire. It zeroes in on the best practices of the 2011 "winner" (best-in-class) companies, which represent about 10 percent of the total study population.

The majority of best-in-class organizations were retailers, which comprised 51 percent. Third-party logistics providers, or 3PLs, represented the second largest faction at 23 percent.

What Makes a Winner?

The study uncovered several shared characteristics among best-in-class organizations.

They kept contract freight rates equal to or lower than 2010 levels. While three-quarters of survey respondents reported rate increases — 12 percent saw dramatic double-digit jumps — best-in-class companies kept their average contract freight rates across their supply chain stable, or lower, in 2011 versus 2010.

Plane, Boat, Ship: Computer keyboard with special transportation icon keys.

"Bear in mind this is an 'all-in' view covering many modes and geographies," Blaeser points out. "Anecdotal evidence suggests that rates have fallen on some key ocean shipping lanes in response to supply and demand imbalances, while U.S. domestic truckload rates are increasing rapidly in response to a possible severe capacity shortage."

They effectively measured price, service and risk associated with carrier bids. The results found that best-in-class companies carefully considered all aspects of a bid — including risk — to ensure they contracted with carriers that could reliably deliver sufficient capacity and service.

"When shippers sign contracts based strictly on the lowest price available, they often get what they pay for: poor service that has far-reaching consequences, including many hidden costs," Blaeser explains.

They implemented newly awarded contracts within two months. About half of all survey respondents reported their negotiations took three months or longer this year, compared with 38 percent in 2010 and 31 percent in 2009. Best-in-class companies, however, implemented bid results quicker and more effectively, with more than 70 percent of their bids implemented within two months of contract finalization.

As Blaeser points out, 3PLs performed particularly well in this area, as expected. "To their credit, [3PLs] don't waste any time putting these contracts to work," he explains. "Manufacturers and retailers appear to move a little more slowly when putting their contracts into action."

They subscribe to a centralized procurement strategy. According to Blaeser, a centralized procurement model allowed best-in-class companies to achieve lower rates, while maintaining command and control over supplier compliance. "Study after study demonstrates the benefits of a centralized management approach, and this study is no different," he asserts. "Centralization of the procurement process is undeniably a best practice."

Nearly all best-in-class organizations (94 percent) managed their procurement process centrally, compared with 79 percent of the study average. As Blaeser points out, this trend demonstrates a modest increase for 2010 — but an increase nonetheless.

Centralized buyers are more likely to fend off rate increases or keep them to a minimum, depending on the prevailing market conditions, Blaeser continues. "These buyers are pooling their volumes into one place and leveraging the total size to negotiate better rates. Not surprising, but worth noting, as this is commonly cited as the key benefit of centralization."

The complete report can be downloaded at the American Shipper website.



RaeAnn Slaybaugh is a writer for the Institute for Supply Management™. To contact this author, please send an email to author@ism.ws.

For more research and survey findings, visit the ISM articles database.

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