Match Shipper Lanes to Carrier Sweet Spots

Once the lane structures are defined, the largest and the most frequently missed savings opportunity comes from matching shipper lanes with carrier sweet spots. To succeed, the shipper must have an understanding of carrier economics. While the costs of operating a tractor trailer unit on a lane varies from carrier to carrier (based upon driver pay, maintenance, and fuel optimization), the single largest factor is the carrier's empty miles.

One way for the shipper to avoid paying for empty miles is to invite a large number of new carriers into the bidding process and sourcing the entire shipper network at one time. While the “right” number of carriers depends on the specific situation, I typically recommend inviting one carrier for each $500,000 in spend.

Moreover, involvement from new carriers is an important element to finding the best rates. I usually recommend that one-third of all invited carriers be new to the client. This will optimize the potential for matching shipper lanes to carrier sweet spots. One company increased savings by more than 70% compared to traditional sourcing techniques. The entire project saved the client $28 million: $11 million from the introduction of new carriers to the network. An additional $9 million came from incumbent providers being awarded lanes at other locations they previously didn't know existed.

This situation is common with shippers that source their transportation for each shipping location separately. When the entire network view is provided to carriers, they frequently find opportunities to expand into other locations and improve their partnership with the shipper.

Keeping Your Empty Miles Low

“Empty miles” are the miles driven between drop-off and pick-up of loads for which the carrier is not being paid. Consider carriers A and B, both with an operating cost of $1.50/mile for a 500 mile lane. Carrier A, with only 10 empty miles to pick up the load, needs only $765 ((500 + 10) x $1.50) to cover its costs, while Carrier B, with 50 empty miles to pick up the load, needs $60 more, or $825 ((500+50) x $1.50) to cover its costs. That $60 per load difference ($825 minus $765) creates a 7% price advantage for Carrier A. Effective strategic transportation sourcing will maximize the use of carriers with low empty miles, such as Carrier A.

Use All Levers Simultaneously

For best results, all of the strategic sourcing levers need to be used simultaneously. To maximize savings, while improving service, requires a careful balancing of the shipper's needs with the carrier's capabilities. The best method for finding this optimal balance is through the use of scenario-based optimization tools. Currently, there is a number of transportation sourcing tools in the market that allow for “what-if” analysis of multiple solutions.

The lane requirements and carrier proposals are loaded into the optimization tool with a clear definition of the shipper's needs. These needs include constraints and service requirements, such as maximum carriers per location, turnover limitations, and specific lane-level service requirements.

The optimization engine then provides the optimal award allocation and scenario analysis reports, including solution summaries (total savings, number carriers, etc.), solution details (network, lane, and carrier awards), and operational impact reports (carrier impact, turnover ratios, and carriers per location). These reports provide information the team needs to review the award scenario and identify potential changes to improve service or reduce operational risks.

At this point, it's possible to identify new constraints or areas that should be negotiated with carriers. Once the new constraints and updated carrier proposals are loaded, optimization and scenario analysis is rerun multiple times to fine-tune the solution and find the optimal award scenario. Careful management of carrier negotiations and implementations will help realize long-term savings with minimal operational risk.

In summary, today's transportation marketplace has created opportunities for rate reductions, and a comprehensive approach to transportation sourcing can boost these savings while improving service. The approach I outlined above leverages the market and identifies further opportunities for shippers to reduce costs by deeper collaboration with carriers. This focus on operational improvements and carrier-shipper collaboration will ensure that all opportunities are fully leveraged, delivering lasting results.