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Logistics Quarterly Magazine - Volume 16, Issue 2, 2010

LQ EXECUTIVE INSIGHTS CITT Icon

How Do You Mitigate Risk and Invest in Outsourcing Your Transportation Requirements?


You’re meeting with the CEO of one of your stellar carriers. The CEO has some troubling news to share; it’s crunch time and they need to renegotiate their contract with your firm. What’s your best course of action?

CITT column - Case Study

Following one of the most challenging years in business, the CEO of a long-time carrier invites you to meet with him. When the pleasantries are over, he gets down to business. The last few months have been particularly tough on his company, and it’s possible the future of his firm is in peril if current business trends continue.
You have been putting pressure on keeping his rates down, as has everyone else, and it’s now known that the CEO’s transportation company has been compelled, in at least a few cases, to take on business that does not cover their costs.

Like thousands of other companies in the field, they require a substantial rate increase across the board to keep their company afloat. How do you respond? Do you quickly end the meeting and redirect your freight to other carriers, thereby precipitating their failure, but ensuring none of your freight gets sequestered in bankruptcy proceedings? Do you discuss what it will take to keep them afloat, and compute what it will cost or require your firm to invest in their services? What concessions will you try to get, and how will you sell the new deal to your management? Do you refocus your freight with them on lanes that have excellent economics so that they can quickly pull out of their slump? How do you deal with the other lanes? Do you maintain the status quo but diversify and use more transportation providers as a result, or do you invest more in this carrier and develop a deeper business relationship to mitigate risk and realize new value?

Advice from Practitioners in the Field

Ginnie Venslovaitis, CITT, Director, Transportation Operations, Hudson’s Bay Company
If this carrier is a true partner, has been a stellar carrier for my business and provides great service, the opportunity to keep his business afloat is definitely an important goal. Keeping carriers in business is good for competition and providing service and alternatives to shippers.

Depending on the size and scope of his volume and lanes to my overall transportation budget I would consider the following process. The initial discussion would likely involve a review of how the carrier found himself in this situation; could it be attributed to the economy, union contracts, another customer’s bankruptcy, etc.? In other words, it was not a result of the company’s mismanagement or poor decisions that led to this crisis.

Once we have established a general cause, let’s look at the CEO’s turn-around plan. I would want to see that there is more in the turn-around plan than just asking everyone for rate increases. What has the company done to reduce their internal operating costs? Is the fleet the right size, have assets been sold off or leases terminated? Have all these issues been brought forward to the managers and even the employees and drivers to allow them an opportunity to understand and appreciate the situation and examine ways to reduce operating costs? If this has been done and there is an action plan in place, and rate increases are a part of the plan to close the gap, I feel this carrier is likely worth supporting.

Next, I would look at what lanes can be supported with a rate increase. Are these lanes undervalued and therefore a rate increase is in order, or are the rates requested substantially over market value, based on benchmarking? Is there an opportunity for me to change my business processes, delay in loading, or time-of-day shipping to be more efficient for the carrier and thereby reduce additional costs for his operations? What collaboration can we find to reduce his costs without increasing mine?

Once a rate increase is determined to be appropriate, I would calculate the financial impact to my overall transportation budget based on the proposed volume and the new rate. Could this increase be offset by other cost savings initiatives that I have in place and is my total budget still intact? If so, I have no obligation to senior management to discuss a specific lane rate increase.

Another avenue to explore is the aging of invoices. If my payment terms were 30 days, would shortening payment terms to 15 days change any cash flow or bank obligations for the carrier? I would expect to have monthly reviews with the CEO via a quick phone call meeting to assess his current situation. I would ask my company’s receivables group to monitor the Dun and Bradstreet reviews on a monthly basis. In the fullness of disclosure, I would also advise that this situation is under high scrutiny and I will be looking for a back-up carrier to be in place in the event of a complete failure. Potentially, I am putting my company at risk and I want to be assured there is full visibility for both parties.

Andrew Paxton, CITT,  Vice Chair, Development, CITT Board
I would want to begin by knowing what it would take to keep them going and ask about the root of their financial problems.
Why are they in financial trouble? Is it mainly due to customers paying below market value or are there other factors? I would also ask the CEO where we rank as a customer and who his key customers are. I would ask for a financial guarantee. I would then explain that I need to review with our management team and will set a future meeting date after our management team’s review of the circumstances.

The CEO has likely been upfront with me in this situation, but I need to verify the facts by talking to some of the other key customers and performing a credit check on the carrier. I would review my carrier base and verify if the carrier is being paid below market value. If this is true, then there is a strong case to grant a rate increase. If I am a smaller client I need to know if other clients are going to do the same, otherwise the impact of my increase will be negligible.

If I have established that we are a major client of the carrier, we can likely grant an increase (but not overpay), and if the CEO will put up a bond I would probably present to the management team — and make a compelling case as to why we should continue to do business with this carrier and work to establish a stronger business relationship.

Ajay Gupta, CITT, Director of International Supply Chain Logistics and Operations, Sterling Agility
This is a tough business situation to be in. First, I would want to develop a deeper understanding of where the carrier CEO is coming from, including whether the situation is close to being salvageable or near bankruptcy. This is important in order to assess my business risks.

My primary inclination is to assess what is needed to keep them afloat and proceed to work with them as a true partner. So, I would consider a rate increase — a negotiated one — while being mindful of a pricing arrangement that is sustainable in the market. If this carrier cannot make a living at the rate I pay them, chances are neither can any other carrier.
Any rate increase agreed to would be time limited, with a clear understanding of re-visiting the pricing to current and/or more competitive levels.
In return, I would ask as to what the carrier would do to work with us in order to streamline processes and reduce costs and improve efficiencies for both of us, thereby lowering the costs for both parties — in the short-to-medium term.

Splitting the loads/lanes should be the last option; it is not an optimal solution for either the carrier or our firm, in my opinion.
In parallel, with these steps, I would likely create a monitoring mechanism; a team consisting of Finance, Operations, and Procurement (and, possibly, Customer Service) would be charged with keeping a close watch on the carrier’s performance, reporting regularly and raising any red flags in short order. Also, I would initiate, in parallel, the process of assessing alternatives and coming up with a focused risk-mitigation strategy.

Valerie McSween, CITT, Vice President, Eastern Region, Mactrans Logistics Inc.
Every carrier has developed core lanes for which they seek to balance the inbound and outbound flows with the objective to reduce empty mileage. With excess capacity consequent of the recent economic downturn, carriers may have been tempted to take on any business opportunity, outsourcing the volumes that they could not handle to other carriers afterwards.

As a first step, we should go through each lane with the carrier to determine which movements are profitable for them. A benchmark comparison should be completed for the lanes requiring a rate increase to determine if they are undervalued or well above the market rates, which would initiate a diversification of our volumes amongst other transportation service providers. In removing some of our volumes from their trucks, we should also consider our carrier’s key lanes to determine if we have other movements, currently handled by other transportation suppliers, that we could allocate to their operations.

Measuring each carrier’s core competencies can be a difficult and tedious task. Before spending an important amount of time meeting with several other transportation firms, we should consider outsourcing the transportation selection function to an expert in the field. An experienced third-party logistics provider will know precisely the strengths and weaknesses of transportation providers and have carrier profiles for those who specifically meet our needs.

If we are dealing with LTL shipments, in addition to knowing precisely which lanes each carrier seeks to increase freight volumes on, a third-party logistics provider will also have the knowledge and expertise required to determine which transportation firm specializes in smaller and/or larger LTL orders, for each of our lanes. For freight that cannot be cross-docked, they will also offer reduced pricing by combining with other clients’ freight, thereby offering volume economies on direct drive services without the costly truckload pricing.

Outsourcing our transportation function to a strong 3PL, whose core business is transportation, will enable us to profit from the strength of each individual carrier. It will also allow us to benefit from a volume economy, a single invoicing process, superior customer service and the flexibility that comes with not being restricted to a specific fleet of equipment.

A professional 3PL will encourage us to pursue business with our current carriers, if it makes business sense to do so. Our carriers will also profit from the third-party operations who will work with them to increase freight volumes on lanes required to obtain a balance and reduce empty mileage.

This CITT column has been prepared with insights from members of CITT’s Board: Ginnie Venslovaitis, Director, Transportation Operations, Hudson’s Bay Company; Andrew Paxton, Vice Chair Development, CITT Board, Ajay Gupta, Director of International Supply Chain Logistics and Operations, Sterling Agility; Valerie McSween, Vice President, Eastern Region, MacTrans Logistics Inc., and LQ’s Executive Editor, Nicholas Seiersen.

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