Optimizing Transportation Contracts for Improved ROIPosted by: Steve Beda
A Step by Step Guide to Creating and Running a Best-in-Class RFP Process
As the year – and managing its transportation budget – unfolds before us, as we make the difficult decisions where to allocate stretched dollars and apply strategic decisions, one thing is certain. The stop-gap measures and think-on-your-feet ingenuity that helped companies weather a stormy 2020, don’t make for best-in-class operational practices that optimize budgets over the long term. Many companies turned to the spot market and/or performed mini bids to muscle through the tough times last year, and while the spot market will always help balance out primary contracted carriers in certain situations, it’s never ideal for anyone to make unplanned decisions. Instead look at ways now to reset operational practices and deliver better ROI for the road ahead.
In planning 2021, it’s difficult to imagine any one line item that can make as significant an impact on ROI as a well-conceived, well-timed, well-executed and well-managed RFP process for contracting with carriers. But too often that RFP process is labelled as a single action, designed specifically to deliver the best pricing. In reality RFPs support a broader opportunity to re-confirm overall service commitments from your carriers/LSPs, optimize your execution by determining and setting the carrier mix and service selection -- and yes, all at a fair price that aligns with your spend commitment and shipping characteristics.
Redefining the RFP Scope to Start
Think of the RFP process more as contract optimization, an opportunity to assess practices, align all operations and both monitor and measure success. Implementing best in class contract optimization, and the dramatically improved ROI it can deliver, comes down to three core “pillars'' of success. Firstly, the use of historical data analytics and future state objectives along with predictive modeling in decision making; secondly, the modal expertise to untangle the various nuances of contracts within each mode of transport and understand the comparatives when considering carrier partners; and lastly, flawless execution of the entire process. Mastering all three enables the effective design, execution, and measurement of contract optimization to improve your business’ bottom line in 2021 and beyond.
Five Step Guide to Contract Optimization
STEP ONE: MASTERING THE THREE PILLERS OF CONTRACT OPTIMIZATION
Historical Shipping profile - We can learn a lot to guide future contract negotiations by understanding where we’ve been: the terms and expectations we set in place for partners and assessing performance of carriers against those metrics. Historical data, of course, isn’t an absolute yardstick. Sometimes market conditions and other performance influencers will be particular to a given time period – for example, navigating the logistics challenges of a global pandemic and the decisions that resulted from it. In general, however, historical data is an excellent starting point on which to build an understanding of transportation spend detail. Remember, not all data is rich or robust. Less mature shippers often rely on shipping and performance data provided directly from their carriers, which obviously comes with extreme limitations and can be inconsistent in format from carrier to carrier. For best-in-class historical data collection and analysis, which enables smart, data-driven decision making, it's essential to collect and analyze actual FAP data which contains charge details (such as accessorial charges). This provides the most robust and accurate information for modeling, which in turn allows shippers to gain a clearer picture and better understanding to negotiate the best (and appropriate) contract rate, terms, and conditions from the onset. Without FAP as a primary data source as well as the master data management technology and processes to analyze it, collecting data becomes a labor intensive and significant, manual exercise.
Future State - Prior years’ data is important to identify efficiencies – and inefficiencies, to pinpoint performance patterns and trends that will impact future operations but using predictive modeling to build a future state will help identify – and plan for – coming changes to your needs and operating practices. What are the growth plans for your business? Do you need to execute differently against residential and commercial deliveries in the coming year or years? Will there be changes to your inbound or outbound shipping or potential network changes to warehousing and distribution?
Ensure you consider all influencers to build as accurate a future state as possible for the year ahead which will guide you today when you negotiate contract terms, discounts, rates, terms and other conditions.
Constraints - Identifying constraints is a crucial part of the predictive modeling process, and ultimately how you will execute your operations for the year. Without considering them, any model will be hypothetical. Constraints come in many forms: technology (WMS, routing); service related; customer routing mandates; time in transit objectives (a need to ship parcel to residential customers within 48 hours); temperature controlled transportation requirements; or constraints specific to a carrier, where a partner carrier may not deliver to certain target geographic areas, or by the zone or lanes required. Certain constraints effectively “road block” an optimal state and will continue to create inefficiencies until addressed. Factor all, whether market condition, carrier or technology related into your modeling now, knowing that 2021 may carry constraints, but if addressed, future years may be constraint free. Ultimately, your final award scenario should represent a realistic yet optimal outcome of the RFP process.
STEP TWO: UNDERSTANDING CONTRACT TERMS AND NUANCES
Contracts can be extremely complicated, nuanced and written using terms and language specific to mode and even carrier. As a shipper negotiating contracts with multiple partners, it’s essential to fully understand language, terms, conditions and specific penalties that may be levied (and affect the final pricing) in order to set your contact optimization project on the best possible footing.
Consider this: do you have the kinds of expertise to review and assess contract terms in-house or does a third-party partner make sense? A specialist third party will help assess things like market and individual carrier capacity, port congestion and regulatory changes in the coming year, all of which will impact execution and carrier fulfillment against contract. It is impossible to drive real ROI without excellent performance from your partners, so ensuring you have the ability or partner in place to systematically measure carrier capabilities during vetting and selection will pay huge dividends down the line.
Comparatives are important whoever manages the evaluation process – assessing and comparing RFP bidders against one another for capacity, capabilities and other performance metrics. Using various third-party information sources will also help you evaluate your RFP relative to market conditions, specific carrier performance, and cost per KPI averages - all independent of responses within the RFP itself. Understanding all of this will help you view the negotiation from different points of view and could provide valuable insight.
STEP THREE: PROPER EXECUTION OF THE RFP
Number of RFP Bidders – when considering the number of bidders to your RFP, first assess your incumbents. Are your current carrier partners executing consistently and are they delivering a quality service? If so, they should be invited to the RFP. As far as new bidders, careful selection is important as too many can create unnecessary work effort with little, or no, ROI. Factor in the most appropriate carrier service criteria to execute your go forward state. Does one carrier offer geographic coverage in areas where you have gaps or weaknesses? If a carrier’s technology usage and data standards align with yours, if they have deep category or lane experience, or specialty services in a single industry profile, they could also be excellent RFP bid candidates. If you are working with a partner on freight data management, there could also be efficiencies in leveraging their broader network and knowledge of carrier partners and their specific capabilities which can save time, effort and better align bidders before actual RFP responses.
Standardization and Management Tools – with multiple bidders across regions, countries, transportation modes and industry profiles, standardization of how a carrier formulates and submits their bid isn’t just a good idea, it’s essential to an efficient level-playing-field analysis of offerings. Bidders must adhere to a standard set of defined elements including mode of transportation and criteria including ocean port codes, IATA codes, for FTL, origins/destinations, parcel, zones and services as well surcharges and respective code values. Equally important is a standardized understanding of rates, terms and conditions including the term of contract, rebates, surcharges, minimum commitment, rate base, multi-class FAK (Freight All Kinds) rates for LTL and more.
Enforcing standardization isn’t easy. It’s common for a bidder to go “off book”, ignore submission guidelines, in part, and submit data in a format that works for them but may not match your own data management requirements or standards. To create a level-playing-field where all carriers understand definitions and contract terms equally, and submit consistent data, it’s important at this stage to consider the use of a technology tool. Productization of the submission process will enforce consistent data entry and format, enabling efficient, accurate and compliance-based analysis of the submissions for better informed decision making.
The use of a sophisticated technology tool is important and helps with key components of executing a best in-class RFP. Various generic procurement tools are available that can be “fitted” to work with transportation RFPs, but in reality, a better choice is technology designed to handle global, multi-modal transportation contracts and which tie directly to historical FAP data. This enables efficient population of things like the number of shipments, total weight, use of services, and any element that influences actual rate which is important to share with the bidder.
The typical RFP process is rarely a one-and-done scenario. They can be lengthy, multi-round communications which need to be recorded and managed accurately and consistently. The best tools will also help create role based collaboration, combined document and rate management as well as simplify the approval/rejection and revision management steps of the process. They are essential for tracking bidder requests, shipper feedback and implementing a scorecard rating and ranking procedure that can greatly simplify the process of carrier comparison. Using a scorecard to rate bidder capabilities, services and offerings will help you rank their responses in terms of quantitative elements such as pricing and frequency of on-time delivery as well as more qualitative assessments such as support and long-term carrier strategy.
STEP FOUR: RFP TIMING AND CYCLE MANAGEMENT
Those multiple rounds of questions, requests and revisions mean the usual RFP process can last 4-5 months, from initial preparation, to executing the RFP and post RFP change management. So, when you issue the RFP in the year and carrier business cycles can be just as important as how. In some specialty industries like retail, timing can be all important, with few carriers appreciating, or being able to respond to, a lengthy RFP during peak season or annual spikes for example. As you begin to settle on an issue date for your RFP consider market conditions, capacity and any other constraints. Sometimes a constraint may be simply technology-related, requiring the addition of a carrier to your technology system enabling appropriate bid submission.
STEP FIVE: COMPLIANCE AND ASSESSMENT
An important and often overlooked phase of the RFP process is measuring and assessing ongoing carrier compliance against your initial goals. Traditional carrier procurement tends to stop with a contract signature and it is assumed that everything promised in the contract was delivered and that the best possible prices were met. Contract optimization really requires a full assessment of every carrier and their performance, which can be daunting and difficult when some contracts require multiple, or hundreds of carriers across the world. A good Transportation Spend Management partner can help significantly here with the entire rate procurement and management lifecycle.
KPIs are the best way to chart carrier performance using a variety of metrics. Use cost per shipment and/or cost per unit weight to measure performance against allocated budget and consider other influencers too in your assessment. What are the other factors that created variance from your initial goals and operational plan? Could they have been predicted? Were constraints missed or overlooked? Don't wait until the end of the year to assess KPI’s and influencers. Doing this will tell you what happened, but only regular measurement and monitoring on an ongoing basis will allow you to identify early variance, spot potential or emerging issues and course correct while there is time to stay on budget and on track with your ROI and business goals for the year.