Have you been told by your carrier representative that you have the best pricing in the area? That you negotiated discounts and concessions that no one else gets?
Is the sales rep telling the truth, or is it just a negotiation line? Of course, not everyone can have the best rates. How can you be certain your rates are truly best-in-class?
By benchmarking your program against other shippers.
Imagine how your carrier contract negotiations would change if you knew you were getting the worst incentives in the area; or that three quarters of peer companies had negotiated a discount on a surcharge, the same surcharge the carrier rep told you is never discounted.
The reality is three out of four shippers could improve their transportation discounts by 10% or more. Through rate benchmarking, you gain an understanding what’s truly possible and how your rate programs compare with others. Most importantly, this information will increase the likelihood of negotiating significant improvements to your carrier agreements.
Basics of Benchmarking
The benchmarking concept is simple: Monitor your company’s internal measurements, and compare this data with other leading organizations. Gaps between a company’s actual performance and the performance of industry leaders become opportunities and are utilized to develop improvement plans.
Benchmarking not only includes measuring and improving performance, but also involves the evaluation of progress and trends over time to achieve target objectives. Effective use of benchmarking enables shippers to enjoy an advantage over competitors now and into the future.
Step One: Decide What to Benchmark
Data is at the core of effective benchmarking. In Step One, decide what aspects you need to benchmark, and in Step Two, against whom.
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 (aka 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 versus sourcing with multiple carriers. 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 Two: 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 can be the most time consuming part of the benchmarking process as it 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 ensure 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 illicit 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.
Because there are so many unique organizational variables to benchmarking transportation rates – most notably wide variance in package characteristics, volumes and carrier mix – do not expect to find benchmarking partners comparable in all respects to your organization. It is very likely there is not a “perfect” partner. Don’t worry, if you get enough partners to participate, the data will reveal opportunities to improve your program.
Step Three: 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 and/or conflicting information may require additional discussion.
Step Four: Recommendations/Implementation
Your analysis may have identified a gap between your Ground incentives (35%) and those of your benchmarks (say, 45%). 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.
Armed with benchmarking information, you are now prepared to negotiate similar discounts and terms from the carrier. It is the ability to target a carrier’s rate response that makes benchmarking so invaluable.
Consider shortcomings as both opportunities for improvement as well as watermarks for which to continuously aim. Measurements in which you lead the benchmark group validate your position as best-in-class.
Step Five: Ongoing Evaluation
Step Five entails the ongoing evaluation of the benchmarking processes undertaken and the results of the improvements against objectives. It is 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.
Benchmarking can be a lengthy process. Involve senior management early on to ensure you have resources and the ongoing commitment required to execute strategic benchmarking programs. Be careful not to spend too much time on one part of the process at the expense of other key elements.
Utilize 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. Shippers 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.