In the last two months, I have spoken with representatives from ten transport companies. Within this group, there are subsets of road and rail freight service providers. Some offer service using both modes. The majority of businesses interviewed offer national delivery coverage but regional players were also included. These validated opinions on issues and trends whilst adding interesting individual flavour.
The language of the transport industry necessitates an interpreter for the uninitiated. In this world, you have to contend with mermaids; double ones with hairdryers on your windscreen (although it’s preferred when they are busy doing a job on a little one); and company names that mutate to “The Drunk Budgies” and “Egg and Lettuce”. Pity the poor supply chain professional charged with the responsibility of identifying and delivering transport cost savings.
Increasing fuel costs are focusing the attention of transport providers and their customers. As transport providers shut their doors, the supply base consolidates and moves away from marginal costing. In-house costing models are being revised to ensure that all costs to serve are accounted for. In driving to improve profitability overheads associated with PUD fleet (pick up and delivery), line haul and handling are receiving separate focus. Whilst the wish is for 10% margin, the aim is to achieve 6-7% EBIT (earnings before interest and tax). National customer contracts may have variations in leg margins from 2-16% but the weighted average must achieve the above. Whilst transport companies are reviewing internal cost models, their customers are also revisiting their supply chain models. For customers, the cost assumptions underpinning the design of their warehousing and distribution networks become invalid. Prior decisions on closure of West Coast warehouses and regional warehouse location may have been different based on today’s fuel prices and economic viewpoint.
What transport companies look for in an account and what an account looks for in their transport company are quite different. The key attributes are misaligned.
What does a transport company look for in an account?
New customers need to be long term, sustainable and consistent. Sustainable customers are prepared to accept a reasonable rate and will thus yield a profit. Consistent accounts allow balancing of capacity of existing equipment and assets. This is achieved in a number of ways. Some carriers leverage business based where their head office is based. Others focus on companies who provide good backload opportunities or can address an existing backload gap. The capability to fit this criterion is assessed by looking at a prospective customer’s freight history. A full 12 months of back history is preferred.
When seeking new business, prompt payers are highly valued. With tight cash flow, 14 days is ideally sought but the accepted average is closer to 30 days. Where freight is palletised, good pallet management practices are also important. A proven history of completing Chep pallet transfers within 30 days, will earn a tick.
In seeking customers to generate interstate linehaul volume, most of those interviewed focus on high volume, full vehicle load opportunities. Customers with this freight profile are preferred over those with part load deliveries. At the other end of the volume market are the consolidators. Consolidators aren’t interested in full loads; they make their money by consolidating many deliveries.
For smaller regional transport companies offering local distribution, where your freight is predominantly part load, they may ask about flexibility in delivery time – a day leeway either way. Multiple local pick-ups and drops can also be a disincentive, attracting hourly rather than fixed rates.
The larger service providers apply a hurdle rate for prospective new customers. Whilst there is some greyish variance around this barrier, it sits at a spend level of about $1,000 per week. Accounts are also categorised by expected revenue (A, B and C class). Where these classifications are applied, there is a direct correlation with rates. The higher the classification, the larger the discount offered. The smaller service providers do not apply hurdle rates but rely on sound credit checks and the acceptability of reasonable rates.
There is a broad aversion to “ugly” freight but the definition is equally broad. Ugly freight can be defined as out of gauge / oversize, very heavy, very light, dangerous goods, or even freight that is likely to cause damage to other freight. Certain carriers won’t handle “smalls” (cartons) because they don’t have the infrastructure, neither the handling equipment nor the right fleet, to handle these efficiently. Others won’t handle anything that won’t fit a standard pallet or isn’t a carton or isn’t packaged, for much the same reason. Over-sized freight is generally avoided as it is difficult to consolidate with other freight and vehicle utilisation is reduced. Uncrated machinery and paint are considered materials likely to damage other freight. Some products have a high likelihood of damage where specialized handling equipment is not available. Some examples are whitegoods (need grabs instead of tynes on forklifts) and carpets (which need a carpet spike for handling). There are some carriers that choose not to manage certain product categories, for example prescription drugs, due to the loss and security risk. These areas provide opportunity for niche carriers.
Potential new customers are often identified through market intelligence; knowing where there are holes, who is being let down at the moment and is therefore vulnerable. Transport providers understand that tenacity and a long lead-time are integral to the process of acquiring a new major account. They prefer more business from an existing customer than going after new accounts.
What does an account look for in a transport company?
Credibility, capability, price and value added services are listed by customers as key attributes in reviewing potential transport providers. A growing business will look for a service provider that can grow with them.
In assessing credibility a prospective customer will ask, “Have you done this before?” and “What is your track record?” They will ask for references and expect to be referred to a range of existing customers. Transport reputation is important for all service providers but more particularly for smaller players. At this end of the market a customer approach is often as a result of a recommendation and the need to fix current service failures. Customers used to look for the cheapest price per route but now they tend to look for strategic alliances. This change is driven by a better understanding of the cost of operating with a high number of peripheral businesses (multiple transport and warehouse providers). It is also driven by the high variability of service the customer’s customers often see from a fragmented freight solution.
Customers want to verify that there is sufficient equipment to service their business. Increasingly they are asking for specific details of equipment, fleet and depot facilities. There is also an awareness of the importance of the break up of fleet between company owned and subcontracted. Some customers are asking for this level of detail. This interest is being driven by focus on service standards and perception of control issues. From a cost perspective, rates are determined in a different way between company owned and subcontracted fleets and although there is strong correlation there are also interesting variances. The rates paid to subcontractors from Sydney to Brisbane have increased by 30% in the last 3 years.
Prospective accounts ask about the transport company’s ability to manage book-in of goods with the customer. This requires additional resource and procedures defining responsibility for the transport provider. On-line access to proof of delivery is expected and it needs to be timely. A query on a delivery most often occurs within 24 hours of the original delivery time and cannot wait for paperwork to be returned to the depot; on forwarded to the head office and eventually scanned and uploaded. This is where real time systems provide a competitive advantage. Satellite tracking of equipment is most beneficial for a carrier’s internal management of operations but also resolves many arguments. Disagreements, from actual delivery timeslots achieved to journey temperature of a rail box across the Nullarbor, can be settled with facts. The need for data capture is extending, with enquiries covering the capability for interfacing between the carrier’s information system and the customer’s enterprise resource planning (ERP) system, to provide full visibility of delivery performance. This task is simplified when the account and transport company operate on the same ERP platform.
Robust exception reporting systems are required to alert delivery failures and damage. Notification of problems must come from the transport company before goods reach the customer. As a supplier, you don’t want to hear about it first from your customer! Communication and information on issues impacting service is important for the credibility of all parties in the supply chain. It is better to over communicate than have too little information sharing. A formal communication from Pacific National on the impact of flash flooding on the intermodal line at Whyalla, with accompanying photos, is a powerful tool in achieving cooperation from customers to reschedule deliveries.
In changing service provider, transport’s view is that the customer is looking to hold cost in year 1 compared to last years cost, with saving achieved in peripheral areas. Where there is also consolidation of service providers, volume will be leveraged to achieve savings in freight spend. Savings in labour costs are also expected as staff is no longer required to manage as diverse a range of interfaces in transport and warehousing.
Price and reputation are the initial attracters for a customer but they will only stay if the service delivers to their expectations. Retention is all about service. The reality of delivering to delivery windows is important to the Logistics Manager. The service provider must be flexible enough to work with the customer to get through the issues. Strong relationships across all functions, not just between operational staff, drive customer satisfaction and high standard of service. Transport providers are becoming aware of the benefits of nurturing these multi-point / multi-dimensional contacts with their accounts. Large accounts that hinge on individual relationships have been lost when key personnel moved on.
Proactive sharing of knowledge on freight profile, route and equipment options is also important in retaining customers. Identifying changes in the customer’s freight profile can suggest a new rate structure (e.g. moving from carton rates to kilogram rates because the customer’s average carton has become smaller). Bringing opportunities to a client with various lead-time and cost tradeoff options further supports this partnership style relationship. Road, rail and coastal freight rates make for interesting comparison. Bringing saving opportunities to a customer can reduce their need to go in search of these savings amongst transport competitors.
When is a Space not a Space?
So once you have a clear understanding and perspective from both sides of the fence, it should be a simple matter to compare competitive quotes or tender responses. Wrong. A generic rate request from “Joe Public” to 9 service providers will result in 9 results in a confusing array of sets of data and formats – various units of measure, break rates steps, fuel surcharges and service aspects included / excluded. The challenge of an apples and pears comparison is before you.
Rates may be in kilograms, kilograms with a volume ceiling, pallets, spaces, cubic metres or cubic metres with a weight ceiling. Even where comparing a single space rate between competitors, closer enquiry on their definition of a “space” yields another difference. Some carriers continue to define this as 1.2 x 1.2 x 2.4m whilst others have revised this to 1.2 x 1.2 x 1.8m. Given the impact of this variance, it pays to check. Break rates, to incentivise larger loads may be applied, but again the level of granularity is not consistent. What constitutes a full load also draws various definitions. Depending on the carrier and their primary mode of transport, a full load may constitute a semi-trailer, B-double, 20’, 40’, 40’ high cube or 48’ container, where maximum dispatch weights apply.
Rates are generally capital city metropolitan region to capital city metropolitan region. Where a delivery point is regional and not included in the quote or tender, it will attract an additional on forwarding charge. The geography that rates cover should be a major focus between customer and service provider during the engagement process. This focus and strong local geographical knowledge should eliminate any unanticipated additional cost.
Your quoted rate will be exclusive of fuel surcharge and GST. You need to apply the fuel surcharge first, then the GST. Fuel surcharges are additional but not specifically quoted as they are revised monthly. There is significant variation in fuel surcharge between service providers. A sample of quoted fuel levies for September 2008 had an average value of 21.87%. The highest value was 29.5% and lowest 15.47%. In theory these should only vary because carriers have different review dates however this variation in fuel surcharge was the outcome of rate requests and quotes received all in the same month.
There are some other interesting charges to be wary of. Booking fees may be additional per consignment. Check that local pick up and delivery (PUD) is inclusive and not additional. Demurrage attracts an hourly fee once allowed loading time and delivery waiting time has been consumed. Whilst proof of delivery documents are routinely available on line, where they are not, or the original is required (due to lack of clarity of scanned image) an additional fee may be charged.
The facilities at pick up and delivery point are important to understand as they impact cost. Are docks or ramps available? Are their docks finger docks or are they rear load/unload with levelers? Can they accommodate side loading for tautliners? Will they accept freight that needs to be unloaded off bars? Where containers are being delivered, will a sideloader be needed to leave the container on-site for later pick-up once de-stuffing is complete? A key issue is “hand offload”. This is a common requirement for some industries and business sectors – retail in particular. It requires the delivery driver to unstuck a pallet carton-by-carton to do the delivery into a shop or very small storage area.
Whilst this level of detail is needed in arriving at a definitive price, it is interesting to note that account managers with some service providers have discretion in quoting 10 to 15% discount on the standard rates. It is also accepted that pricing improvements can be dependent on relationships between account and transport company representatives.
The Tender Process
Transport companies views of tenders are changing. They are beginning to ask – “Should we bother going into these?” and “How many do we win?” Tender documents ask for significant detail around features and value-add capability but carriers feel that ultimately the decision is driven by the dollars. There is also the view that data provided, as freight information, is incomplete and often doesn’t reflect the future state. Anomalies and idiosyncrasies are not evident or highlighted.
During the interview process, in researching this article, an interesting recommendation was made to me. This was for a two step tender process, where the first cut was based on capabilities before moving into a partnership style discussion on service and pricing as second step. This would be a more time effective approach for both parties.
How is success measured?
One of the main trends in additional data collection and sharing is the customisation and increased sophistication of key performance indicators (KPIs). KPIs shared between transport provider and account are strongly customer focused. Where delivery is to retail customers then reporting delivery in full and on time results (DIFOT) is primary. Performance measures are objective and transactional focused. Some examples are:
- Transit time
- Number of consignments on time
- Number of consignments delivered late
- Freight volumes – Chep pallets and freight spaces (indicator of vehicle utilisation)
- Freight volume versus available fleet capacity (calculate fleet utilization)
- Number of consignments moved in a given time period
- Transport cost per customer selling unit
- Number of consignments damaged
- Number of consignments lost
- Non-conformance reporting is more subjective with incident reports providing descriptive explanation for late and damaged goods.
Legislation – Impact and Awareness
The projected doubling of heavy vehicle movements on our roads, coupled with the statistics of accidents and incidents involving heavy vehicles is driving legislative change. In spite of broad explanation and advertising, there remains a belief that driver fatigue reforms and Chain of Responsibility Legislation are not well understood outside of the immediate transport function. Parties in the Chain of Responsibility include consignor and consignee of goods transported by a vehicle, yet a retail stock-out will still drive an unachievable delivery demand. Some unloading staff at distribution centres remain unaware of their responsibility in managing queuing and driver unload times. Heavy vehicle driver fatigue reform increases compliance and recording requirements for all companies operating fleets containing vehicles of 12 tonne gross vehicle mass (GVM) and over. Allowable driving hours have changed and exceptions from standard hours are governed by a new system of accreditation. This additional activity will impact operating costs for transport companies. This is a small price to pay when weighed against the terrible cost of a workmate lost in pursuit of an unreasonable deadline. Most people who have spent a few years in road transport can tell you of a colleague who has died at work.
The Crystal Ball – Future Challenges
When I asked transport providers for their view of the most significant developments and challenges ahead of the transport industry, I did not get the answers that I expected. Hot topics from recent industry events – alternate fuels, electric / hybrid vehicles, super singles versus conventional tyres – were not mentioned until prompted.
There are two common issues.
The need to move more freight to rail and address the infrastructure gap is widely acknowledged. Public pressure and the Kyoto protocol will force development and appropriate upgrading of rail corridors. Government money is needed to make this happen. There is also a drive for legislative change to equalise competition between road and rail freight. This is focused on establishing a genuine cost for use of infrastructure by road freight companies. As carbon footprints gain importance, this will gain momentum. Volume and incentive discounts are available for customers who are prepared to use rail currently rather than road; however there is an impost in lead-time.
The other key issue discussed was drivers. Driver shortages are concerning road operators. They see drivers aging, leaving the industry and insufficient new recruits. For linehaul drivers, the time away from home is tough on relationships. As a local driver, consider the challenges of spending your working day on metropolitan roads. One company highlighted their well presented and maintained fleet as the best way of attracting enquiry from prospective drivers and customers. Their equipment is a mobile recruitment and service advertisement.
Understanding what a transport provider looks for in an account and what an account looks for in a transport provider is of benefit to both parties. This understanding can be leveraged by transport providers in focusing on prospective customer targets and it can be leveraged by accounts in achieving lower costs which are valid in practice. Request for quote and tender documents should include questions and requests for definition that remove uncertainty from the resulting pricing. Key performance indicators need to be relevant to both organisations where they are published and discussed regularly. Current and proposed legislation is driving industry reform. The future industry challenges are broadly acknowledged and the discussion of these is lapping into the mainstream.
Thank you to all the industry representatives who shared their knowledge, information, opinion and insight in researching this article and to my Logistics Bureau colleague John Cole, for his honest and valuable feedback.
Want to know who the “Drunk Budgies” are? See below.
The language of the transport industry necessitates an interpreter for the uninitiated. In this world you have to contend with mermaids; double ones with hairdryers on your windscreen (although it’s preferred when they are busy doing a job on a little one); and company names that mutate to “The Drunk Budgies” and “Egg and Lettuce”. Pity the poor supply chain professional charged with the responsibility of identifying and delivering transport cost savings.
“Translation” of terms:
Mermaids – RTA (Roads and Traffic Authority) inspectors. The name derives from RTA inspectors being referred to by some truck drivers as “ladies” with scales.
Double ones with hairdryers on your windscreen (although it’s preferred when they are busy doing a job on a little one) – A double one is a highway patrol vehicle. Radar guns are referred to as hairdryers. When they are on your windscreen, they are right ahead of you. When a highway patrol officer is writing up a ticket on a car driver, they are doing a job on a little one.
“The Drunk Budgies” – Piscioneri Transport Solutions. Piscioneri becomes Pissed Canary which becomes The Drunk Budgies.
“Egg and Lettuce” – Toll Group. The corporate colours used on prime movers from the Toll Group earn their vehicles this nickname.