What do planes, trains, trucks, and ships all have in common?…
Unless you own them, you have to pay for space onboard. When you negotiate freight contracts though, there’s a lot more to consider (and haggle over) than the price per unit/tonne/pallet that you wish to transport.
Indeed, freight contract negotiation can be time-consuming, frustrating, and complicated, but there are ways and means to reduce the frustration, and perhaps yield more rewarding outcomes.
In this post, we’re going to share some suggestions, along with some principles to adhere to if you want to negotiate freight contracts that really benefit your business. We’ll begin with the single most important thing to keep in mind… Prices play but a small part in overall contract value.
Make it More about the Contract, Less About the Rates
Of course price matters when you negotiate freight contracts. But what matters more is the understanding of what drives a carrier’s pricing, and of what makes a freight contract worth the rates you agree to pay.
For instance, a carrier’s performance capabilities can make all the difference to contract value, particularly in the following areas:
- Timeliness of shipment collection and deliveries to customers
- Accuracy of invoicing by the carrier
- The presence of online tools to provide information and self-service capabilities
- Carriers’ willingness to build a collaborative relationship with your company
- Carriers’ communication effectiveness
- Carriers’ customer service performance
- Carriers’ ability and willingness to manage your account proactively
- Carriers’ approach to training and continuous improvement
All of the above factors should be evaluated when negotiating freight contracts, because they’ll all make a difference to the overall cost of getting your freight from point A to point B. It can often be worth accepting slightly higher freight rates than you might have anticipated, if a carrier is able to commit to a correspondingly high level of performance.
You Need Intelligence to Negotiate Freight Contracts
Negotiating freight contracts can be complicated, but intelligence makes the task a whole lot easier. We’re not talking about the IQ of your negotiating team here, but about the intelligence that comes from diligent investigation into the needs of your company, and the capability of a carrier to meet them.
It makes sense then, to begin with a thorough assessment and evaluation of your freight transport needs.
Here are some of the most important questions to answer, in order to be well-prepared before approaching potential carriers—and certainly before sitting down at the negotiating table.
- How frequently will you want the carrier to pick-up shipments from your distribution centre?
- Do your shipment schedules need to be rigid, or is there room for flexibility?
- How much tonnage do you ship weekly/monthly/annually (on average)?
- What are the freight rates that you pay to your incumbent carrier/s?
- What are your company’s payment terms?
- What destinations do you require your carrier to ship to?
- What is the average tonnage that you ship to each destination?
- What specific types of freight are you shipping?
- Will you require shipment of hazardous materials?
- Are your shipments full truckloads, or only part loads?
- Do you require prepaid freight shipment, or postpaid?
By acquiring all this intelligence about your company’s shipping needs, you’ll find it easier to target specific carriers with which to negotiate freight contracts.
Better still, this information will permit you to negotiate from a much stronger position than would otherwise be possible, because you’ll be able to use much of it as leverage when negotiating contract conditions and rates. There is simply no such thing as having too many levers when negotiating freight contracts, whether your talks are with incumbent carriers or brand new partners.
Examples of Negotiation Levers
Let’s take a slightly more detailed look at how some of the information you gather can be used to gain leverage in freight contract negotiations.
Current Freight Rates: It’s important to know precisely what rates and charges you currently pay for carriage of your freight, especially when you negotiate freight contracts with prospective (as opposed to incumbent) carriers.
Although price isn’t everything, if you can demonstrate that you know what you currently pay and make it clear that better pricing could be a business-winner, you’re incentivising prospective service providers to offer attractive discounts. Just be sure you’re informed of any conditions attached to discounted freight rates, and scrutinise them carefully.
Payment Terms: These can be used as a bargaining chip when negotiating freight contracts. You may have the option to negotiate lower rates in return for a guarantee to pay bills within a certain time. Alternatively, you might be able to offset higher rates with an agreement for longer payment terms.
Shipment Scheduling: If your shipments must be collected on specific days and at specific times, try to make sure you negotiate freight contracts with carriers who can meet your required schedule.
The more flexible you can be with regard to scheduling, the more likely you are to be offered an attractive rate. Remember though, the needs of your customers should take precedence over freight rates, so be sure your flexibility won’t increase the risk of service shortfalls.
Types of Freight: Expect carriers’ rates to correspond to the types of freight that you need to ship. You should be able to negotiate better rates for freight that is dense, heavy, resilient, or easy to handle. On the other hand, if your freight requires special handling, is fragile, bulky, or of especially high value (attractive to thieves), rates may be higher, or surcharges may be added to overall base-rates.
Customer Service: It’s important to keep in mind that anything can be negotiated, and in terms of customer service (as with the other levers mentioned already) achieving more for your money can be as important (if not more so) than getting the lowest possible rates.
If your current carrier arrangements leave you vulnerable to customer service issues, or you foresee the need to improve customer service, you might want to negotiate freight contracts predominantly on the basis of service, rather than price.
What Will Carriers Bring to the Table?
Thus far, we’ve discussed mainly those points which matter to you, the customer, in negotiating freight contracts. However, any carrier that sits down to negotiate with you will bring its own intelligence to the table.
This is one piece of the negotiation puzzle often overlooked by companies in their discussions with carriers, and frankly, is an oversight that can weaken the shipper’s position.
If you want to negotiate freight contracts effectively, you should be aware of the factors that carriers consider when determining how far they can move on price, and what else they can do to sweeten the deal with a prospective customer.
Some of those considerations (cost drivers) are listed below:
- The carrier’s own business overheads
- Distances over which your shipments are to be carried
- Projected fuel consumption during shipment of your consignments
- Availability of return loads (to avoid carrier’s vehicles running empty)
- Number of times that the goods on your shipments will be handled by the carrier
- Average shipment volume and weight
- Handling requirements for the freight you wish to ship (are the materials easy or hard to load, carry, unload, trans-ship, and store?)
- Number of drops to be made (if your carrier will be making multi-drop deliveries on your behalf) and the distance between drops
While these are all factors that a carrier will take into account when negotiating freight contracts, you’ll be wise to learn as much about them as possible, because if you understand them, you can also turn them to your advantage.
Too many companies try to negotiate with the sole aim of driving down the overall shipping rate, where it might make more sense to focus on reducing the cost of factors that drive pricing decisions.
Of course, in order to do this, you must be prepared to work with the carriers to lower the costs. This is one of the reasons why a carrier’s approach to collaboration becomes important when negotiating freight contracts.
Negotiate, Then Collaborate
If you can negotiate a multi-year contract with a carrier prepared to build a collaborative relationship, initial rates may be determined with a commitment from both parties to review (and if necessary, renegotiate) them at set periods in the future.
In the interim periods between rate negotiations, your company and your carrier should work in partnership to control freight transport cost drivers.
Future rate reviews and negotiations should then take cost-control progress into account. This approach might not get you the lowest possible rates at the outset of the relationship, but could well save your company a lot of money over the full term of the contract.
Considering Service in Freight Contract Negotiations
As briefly mentioned earlier in this post, service should be given a high profile when you negotiate freight contracts. The lowest price will not necessarily save you money in the long run, especially if it doesn’t buy you the levels of service required by your company and its customers.
Let’s take the concept of on-time delivery as an example…
Instead of negotiating the lowest rate possible from a carrier, it might be more beneficial to:
1) Agree on a rate at which your carrier can meaningfully commit to collecting shipments (and delivering them) on time.
2) Write an “on-time” service KPI target into the contract.
3) Agree upon price reductions to be applied if the carrier fails to meet the agreed service level.
A similar process can be used for negotiating other important service elements. This method of negotiation sets the scene for a more collaborative and less transactional relationship between your company and your carrier.
Instead of negotiating all the quality out of a contract, try to build in measures which incentivise carriers to meet your needs and enable them to make a realistic profit, while offering you some protection from the incalculable costs of poor service.
Reviews and Renegotiations: Factors to Consider
Whether you take the long-term approach when negotiating freight contracts, or prefer to stick with annual contracts, the process of negotiation is never a one-time event.
When it’s time to renegotiate and annual contract or review a longer-term deal, the one big advantage you have is at least a year’s worth of performance to reflect upon.
You should take full advantage of this historical and current data when sitting down with your carrier to review or renegotiate a contract. Consider and assess all the factors influencing performance of the contract. The following questions are particularly important to answer:
- Have your shipment volumes increased, decreased, or remained largely static?
- What about the carrier’s volume? Has that gone up, down, or stayed the same?
- Have fuel prices risen or fallen?
- Have your average shipment weights increased or decreased?
- How well has the carrier performed in terms of on-time collection/delivery?
- How good/poor is the carrier’s record of lost/damaged shipments or goods?
- Has your business operation caused any issues for the carrier?
- How satisfied are your customers with the service received from your carrier?
- Has your carrier’s operation caused any issues for your business and if so, how quickly were they resolved?
With the answers to these questions at your fingertips, you’ll have plenty of points on which to negotiate for improvements in the quality or cost of your carrier’s services. Of course this cuts both ways, assuming the carrier’s negotiators are similarly diligent about doing their homework.
As you have probably noted by now, in order to negotiate freight contracts for value, you need to equip yourself with a lot of detailed information – and present it clearly at the negotiating table.
In the case of reviews and renegotiations, the task becomes easier if you and your carriers’ are singing off the same hymn sheet in terms of the data to be discussed. This brings us nicely to our final freight contract negotiation tip, which relates to the use of mutually agreed measurements throughout the life of a contract.
Share a Common Version of the Truth
What if your perception of performance is different to that of your carrier? If nothing else, ironing out the differences of opinion will increase the time and effort required to negotiate freight contracts.
Rather than suffer this difficulty each time you sit down to review or renegotiate a contract, it’s worth spending some time at the outset of a carrier/shipper partnership to agree and align upon some key performance indicators (KPIs) with which to measure contract performance.
It’s not enough just to agree defined KPIs though. Your company and your carrier should also share a clear and common understanding of how each KPI is calculated.
This will take some discussion of course, and the shared task of preparing KPIs and reports will add time and expense to the first contract you negotiate with a given carrier. At the same time though, it’s a process that will make subsequent negotiations more straightforward.
Negotiation after all, tends to be easier when you can focus immediately on the numbers, without getting waylaid by conflicting interpretations of their meaning.
It’s (Nearly) All in the Preparation
It is possible to negotiate freight contracts without an excess of frustration, even if it’s always going to be a time-consuming and sometimes complicated process. You can be forgiven for thinking that the tips in this post suggest you’ll spend more time on your negotiations, rather than less.
That may be true, since they are all about gathering knowledge before you negotiate freight contracts, and about turning that knowledge into power at the negotiating table.
They are also about negotiating value into your contracts and thus, reducing the frustrations that arise when rate-haggling is the sole strategy—frustrations which can manifest not only during negotiations, but might also arise time after time over the life of the contract.
So a little extra time is the price to pay, but the rewards will be worth it. Your negotiations will be less frustrating. Rates will be realistic, and easier to review. Above all though, your company should be able to save time and money over the lifetime of your freight contracts, meaning the extra time spent up-front will have been well invested.
Apart from rates, performance and contract, also matters how promptly we pay them.
I want to start logistics business.
Best of luck!