Thursday, October 15, 2009

Fuel needs to be a flow-through consumption-based charge – a system that would fair for everyone.

Fuel costs are the largest ongoing financial concern for both carriers and shippers. Fluctuating fuel costs create challenges for companies to remain on budget, which ultimately impacts bottom lines.

The current recession has tempered the volatility we’ve seen creating chaos in previous years. Rack fuel prices this year have been trending between $0.692/litre and $0.792/litre, according to Freight Carriers Association (FCA) data. The truckload rate for fuel surcharges ranges from 16% to a recent high of 21.4%. Compare this to July 2008 when fuel peaked at a rack price of $1.33/litre with the truckloads surcharged at 49.9%.

The recession has reduced the demand for fuel, and that has provided relatively stable pricing. Fuel consumption will inevitably pick up again, once the economy begins to recover, and many of the issues that existed prior to the recession to create fuel shortages (and drive prices up) are still in force. This will leave Canadian consumers paying considerably more for fuel. Carriers will be forced to increase the fuel surcharge… and transportation service purchasers will have to pay.
The logistics community needs to start reviewing how it deals with the cost of fuel. The current method of surcharge using a percentage doesn’t account for how fuel is consumed. Percentage based fuel surcharges have no real bearing on how much fuel is required to haul a particular load. It creates an unequal cost for fuel for the shipper paying a higher freight rate than a shipper with a lower rate for a move for a similar lane.

Take, for example, “Shipper A,” rated at $1,200, and “Shipper B,” rated at $1,000. The extra cost of the fuel surcharge at 21.4%, once the rate differential is removed, is $42.80 more for “Shipper A,” who has not consumed any more fuel to move his load.

The original concept for fuel surcharges was cost recovery, according to the FCA’s fuel bulletin of August 13, 1999. The idea was to compensate carriers for incremental fuel costs that were occurring at any given time. But when fuel is charged on a percentage basis, a portion of the rates is compounded into the total freight costs, causing a hidden increase. How many rate increases have carriers submitted over the past 10 years since the original percentage based fuel surcharge of 1999?

The best way to change this is to use a distance formula based on average vehicle consumption of fuel. Therefore the formula would be the rack price per litre use the current $0.792, less the $0.39 litre cost that was embedded in the original freight rate when fuel surcharges were implemented, equals $0.402. Divide this by the average kilometres per litres providing a cost kilometre travelled. A good conservative benchmark for a tandem tractor is 2.3 kilometres/litre. This provides a fuel surcharge of $0.175/km. On the $1000 rate for a recent trip of 842 kilometres, the percentage fuel based on 21.4% was $214 but as cost per kilometre it is $147, a difference of $67. For the low volume shipper the fuel reduction difference was $110.
Opponents of this method will indicate trucks pulling heavier loads use more fuel versus lighter loads. Then there’s the question of what to do with LTL. When I look at the Freight Carrier Association fuel charges there are three classifications LTL, TL, and Heavy TL. This could be easily adapted into a distance based formula. With the LTL being the most complicated to develop. However nothing is insurmountable, a cost per cube kilometre could be developed similar to how the FCA developed the LTL percentage surcharge.

The other issue opponents have against using a per-mile fuel formula is empty miles, summer versus winter utilization. Trucking companies benchmark fuel consumption on an ongoing basis. The number of 2.3 kilometres/litre was for a tandem fleet of 150 tractors that operated over a number years. It has everything embedded in it: summer, winter, empty, full, city and highway travel.
Fuel needs to be a flow-through consumption-based charge – fair for everyone, based on the original intention.

Monday, August 24, 2009

Freight Negotiations - Finding the win-win deal

Finding the win-win deal

Freight negotiations don’t need to be like poker games, where only one side can win the pot.

By Sam Kopytowski

Negotiation is something logistics professionals will be called upon to conduct many times throughout their careers. It comes with the territory. Successful negotiation is essential in business – especially when the economy is struggling. Everyone strives for the best value and the lowest costs when obtaining the best service possible.

Unfortunately, however, when it comes to freight negotiations, many companies specialize in the “win-lose” approach – a positional or distributive negotiation whereby one party’s gain is another party’s loss.

In win-lose bargaining, both parties are in direct competition and there can be only one winner.

Understandably, many people look at win-lose as a kind of game. Indeed, it can be compared to poker in that it is adversarial in nature, with both side trying to win the pot through keen observance of an opponent’s weaknesses, and a strategic use of bargaining chips. The big difference, of course, is that win-lose negotiations are not a game. And the stakes are very real.

Poker players like to play their cards “close to the vest,” careful not to share information or reveal too much to their opponent. The same is true in win-lose negotiations, where there is minimal disclosures to the other party. Furthermore, buyers avoid giving any clues (or “tells”) that would reveal their true position. In fact, good negotiators are known for their poker faces. They ‘hold’ and ‘raise’ as necessary with pressure tactics and they pressure their opponents through delays, walkouts, and threats.

How effective is this approach to negotiations? Not very. In fact, it is often counterproductive and does not have any long-term sustainability.

Even when you win in this confrontational style of business, you still lose because the relationship with your counterpart is irreparably damaged. If you win enough your opponent will eventually stop playing the game. No one likes to lose, and they certainly don’t appreciate being bullied. As the relationship deteriorates, the winner can expect the tables to turn when their opponent gets even by providing substandard service at lower cost in an effort to recoup losses.

In win-lose negotiations, logistic professionals are taking a short-term view, potentially locking their companies into a narrow range of positive outcomes. Win-lose does not serve the long-term interests of the winner, even in if short-term objectives are achieved.

“Win-win” negotiations, on the other hand, involve integrative bargaining or interest-based bargaining, where the parties collaborate to find a mutually beneficial solution.

In the win-win approach to freight negotiations, both the shipper and carrier are engaged in finding the best solutions to move freight economically. It yields a freight agreement that each party is willing to fulfill.

Successful logistics buyers looking to achieve best outcomes use win-win techniques where both parties in the negotiation walk away with the sense they have accomplished their objectives. Relationships are developed that have a foundation of trust because they are mutually beneficial. At the heart of the negotiation is true cooperative problem solving, cost cutting, customer service, and mutual profit.

This kind of collaborative takes additional work on the part of the logistics buyer.

1. Preparation

This is the most important element in achieving an agreement… and it starts long before you sit down at the table. It involves a lot of data gathering.

First, understand the shipment. What is the size? The weight? The average cube per shipment? What kind of commodity is it? Is it dangerous? Does it have special requirements? Will it need temperature controls? Additional security? Dunnage?

Next, you have to know your customer’s requirements. How much will be shipped? How often? What are the delivery locations? What about the dock-side requirements? Unloading equipment at consignee? Dock? Tailgate? Pallet? Hand bomb?

Now, what kind of equipment will be required? Dry van? Reefer? Heated service? Flat bed? Tridem? Tandem?

And finally, what is the service cycle time? What is the best mode of transportation?

Proper preparation will help you understand the implicit costs. Use benchmarking, historical data, industry associations, and the Internet to map out what you need. Based on this information, the shipper can set flexible objectives. They’ll consider what would be the ideal situation, the very best that can be achieved. They’ll also get a sense of the biggest challenges they’ll face.

Preparation also involves finding the right transportation suppliers to negotiate with. Research and qualify the carriers that can provide the services you required. Find out as much about the companies as you can, the lanes they service, their service objectives, their response to damages, their reputation in the market place, the corporate culture they have fostered… anything that will help with the discussion.

2. Exchanging Information

At preliminary meetings with potential partners, a frank and open discussion is the best way to meet objectives. Shipment data is shared and service requirements are discussed. Where the sides differ, their expertise will be needed to improve the cost and service.

3. Making a Deal

When you’re close to an agreement, have the carrier provide the full cost and service proposal electronically in advance of the meeting. This allows you to prepare for the meeting. Analyze the quote against current shipping data to understand the value proposition. The meeting agenda should consist of a discussion to understand services, rates, fuel surcharges and ancillary charges, and process improvements.

There is no room now for misconceptions. Don’t be afraid to ask the carrier representative how rates can be lowered. Talk about what needs to be done. Never assume the amount quoted is the final price. Most carriers’ rates have some “wiggle” room.

The steps you take to improve the transportation deal are important blocks to building a solid relationship. Some concessions may have to be provided, to get lower costs, but it is worth it. Problem solving must be done jointly.

Focus on the issues at hand, don’t take positions, and be flexible, using fair business practices. Most important, use reason not control, pressure, or power. Listen to what is being said. Find ways to make your freight attractive to the carrier.

This is true win-win negotiating, and it ensures that in the long run, everyone wins.

Sam Kopytowski is the principal at XCD Logistics Solutions Ltd. in Toronto. You can reach him at
Request for Proposals
Requests for proposals and quotations show suppliers that you’re organized, impartial… and growing.

By Sam Kopytowski

Generally speaking, logisticians at small- to mid-size logistics firms make too little use of standard Requests For Proposals (RFPs) and Requests For Quotations RFQs).

Both are important parts of the logistics buying process, allowing potential suppliers to join the competition to provide a business with goods or services. The issuer makes available the specifications and requirements to several candidates, and then waits for the competitive responses to be submitted.

But while RFPs and RFQs have similar structures, they are used in slightly differently ways.

The objective of RFQs is to set pricing, terms and conditions for a well-defined and quantifiable service or goods. For example, companies may be invited to bid on specific lane transportation services, or the leasing or purchases of equipment.

RFPs, on the other hand, are issued when there is complexity to the business requirement, such as in constraint-based complicated distributions requiring various services or in the total outsourcing of services to a third party. The RFP process is more time consuming, from preparation, through final selection, to the signing of a contract. It should be used for longer term relationships, beginning with a strategy, incorporating a needs assessment, and ending with a deliverable. Effective RFPs reflect long-term business objectives, and provide detailed insight into a business.

Both RFPs and RFQs are excellent methods for leveraging a company’s negotiating ability and purchasing power with suppliers, no matter how large the purchase or size of company issuing them. There are many key benefits to issuing them.

They provide you with a template to fully map out your requirements and specifications, so crucial in the preplanning process. They bring structure to the logistics buying decision. And they generate a healthy “buzz” about you in the industry.

They also let potential candidates know you’re serious, so they’ll provide their best pricing and solutions. Furthermore, it reassures them that you’ve set a structured response analysis and selection procedure demonstrating your impartiality. This is absolutely crucial in today’s business environment for corporate governance and credibility.

There are many templates available out there to develop a proper RFP or RFQ. All should begin with a letter that invites responses and spells out the objectives. You’ll also want to include a statement of confidentiality that needs to be returned by candidates within a specified time.

Make sure there’s no misunderstanding about the process. Instructions for responding to the proposal (including number of copies, who to direct the response to, and the deadline date) should be clearly stated, and the ramifications of missing the deadline should be set out in this section. Typically, all responses are accepted at the discretion of the analysis team.

Once the process is underway, candidate questions should be directed to all participants, with a cut-off date for further questions.

The detailed services requirement – including data or specifications of the equipment – must be part of the information provided. The better the quality of information provided or the more complete the specifications, the better the chances that the proposal will have a proper response.

When it comes to the information you get back from respondents, of course you’ll want things like company history, company financials (including bank references), insurances and guarantees, their business continuance plan, a detailed implementation plan, and references.

One of the most important parts of the process is candidate qualification. RFPs and RFQs should be sent only to companies that can provide the services and equipment required. Find your targets using the Internet, and through discussions with colleagues and your own business network. Remember, if you spread the word, candidates will find you. Have frank discussions with potential suppliers. Candidates will let you know if they’re able to fulfill the requirements, as the effort to respond is very time consuming.

Once the responses are in, it is up to you to analyze them in a consistent manner, to ensure the right outcome.

RFQs are easier to analyze, as they tend to be price- and terms-oriented. A simple Excel spreadsheet will suffice with a matrix of respondents down one side and pricing and terms on the other.

RFPs, on the other hand, are challenging to evaluate. You’ll want to set up the criteria in advance, as part of the process, and then review the services portion separate from pricing. Use a weighted point system to compare the candidate offering against specific service requirement criteria.

When it comes time to review the short-list candidates, invite them to make a presentation to your response analysis team in a boardroom session. A one-hour presentation, with a half hour question-and-answer period, ought to suffice. Limit the number of people from the respondents, typically three. Who attends the meeting is crucial. I know of at least one respondent in a recent session who did not bring the senior operations person. That demonstrated a clear lack of understanding of the requirements.

RFQs and RFPs are an excellent way to acquire the services and equipment that are so important in the logistics process. Large companies use them on an ongoing basis. And small- to mid-size companies can definitely benefit from learning the process.

Sam Kopytowski is the principal at XCD Logistics Solutions Ltd. in Toronto. You can reach him at