Effective Price Benchmarking with LTL s Most Popular Base Rate

Transcription

1 Effective Price Benchmarking with LTL s Most Popular Base Rate An SMC³ White Paper August 2009

2 CONTENTS Introduction Benchmarking For Predictability & Consistency A COMMON LANGUAGE FOR COMMERCE right right right The Case For A True LTL Price Benchmark 2 WHY ALL LTL DEALS ARE NOT EQUAL 2 THE PROBLEM WITH CUSTOM SHIPPER TARIFFS 3 Successful LTL Benchmarking with SMC 3 CZARLITE 3 CZARLITE USER DEMOGRAPHICS 3 KEY PRODUCT CHARACTERISTICS & DIFFERENTIATORS 4 THE IMPORTANCE OF REGIONALLY BASED LTL ECONOMICS 4 Built To Last: Why CZARLITE Is Here to Stay 6 INDEXING CARRIERS COSTS TO DO BUSINESS 6 MAINTAINING ZIP CODE ACCURACY 6 INTRODUCTION The once-humble surveyor s benchmark has evolved into a highly sophisticated analytical approach and management practice. Today benchmarking is used by businesses worldwide to compare cost, cycle time, productivity, financial performance or quality against a standard or best practice. Uniform, actionable data, content and business rules are at the heart of benchmarking. Its ultimate goal is to facilitate informed business decisions that will, in turn, support strategic, operational efficiency and financial goals and help assure consistent, predictable performance. In this white paper, we explore general management benchmarking best practices; benchmark pricing examples; superior LTL benchmarking characteristics; and the specific, tangible business benefits and value benchmark pricing tools provide to LTL freight purchasers and vendors alike. BENCHMARKING FOR PREDICTABILITY AND CONSISTENCY Benchmarking best practices are a business cornerstone of effective metrics-based organizations worldwide no matter what their strategic, operational, process or financial goals. Benchmarking best practices rely on a combination of systematically updated information, which serves as a stable metric for making informed decisions; unbiased information, which is collected and distributed independent of external influences; and widespread usage, so the benchmark or benchmarking process can serve as common ground for negotiations. Fortune 500 companies embrace universal benchmarking methods as a systematic way to achieve strategic and revenue objectives. Small- and medium-sized companies embrace the strategic value of establishing a basis for performance and business processes improvement. All seek to enhance and secure their competitiveness with benchmarking. INDEPENDENT VERIFICATION 7 Conclusion 7 More About SMC 3 8 Information Sources 9 A COMMON LANGUAGE FOR COMMERCE Many august benchmark-development organizations and benchmark pricing indices have attained regional, national and global scope and influence, with the ultimate goal being a common language by which users can conduct commerce. Financial Benchmarks and Benchmarking: Financial benchmarks are at work in most global financial markets, including equities, foreign exchange and interest rate derivatives. While there are many pricing models, the Black-Scholes model (and some of its knock-offs ) is generally regarded as the quintessential financial pricing benchmark. 1

3 U.S.financial benchmarks include bond yields (generally compared to benchmark yields on U.S. Treasury securities of similar maturity) and the Standard & Poor s 500 Index and the Dow Jones Industrial Average (the most widely followed benchmarks or indicators of the U.S. market for large-company stocks and funds that invest in those stocks). Multi-Industry Management Benchmarks and Benchmarking: The members of the International Standards Organization (ISO) a worldwide federation of national standards bodies from over 100 countries collaborate to develop and promote universal management benchmarks and standards used in industries ranging from manufacturing to communication. ISO certification assures internal operational, product and service compliance and excellence. Energy/Commodities Benchmarks and Benchmarking: Perhaps the most widely accepted benchmarks are in the energy sectors: Oil is priced using benchmark pricing or price markers that link local prices to publicly traded benchmarks like NYMEX WTI crude oil and IntercontinentalExchange (ICE) Brent crude oil. The Argus/McCloskey Coal Indices often serve as the benchmark price for coal markets. Reuters RICs and history for the Argus liquefied petroleum gas (LPG) dataset is the benchmark pricing source for LPG markets. Steel Benchmarker draws information from almost 1,000 steel buyers, sellers and users and provides benchmark pricing data (these information providers and pricing assessment inputs are anonymous and in compliance with U.S. and European Union anti-trust and competition laws). The Energy Information Administration (EIA) at the U.S. Department of Energy (DOE) provides unbiased, policy-neutral energy data, forecasts and analyses to promote efficient markets. EIA s data products cover energy production, stocks, demand, imports, exports and prices. Companies worldwide rely on EIA content to make informed strategic and operational decisions. Benchmarking is an ongoing outreach activity; the goal of the outreach is identification of best operating practices that, when implemented, produce superior performance. Bogan and English, Benchmarking for Best Practices PAGE 1 Figure 1. Three individual carriers pricing programs for the same average LTL shipment traveling from and to the same origin and destination locations fluctuate widely, causing even savvy LTL purchasers to question whether they received the best pricing scenario. $2,250 Carrier C Shipment Cost $1,750 $1,250 Carrier B Carrier A Shipment Profile Class: 77.5 Shipment Weight: 1,500 lbs Origin ZIP Code: $ Key Point Miles continued, next page

4 The use of one tariff limits complexity for the shipper and simplifies the comparison of LTL bids CzarLite use has increased as a standard tariff format. Shippers may prefer CzarLite because it is carrier neutral... Norbridge, Inc., LTL Pricing Effectiveness Research Study 4 PAGE 2 THE CASE FOR A TRUE LTL PRICE BENCHMARK The old adage information is power is a new truism for companies sourcing freight within today s ultracompetitive LTL environment. There is literally no margin for making flawed business decisions based upon inaccurate information or faulty assumptions. Despite economic upheaval and a ferociously competitive LTL market, some carriers and shippers continue to forgo base rate benchmarking. But lacking a shared pricing benchmark, the integrity of both parties shortand long-term planning processes can become compromised. The North American LTL carrier pool has contracted dramatically, and industry consolidation is leaving only the fittest, best-capitalized carriers standing companies with considerable power, who have learned how to obtain significant revenue yields on a lane-by-lane basis. As the Canadian Web site trucknews.com recently reported, Shippers should not be lulled into a false sense of security that there is a lot of capacity. Two thousand six hundred and ninety (2,690) trucking companies went bankrupt or closed through mid- November [2008], with more to come. That kind of capacity drawdown will leave a major dent when the economy finally turns around. 2 True LTL benchmarking where shippers and carriers employ reliable, fuel- and direction-neutral baseline LTL rates to manage mutually successful outcomes and reliable sourcing has become core to doing business. WHY ALL LTL DEALS ARE NOT EQUAL LTL shipment handling costs vary greatly for carriers, depending on whether the shipment is local, regional or long haul. For example, short-haul regional shipments have a higher percentage of their overall cost at the terminal level, while longer haul interregional and transcontinental shipments have a higher percentage of cost in their linehaul operations. These cost differentials play out in various ways in individual carriers tariffs, and introduce unnecessary pricing complexity when used as a base rate. An individual carrier s base rate alternative rarely incorporates a historical maintenance perspective, and may simply use a basic or even out-of-date price/zip code matrix that does not reflect current postal code complexity. So-called free rates often come with substantial fine print and subsumed goals; therefore, all LTL deals are not created equal. Figure 2. The relative share of cost varies dramatically between national and regional carriers due to differences in the length of haul, average weight per shipment, traffic density, terminal network and equipment. Operating Cost 70% 60% 50% 40% 30% 20% 10% 0% 65.17% 38.50% 35.70% 17.74% 15.90% 7.90% 8.47% 8.50% 0.72% 1.50% Linehaul P&D Terminal Hub Administrative Transportation Activity National Carrier Regional Carrier

5 Strategic Marketing Goals: Individual carriers use their pricing to tailor their rates to market conditions. As conditions and strategies change for carriers and shippers, the shipper is not always provided a viable means to change their current pricing. System Distribution Goals: Individual carriers tariffs are designed to give them the advantage, since their pricing is based on their specific head-haul lanes, deadhead, through rate, turn around, differential routes, peddle runs, needed back haul, terminal locations, traffic patterns and lane imbalances. An inbound premium covers a vehicle s less-profitable return trip to its origin terminal, and carriers offset circuitous routings and empty or lowcapacity miles in short-haul lanes with additional charges. Profitability Goals: Carriers simply cannot supply every transportation solution to every shipper; they are limited by their terminal systems and geographic range. Each market has a unique set of operational challenges and associated costs. Profitability is a function of the price/cost ratio and is often adjusted in the rate to or from these areas. There is a severe cost disjuncture when regional carriers are forced to do business out of their normal areas of operation. Thus, the shipper may be paying for individual carriers operational decisions although those costs were not incurred by the freight. THE PROBLEM WITH CUSTOM SHIPPER TARIFFS On the flip side of the coin, very large shippers and logistics service providers have created their own shipper-optimized tariffs to cherry-pick the lowest-priced freight movements. However attractive these tariffs may seem for shippers, this approach also contains inherent risks: When carriers gain pricing strength in an economic turnaround and are no longer low-balling to garner shipper business and meet their fixed costs, they will most likely be unwilling to price using today s strategically optimized shipper rates. These vanity tariffs will be the most obvious agreements for carriers to renegotiate or do away with. SUCCESSFUL LTL BENCHMARKING WITH SMC³ CZARLITE To work effectively and reliably over time and through the twists and turns of a global economy, an LTL price base must be fair, balanced, and maintain a fuel- and direction-neutral basing system. It must also closely benchmark key independent data as well as draw from a transportation network and the frequently updated, well-understood postal and ZIP code assignments. Above all, it must be able to express and maintain all the aforementioned information in an efficient, effective database that delivers key decision-making information on time to shippers and carriers alike. Industry-standard SMC 3 CzarLite is a trusted, predictable pricing benchmark. Refined over 21 years, CzarLite is used routinely throughout North America as the basis for thousands of successful shipper, carrier and logistics service provider pricing agreements that represent several billion dollars in annual managed transportation spending. CZARLITE USER DEMOGRAPHICS CzarLite relies on the periodically updated SMC 3 Carrier Cost Index (CCI), regionally based economics and independent verification of the update process to enable shippers and carriers from all areas of commerce and transportation to make wise choices: Several branches of the U.S. government employ CzarLite to process literally thousands of competing motor carrier rates and maintain control over their massive LTL transportation needs. 11% Own Carrier Tariffs 20% Other Carrier Tariffs 69% Other Tariffs Shippers Use of Benchmarks Source: Norbridge and Associates PAGE 3 Benchmark pricing has been a normal practice in the LTL industry for many years. A study by Norbridge and Associates showed 89 percent of a carrier s customers use price lists other than the carrier s for benchmarking their freight. The same study determined that CzarLite is the most popular noncarrier tariff. 4 continued, next page

6 PAGE 4 Nearly half of the Fortune 500 and more than 2,000 shippers, including some of the largest U.S. logistics service providers, use CzarLite to optimize their LTL purchasing processes; secure long-term value and core carrier capacity; and adjust their freight services to meet their transportation planning needs and strategic business goals. CzarLite serves as a critical negotiating tool for securing and affirming competitive carrier pricing and automating shippers contracts. Over 375 carriers, including all 50 of the largest national, multi-regional and regional LTL carriers use CzarLite with shipper-customers to negotiate single and joint-line movements; eliminate rate disputes with connecting carriers; develop their overall pricing offers; secure freight that supports their operational strengths and goals; avoid pricing hazards like freight mix changes, artificially inflated regional pricing and DC relocations; improve productivity; reduce request for pricing (RFP) expenses; and compare shippers historical freight statistics with marketplace statistics to determine shippers shipment profiles. Benchmark pricing has been a normal practice in the LTL industry for many years. A study by Norbridge and Associates showed 89 percent of a carrier s customers use price lists other than the carrier s for benchmarking their freight. The same study determined that CzarLite is the most popular non-carrier tariff. WITH CZARLITE, SHIPPERS AND LOGISTICS SERVICE PROVIDERS: Make wise logistics choices by assessing annual bid awards to carriers Survey general pricing availability in various markets Ensure carrier rate competitiveness Standardize critical areas of their business operations, including accounting functions, computer systems, purchasing agreements and RFPs Increase productivity and overall efficiency for greater profitability and competitive end-customer pricing KEY PRODUCT CHARACTERISTICS AND DIFFERENTIATORS Delivered via Web services (also known as serviceoriented architecture, or SOA) or other engines for PCs, networks and UNIX, CzarLite supports a wide range of transportation and warehouse management systems as well as enterprise resource planning systems. Reliable benchmarking is only one CzarLite benefit; it also brings value through reduced operational and labor costs, ease of integration, quick ramp-up times, common terminology and rules that facilitate internal and external communication, borderless pricing and proven technical support. FOR THEIR PART, CARRIERS: Develop their overall pricing offers effectively and benchmark industry standards at regional, multiregional, transcontinental and North American market levels Gain access to freight that supports their operational strengths and goals Improve productivity and reduce expense when replying to RFPs Determine shipment profiles by comparing a shipper s historical freight pricing statistics with marketplace statistics All CzarLite products including SMC³ MexicoLite and SMC³ CanadaLite are designed to help users establish pricing details that correlate with each of their carrier agreements, including discounting, minimum charges, fuel surcharges (by individual carrier or national average) and FAKs. Robust discounting features allow simple discounts, weight break discounts or discounts attached to very specific geographic lanes. THE IMPORTANCE OF REGIONALLY BASED LTL ECONOMICS CzarLite is designed to handle the anomalies as well as the economic and geographic complexity of North America s many regions, which affect carriers ability to price and move LTL freight and shippers transportation rates. The factors CzarLite takes into consideration are:

7 State and regional labor expenses Weather-related costs Speed, weight and restricted road limits Load factors Freight flow costs, traffic congestion Local, state, county and city laws and restrictions Chronic head-haul imbalances into New York City, Washington, D.C., and Florida Additional operational expenses, such as tolls and access fees, and restrictions, such as timelimited road access, bypasses, etc. For example, the heavily populated Northeast has a highly unionized labor force and considerable urban congestion. Trucks are limited by interstate highway congestion and often operate on surface streets. Conversely, the Southeast has less-expensive labor, less-congested roads, and high-speed road access with higher speed limits. And unlike some carriers individual pricing systems which use one level of rates for intrastate freight pricing and another for interstate freight pricing CzarLite simplifies intrastate pricing, which is based on regional pricing for the corresponding interstate movements. For example, CzarLite s transportation cost for freight traveling 200 miles between Georgia and North Carolina is the same as a corresponding shipment moving between two points in Georgia or two points in North Carolina. This eliminates analysis, billing errors, and discount negotiation and administrative management problems an important feature if a shipper s logistics patterns include regional distribution or a local customer base. Figure 3 compares two individual carriers inbound and outbound rates versus CzarLite for the same shipment moving from Phoenix, Ariz. to nine U.S. points. CzarLite price increases are uniform across distances, while carriers rates fluctuate based on individual lane requirements and revenue goals to and from the target city. The SMC³ CzarLite, CanadaLite and MexicoLite base rate systems are aligned to provide consistent rating throughout North America (as shown in Figure 4): MexicoLite enables shipments to move between any point within the United States and the Mexican border crossing point under the standard, established CzarLite rates, while the distance from the border crossing point to the Mexican destination is rated for the Mexican portion of the move. For convenience, these PAGE 5 Figure 3. Carriers tailor their inbound (IB) and outbound (OB) rates to reflect individual operational and marketing objectives. CzarLite rates trend uniformly on an IB and OB basis without unknown headhaul or backhaul adjustments. National OB Regional OB Rates National IB Regional IB Czarlite IB/OB Distance continued, next page

8 Figure 4. CzarLite s comprehensive regional, inter-regional and international pricing supports accurate LTL decision making throughout North America. Canada Region 1 Canada Region 2 Canada Region 3 Canada Region 4 U.S. Western U.S. Pacific Northwest U.S. California Intrastate U.S. Middle West U.S. Southwest U.S. Southern U.S. Central U.S. Eastern Mexico Region 1 PAGE 6 Mexico Region 2 The SMC 3 CCI applies to specific, identifiable expenses, aligning the process with the recommendations of the Bureau of Labor Statistics. rates are presented as through rates from the point of origin to the point of destination. CanadaLite enables a shipment to move between any point within the United States and a Canadian border crossing point under the standard, established CzarLite rates. BUILT TO LAST: WHY CZARLITE IS HERE TO STAY INDEXING CARRIERS COSTS TO DO BUSINESS The SMC 3 Carrier Cost Index is designed to support CzarLite regional benchmark pricing and is a key factor at the heart of the CzarLite update. Unlike other supposedly indexed base rates which may draw from irrelevant indices the CCI is based on a statistical subset of regional U.S. Department of Labor, Bureau of Labor Statistics Consumer Price Index (CPI) and Producer Price Index (PPI) 3 data and: Mexico Region 3 Mexico Region 4 Tracks motor carrier costs Eliminates CPI items that are not part of motor carrier costs (e.g., entertainment, produce, timber, food, liquor, etc.) Assigns a weighted, regional cost Allows interregional or overhead pricing that reflects cost characteristics of the transcontinental freight market Quantifies carriers labor expenses (including, for example, salaries, wages and fringe benefits) and non-labor operational expenses (for example, equipment depreciation, amortization, general supplies, insurance, rentals, etc.) MAINTAINING ZIP CODE ACCURACY CzarLite s pricing accuracy relies on biweekly ZIP code system updates from the U.S. Postal Service (USPS). But these updates generate a staggering amount of data, resulting in 1,676,738,704 unique

9 U.S. lanes (origin-destination pairs). To add to code maintenance complexity, each CzarLite change which varies from the extremely large ZIP code boundaries in the western United States to the unique pricing challenges posed by areas like the Chicago Loop, Puget Sound, the Florida Keys, and California must be individually investigated and aligned with the proper ZIP code rate. California, for example has over 10 percent of the total U.S. population, large shipment volumes, generally smaller shipments, and unusual traffic patterns that must be adjusted to insure equitable pricing for both shippers and carriers. To deal with these many complexities, CzarLite employs an intelligent hybrid of three- and fivedigit ZIP codes and state-of-the-art software that gives users the most granular, accurate, and costefficient information available to make highly informed strategic pricing/cost decisions, avoiding overcharges and undercharges. This hybrid system has an additional payoff: a smaller, faster engine able to rate 50,000 shipments per minute. INDEPENDENT VERIFICATION The CzarLite, CanadaLite and MexicoLite benchmarks are periodically updated to assure accuracy. These updates are guided by the regional and interregional changes in the CCI, resulting in updates to the rates. The economic update process is carefully vetted by industry experts: An independent Certified Public Accountant (CPA) verifies the application of the SMC 3 documented process and the product s mathematical accuracy, and an outside economic review panel comprised of economic and supply chain subject matter experts carefully reviews any proposed changes to the benchmark, assuring a practical, fair and carrierneutral approach. CONCLUSION Like other professionals throughout the world who use highly accurate benchmarks and benchmarking best practices to assure their organization s progress and success, savvy LTL purchasers throughout the United States and North America succeed when they utilize benchmarks and best practices to accurately, consistently and predictably manage their transportation pricing agreements. CzarLite base rates are the tool of choice for many organizations in their daily supply chain management activities, because they predictably and consistently provide a common language for commerce and they are fairly indexed according to carriers costs to do PAGE 7 Figure 5. The graph below re-plots individual carrier rates from Fig. 1 with CzarLite pricing, represented by the green line, showing CzarLite s uniformity over distance. $2,250 Key Point Miles Carrier C Shipment Cost $1,750 $1,250 Carrier B Carrier A SMC 3 CzarLite Shipment Profile Class: 77.5 Shipment Weight: 1,500 lbs Origin ZIP Code: $ Key Point Miles continued, next page

10 PAGE 8 business without being biased toward any individual carrier s operational structure. MORE ABOUT SMC 3 Founded in 1935, SMC 3 is devoted to consistently raising the level of knowledge, collaboration and technological capability in the freight transportation marketplace. We achieve this by using our internal expertise and industry connectivity to provide the best data, content, technology and educational services to our members, customers and associates. Our deep-seated core values of integrity, consistency, thought leadership and operational excellence support this mission and provide a foundation for our unique portfolio of industry solutions. Shippers, carriers and logistics service providers look to SMC³ for the technology, industry data, educational services and general know-how they need to achieve greater success in the transportation marketplace. TECHNOLOGY AND PRODUCTS TO FURTHER SECURE YOUR KEY LTL BUSINESS RELATIONSHIPS CzarLite s value is enhanced through integration with SMC 3 companion products. Often delivered via an SaaS delivery model, these products assure complete freedom of choice among a wide range of hardware, operating systems, databases and software applications and eliminate systems integration issues: A vital part of the new SMC 3 portfolio of products, the SMC 3 CarrierConnect XL database combines carrier operational capabilities, points of service, transit times, hours of operation and terminal-toterminal network information into one easy-to-use system. More than 150 participants data files represent the industry s leading national, interregional and regional LTL carriers, plus select truckload carriers. Shippers can easily add niche carriers; view detailed, terminal-level carrier contact information; make accurate routing decisions with regular data/content updates; audit freight bills; and review effective dates for auditing carrier on-time performance. SMC 3 RateWare XL totally accurate and timely rate calculations, delivered via SOA to speed critical information to accounting, purchasing, transportation planning and other shipper business functions requiring transportation pricing content. Unlike RateWare, many technology offerings miss the point and key inputs, such as line item discounts, FAK calculations, floor minimums, and other Figure 6. As distance increases CzarLite provides smooth, predictable, omni-directional benchmark rating across regional, inter-regional and transcontinental territories. CzarLite Rating Curves Cost Northeast Region Central/ Middle West Inter-regional Southeast Region Southwest Regional Distance

11 shipment rating details. The result: Wrong carrier assignments and unexpected charges. Other s flawed workarounds rely on estimates and rating modeling, instead of rate calculations. The result: Quality errors. Still other offerings lack service and transit times. The result: Inaccurate rates. SMC 3 Bid$ense helps shippers and carriers achieve the optimal carrier selection and maximize cost savings. Automated RFP distribution and analytics support operational excellence for all bid parties. Bid$ense integrates seamlessly with CzarLite base rates, so common rating structures are shared between carrier responses for true apples-to-apples bid comparisons. With complete, uniform shipment data from shippers, carriers remove costly steps from their RFP response process, reducing their pricing decision uncertainty. Automated review-and-respond features save carriers time and expense. Density-based transportation pricing is the default approach for most of the world. The United States the only country in the world using class-based LTL pricing is catching up with the global market with CzarLite density pricing. Density pricing enables U.S. carriers to accurately compute density-based LTL charges to or from a U.S. port or between any two points within the continental U.S. using SOA; and supports loadplanning software requirements for dimensional data (to assure efficient trailer loading and cost savings). With CzarLite density, foreign manufacturers can bid their wares inclusive of transportation to U.S.-based points and foreign customers can easily price the inland U.S. portion of their shipment. Lastly, carriers are free to price and sell to shippers with greater flexibility, to meet individual customer needs and performance goals. PAGE 9 INFORMATION SOURCES 1. Trade Technology Australia Web site (see: 2. Schneider Logistics Gives State of the Industry Overview, April 13, For CPI and PPI source information, visit the U.S. Bureau of Labor Statistics Web site ( release/cpi.toc.htm and respectively). 4. Norbridge, Inc. LTL Pricing Effectiveness Research Study, November 2002.

12 ATLANTA HEADQUARTERS 500 Westpark Drive Peachtree City, GA phone Copyright 2009 Southern Motor Carriers Rate Association, Inc. SMC 3, Bid$ense, CzarLite and RateWare are registered trademarks; CanadaLite, CarrierConnect and MexicoLite are trademarks; and Pricing Expertise Delivered is a service mark of Southern Motor Carriers Association, Inc. Other brand and product names are the property of their respective owners. PI# L.