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Transportation Sourcing in Today's Environment: It's Not About You, It's About Them

Executive Summary

When planning for negotiations with transportation providers, shippers often try to "think like a carrier" in an effort to gain the most favorable outcome. However, in those attempts to give carriers the best information, shippers may misread the driving forces determining their prices - yielding less effective negotiation results. What will cause suppliers to act aggressively? Is it feedback on how close their bids are to other participants? Is it feedback on how many other suppliers are in close competition? Or is it feedback about what is most important to your company? The answer that we found was that it could be all of these factors. Or none of the above.

Suppliers have surprisingly different tactics and strategies for bidding in multi-round sourcing efforts - ranging from improving all bids to keeping all bids the same; or changing bids for contracts in which they were a close runner up, or using the same tactic for deals in which they were far from winning. Rather than play this futile guessing game, Archstone has determined that it is more effective to simply share as much information as possible. By doing so, suppliers can price aggressively and yield a profit, which creates strong relationships for the future. This principle holds true and will yield savings in today's highly competitive markets, but may be even more important in finding success in less attractive supply markets which will eventually follow. In this article, Archstone will discuss tactics for sharing high-quality feedback with suppliers that can establish further competition and allow you to sit back and reap the benefits.

Background

The company that we were most recently working with was performing an RFP for their North American outbound shipping. The client ships truckloads (and some intermodal containers) of industrial packaging products from a dozen manufacturing sites to over 1,000 locations in the US and Canada. The resulting combinations of origins and destinations resulted in over 1,600 lanes.

We sent out a combined RFI/RFP to 120 truckload carriers and brokers in US and Canada. After evaluating over 100 bid responses (referred to as "Round 1" bid responses), the client chose 40 carriers with whom they wanted to continue discussions ("Round 2" bid responses).

The Round 2 communication took the form of a one hour call where we negotiated specific accessorials, answered questions about the bid process, and gave the carriers feedback on their bid response (which will be the subject of the rest of the article). Carriers were given instructions that the lowest Round 2 bid would be the main determining factor in winning a lane provided the carrier met all of the background and accessorial requirements.

During out meeting, we gave the carriers such feedback on each lane:

Category Definition Feedback Level
Bid Ranking Ranking based on Round 1 results Current Leading Bid, Bid in Top 5, Bid Not in Top 5
Bid Closeness Closeness in % to Round 1 Leading Bid Within 10% of Leading Bid, Greater than 10% from Leading Bid
Client Priority Lanes Lane priority was determined numbers of truckloads and spend in dollars High Priority, Medium Priority, Low Priority
"Special" Feedback Exact feedback on Round 1 ranking or closeness to Round 1 leader using $ or % Special Feedback Given, No Special Feedback Given
"Up for Grab" Lanes If the Round 1 Leading Bid was from a carrier not invited to participate in Round 2, the lane was deemed "Up for Grabs" Lane is "Up For Grabs", Lane is Not "Up for Grabs"
Incumbent Lanes Incumbent carriers were the primary carrier in Client's previous Routing Guide Incumbent Carrier, Not Incumbent Carrier

Summary Results

Improvements in the Round 2 Bids could be judged by either the frequency of improvement (% of lanes the carriers improved in Round 2) or the magnitude of improvement (average improvement % on lanes with changed bids in Round 2).

Category Feedback Level % of Lanes with New Bids in Round 2 Average Improvement % on Lanes with New Bids in Round 2
Overall 24% 9.0%
Bid Ranking Current Leading Bid 14% 3.8%
Bid in Top 5 30% 6.0%
Bid Not in Top 5 23% 10.1%
Bid Closeness Within 10% of Leading Bid, 26% 5.0%
Greater than 10% from Leading Bid 24% 9.8%
Client Priority Lanes High 29% 9.1%
Medium 24% 9.1%
Low 23% 8.1%
"Special" Feedback Yes 41% 6.9%
No 24% 9.0%
"Up for Grab" Lanes Yes 27% 7.3%
No 24% 9.1%
Incumbent Lanes Yes 43% 7.1%
No 24% 9.1%

Carriers had clear and surprisingly different response tactics and strategies in bidding during Round 2. Looking at a summary of the responses by carrier, we found:

  • 1 carrier improved every lane on which they bid in Round 1
  • ~30% of carriers improved between 50% and 100% of their Round 1 bids
  • ~55% of the carriers improved between 0% and 50% of their original bids.
  • ~10% of the carriers did not improve any lanes (One of these carriers was very aggressive in Round 1 and still won a number of lanes.)
  • 1 carrier even chose to raise rates on 10% of lanes from their Round 1 bids (and subsequently lost all business!)

Feedback: Round 1 Bid Ranking

As we expected, none of the carriers focused their Round 2 improvement efforts on lanes where they were identified as the Current Leading Bids. Surprisingly, however, an equal amount of carriers (10% each) focused their Round 2 improvements where their Round 1 bids were classified as "Top 5" as they did for bids classified as "Not in the Top 5". The feedback was clearly relevant to these 20% of the carriers, but the carriers pursued improvement opportunities differently based on their company's objectives. The balance of the carriers improved their Round 2 bids relatively equally across this category, so while they may have found the feedback important on particular lanes, they did not base their overall response strategy on the results of Round 1 bid ranking.

In total, carriers who were already leading after Round 1 did not respond aggressively in either frequency or magnitude. However for the 14% of carriers who were leading after Round 1 and still chose to improve their bid in Round 2, they did so at an average of 3.8% (see Figure 3) which went directly into savings on the lane unless other carriers outbid them. Carriers re-bid lanes more frequently but for only moderate improvements when they were identified in the "Top 5." Carriers who were "Not in the Top 5" improved lanes at a moderate frequency but with higher magnitudes.

Round 1 Bid Ranking

Feedback: Round 1 Bid Closeness

We also provided information on how close carriers were to the Round 1 leaders expecting that carriers who were closer to the leaders would be more aggressive than those who were further away. However only 10% of carriers focused their efforts on lanes they were close to winning as identified by "Within 10% of Leading Bid." A greater number (25%) of carriers put a majority of their improvement efforts in Round 2 on lanes where they were further away from the lead.

Interestingly, carriers who were told that they were within 10% of the winning bid improved by an average of only 5% (see Figure 4). This would not necessarily move the carrier into the lead for the lane, but may have positioned them as a strong alternate carrier for the lane. When carriers improved on lanes where they were not within 10% they did respond predictably in a more aggressive fashion.

Further investigation of this type of feedback revealed an aggressive subgroup of carriers that were told they were "Within 10%" of the best bid and in the "Top 5" bidders. They improved their bids 1/3 of the time but only at an average improvement magnitude of 5%. The most aggressive subgroup by improvement magnitude were carriers told that they were not in the "Top 10%" and were not in the "Top 5" bids. Carriers improved these lanes an average 10.2%.

Round 1 Bid Closeness

Feedback: Client Priority Lanes

Twenty percent of carriers focused efforts on lanes identified as High and/or Medium priority, while 10% of carriers focused efforts on Medium to Low priority lanes. The remaining carriers spread their improvement focus equally across all categories.

Carriers on average did respond more frequently to "High Priority" lanes, but their magnitude of improvement percent was no higher than "Medium Priority" lanes (see Figure 5). Even though the High Priority lanes represented the most amount of revenue to the carrier, the classification did not significantly improve their bids over the averages.

Client Priority Lanes

Feedback: Round 1 Bids Given Special Feedback

Twenty-five percent of carriers focused efforts on lanes where they were given special feedback (e.g. "your Round 1 bid is 3rd best", or "your Round 1 bid is within 4% of the leader"), while 10% of carriers focused efforts on lanes where there was no special feedback. The remaining 2/3 of carriers did not show particular improvement trends toward special feedback.

The intent of this special feedback on how close carriers were to competitors was to give carriers more exact feedback so that they would be aggressive on client high priority lanes. Carriers did improve more frequently with this feedback, but with a significantly lower magnitude than when not given special feedback (see Figure 6). The results here indicate that directional feedback may be just as effective, or more effective, than exact feedback.

Round 1 Bids Given Special Feedback

Feedback: Round 1 Lanes "Up for Grabs"

An equal amount of carriers (10% each) focused their Round 2 improvements on lanes where their Round 1 bids were identified as "up for grabs" (i.e. the Round 1 leader was not one of the 40 finalists) and when lanes were not identified as "up for grabs." Carriers did seem to respond with any additional enthusiasm for "up for grabs" lanes (see Figure 7). This may be because carriers did not understand that they had a stronger chance of winning these lanes as the Round 1 leaders were effectively passed over.enough after several cycles of Piloting and Refinement to begin to scale the process to other parts of the business and to begin the optimization of the process.

Round 1 Lanes Up for Grabs

Feedback: Incumbent Carrier

Incumbent carriers responded more frequently to feedback, but at a lower magnitude than non-incumbent carriers (see Figure 8). The group that had the highest frequency of improvement in our analysis was incumbents who were in the Top 5 (53% lanes improved), whereas the least frequent improvers were incumbents who were leading after the Round 1 (only 7% lanes improved). Both incumbents and non-incumbents responded aggressively in magnitude to feedback that they were not in the top 5.

Incumbent Carrier

Summary and Conclusion

Determining the type of information and level of detail to share with suppliers during a negotiation may not be as straightforward as it seems. If we had pre-determined, for example, that Round 1 bid ranking was the only feedback suppliers would need to make their decisions, we would have potentially missed out on improvements from carriers who reacted to different feedback.

We have determined that suppliers may use one or many of the multiple pieces of feedback in their decision making process, and they may react quite differently to the same types of feedback. The results of our negotiations yielded an overall 2.7% improvement from Round 1 to Round 2 (or 6.4% for lanes which had any improvement) due in large part to the volume of feedback we shared with suppliers.

Rather than attempt to guess which factors will trigger aggressive behavior, it is our experience that sharing as much information as possible with suppliers will allow them to price aggressively while still yielding a profit for the supplier which allows them to be a good business partner for the future. This principle holds true in both today's highly competitive markets, but may be even more important in finding success in less attractive markets which will eventually follow. Sharing high-quality feedback with suppliers will establish further competition and allow you to wait for the improvements to pour in.

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