Thursday, May 18, 2006

Secrets for reducing LTL costs

With rates on the increase for less-than-truckload (LTL) services, buyers and logistics managers are getting antsy. Put sky-high gas prices on top of that and any company shipping anything is probably extremely anxious about the cost of doing so—notably LTL shippers.

The rate increases came from LTL carriers fast and furious in April. For example, FedEx Freight implemented a 5.95% general rate increase effective April 24. Vitran implemented a general rate increase of 5.9% effective April 3 and Con-Way raised its LTL rates 5.5% in April. LTL giant YRC Worldwide (the combination of Yellow and Roadway) reported LTL tonnage up 4.6% in the first quarter and revenue per hundredweight up 7.3%. And ABF said it raised its rates in the first quarter an average of 3.3%.

At the same time in April, fuel prices including diesel spiked so high, it prompted legislators to call for an investigation into price-gouging by oil companies. On April 24, the national on-highway average for a gallon of diesel fuel sat at $2.88.

So what can shippers do about it? To answer this question, Purchasingrecently polled a group of LTL shippers for their suggestions. Troy Minnaert, manager of expedited and specialized transportation at Anheuser-Busch in St. Louis, says LTL buyers should require all carriers to use a single rate base to rate their freight bills. "This will help your company in contract negotiations because you can compare apples to apples when evaluating carrier bids," he says. "It also helps in analyzing specific lanes for cost analysis and auditing of freight bills. The resulting LTL program will have uniform pricing less the negotiated discounts, regardless of which carriers are used."

Robert Newton, a senior buyer at HH Sumco in Indianapolis, says every carrier should provide some kind of discount program, even in today's pricing environment. While it may seem like an obvious suggestion, a surprising number of purchasing departments may not have done a deep-dive negotiation in its LTL spend area for some time—or may not have control over the carrier selection in some inbound cases.

"If your company does not have an LTL carrier with a discount program call one up and ask what kind of discount you can get," Newton says. "To ship without some kind of discount will almost certainly double your freight costs, if not more."

Newton points out that sometimes local buyers or logistics managers at the plant-level may not realize its parent company has a newly negotiated deal with a certain carrier to take advantage of. "If a buyer at a plant can coordinate with the organization at the corporate level, there may be a discount structure in place or it may be time to use all of the volumes to negotiate a discount," he says.

Tamra Lewis is traffic coordinator at SafeFence, an Idaho-based manufacturer of electric fencing products. SafeFence has tariffs with up to 10 LTL carriers, but has four core carriers it works with, Lewis says. Like many shippers, SafeFence has seen price increases from LTL carriers and fuel surcharge increases, which required her company to increase its product prices.

But one strategy Lewis uses to minimize the impact of LTL rate increases is the use of online bidding tool FreightQuote, which allows a more streamlined bidding process for time-sensitive shipments. Lewis says some carriers like to be included in the FreightQuote bids, but others really dislike the increased pricing competition.

Lewis emphasizes online tools are especially useful to midsize shippers that may not have the volumes to leverage with carriers in pricing negotiations.

Lee Cornell is a logistics manager at Firstar Fiber in Omaha, Neb. and has seen fuel surcharges increase up to 25% this year. He says there is a definite advantage to knowing not only the base rates a carrier is using, but fully understanding the fuel surcharge in use.

"All of the carriers use a different fuel surcharge and if you cannot find it or understand it, you cannot properly compare pricing," Cornell points out, adding that a concerted effort to consolidate LTL into truckload shipments is always good advice.

Cornell also recommends tracking service levels of carriers as closely as possible, but says it can be difficult. "When there is a service problem, carriers usually say it is because of a late pickup at the last stop or because of a driver shortage."

And certainly there are always options in terms of carriers. While the LTL industry has seen some consolidation in recent years, Gary Lozowski, logistics commodity manager at Invensys in Foxboro, Mass., says there are some very strong second-tier regional LTL carriers that are hungry for business in the current LTL environment.

"For example, we use Brandt Trucking in several states in the Midwest and they are consistently more flexible in terms of service and pricing than many larger carriers are," he says.

Some businesses are overhauling their entire supply chains to lower the impact of increased trucking costs. For example, the San Diego Union Tribune recently covered the story of Olhausen Billiards, a company that had been manufacturing its pool tables in San Diego since 1973, but has decided to move its factory to Tennessee because it is more centrally located for U.S. distribution and will lower the company's trucking costs. "We're on the western edge of the continent, while 65% of our business is east of the Mississippi," Olhausen president Gregg Hovey said. Moving to Tennessee will shorten its average shipments and decrease its fuel spend considerably—enough to justify moving its plants halfway across the country.

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