Finding a fit

Online bidding for transportation isn’t necessarily about driving freight rates into the ground. With robust technology and a collaborative approach, freight auctions can produce a win-win result for carriers and shippers.

In the late 1990s, Internet-based auctions or freight exchanges began to spread throughout many supply chains. For the most part, these online markets seemed to be designed expressly to squeeze out transportation costs by increasing visibility and competition for freight. Although the Internet was an opportunity for shippers to leverage competition as a means to lower costs, carriers instantly formed a negative impression regarding freight exchanges.

“When automotive first went online, 20 percent of our revenue went out the door,” says Kevin Burch, president of Jet Express, a 400-truck carrier based in Dayton, Ohio. After taking some hard blows from freight exchanges, many carriers became leery of participating in a process that appeared to do nothing but hammer down rates. Burch, however, says that online bidding has opened up a new strategy – that of gaining visibility of all of a shipper’s freight to go after new business. He has been able to recapture some of his lost business and even expand into new areas.

Whether carriers like it or not, online bidding likely is here to stay as a powerful tool for shippers to lower freight costs. But as carrier capacity tightens due to strong freight demand, driver turnover and the new hours-of-service rules, shippers may need to move to more collaborative, rather than competitive, methods to constrain transportation costs.

Today, some shippers and carriers already use Internet-based systems to power collaborative approaches to lowering costs. Some of these systems feature: sharing of detailed traffic information for carriers to better utilize their assets; factoring out personal relationships in awarding freight; and in some cases, collaboration among shippers to offer carriers dedicated routes in return for pricing discounts.

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Sharing information
Several years ago, D&D Sexton Inc., a 150-truck refrigerated carrier based in Carthage, Mo., hauled raw turkey for a customer from Missouri to a processing plant in Minnesota, and then loaded finished product back to Kansas City. When the customer began using a nationwide online bid auction, Sexton discounted each lane in the roundtrip based on the assumption that he would get all or nothing. The bid process was intense, but in the end, D&D Sexton Inc. was only awarded a one-way trip from Missouri to Minnesota.

“That doesn’t make any sense,” says company President Dean Sexton. Based on this past experience, and the volume of bid packages he receives, Sexton says he often declines to participate in online bid packages. He perceives that the process focuses only on prices for single lanes – a process he finds anything but optimal.

Online bidding typically relies on a reverse auction process for truckload carriers to bid on freight lanes, but sophisticated bid packages allow carriers to condition a bid for a single lane on being awarded a certain volume of freight in a complimentary lane. If submitting a bid from Dallas to Houston, for example, a carrier can condition the rate of this particular lane on receiving a certain volume of freight priced at X amount from Houston to Austin, says Darren Wood, vice president of product management for the logistics suite of I2.

In practice, however, few carriers actually take the time to submit bids on lane combinations. And even when they do, the discounts are hardly effective in winning a lane, according to research by Clint Plummer, who recently studied how truckload carriers structure bid packages.

Representatives of bid optimization software vendors, including Manhattan Associates, Schneider Logistics and I2, say that one of the most effective ways to collaborate with carriers in the bid process is to provide carriers with in-depth details of shipping lanes. Carriers can use the data to forecast lane volumes and the day of the week, time of day, and the season in which freight will ship. The overall strategy in providing better information is so carriers will provide pricing discounts based on better asset utilization.

FreeMarkets, an online bid package that Jet Express’ major customers use in the automotive industry, pre-packages many shipping lanes into roundtrips. Those opportunities come with detailed information about lane requirements, such as the number of stop-offs, loading/unloading times, volumes, drop trailers or live loads, Burch says.

“Anything that is a closed loop changes the rate,” Burch says. “If the carrier’s cost per mile is lower, the shipper or vendor knows he can get a lower price for it.”

Another detail that Burch says is helpful in online bid packages is a ceiling price for each lane – the highest price the shipper will accept in that round of bidding. The ceiling price often is the current rate. Burch uses the ceiling price to quickly determine whether or not Jet Express is competitive in each lane. But don’t assume that the ceiling price represents the true maximum price in that lane. If a shipper is trying to reduce costs significantly, it may find that no carrier is willing to accept that rate. The shipper then will need to raise its ceiling. In addition to a ceiling price, Free Markets shows a reserve price for each lane – the price that will make it beneficial for the shipper to switch carriers.

“For a million annual spend, chances are a shipper is not going to switch for $3,000 to $4,000 in annual savings,” Burch says. “Chances are, it won’t switch unless the discount is 2 to 3 percent.”

Leveling the playing field
Although a shipper may use advanced technology to optimize its network in terms of pricing and coverage, this is no guarantee that carriers will be awarded the freight exactly as anticipated when bidding. Shippers may find it impossible to factor out personal relationships with carriers in the decision regarding which carrier gets what freight. But technology can help reduce this bias for a group of similarly qualified carriers. That’s the role of transportation execution systems, which are designed not just for bidding freight contracts but for automating carrier selection and communications each day based on parameters involving price, service and capacity.

System Transport, an 800-truck carrier based in Spokane, Wash., uses an online transportation execution system called BestTransport to interact with three customers, says Dale Peterson, chief operating officer. The carrier automatically receives load tenders in its operations system from BestTransport through electronic data interchange (EDI) based on a priority list that ranks the carrier based on rates submitted for each lane, equipment availability and its service record.

“The beauty for shippers is that it is done through a central office that controls it,” Peterson says, meaning that regional traffic directors can’t change your availability on that list randomly. “You get put on list of carriers in numerical order, from the lowest to the highest lane rate. If you want to lower your rate if you’re not getting any freight, they might put you higher on the list.”

One of System Transport’s customers, Allegheny Ludlum, uses BestTransport to automate the key aspects of its carrier interactions, says John Sample, director of traffic and conversion services for Allegheny Ludlum. The producer and marketer of specialty alloys automatically tenders loads to carriers based on pre-negotiated rates. Its carriers receive and accept or reject load tenders through their preferred medium – a fax machine, the Web or directly through their operations systems via EDI.

Transportation execution systems allow shippers and their carrier partners to set and measure performance expectations on a variety of metrics, including detention times at docks, by collecting information directly from a carrier’s dispatch system through EDI or through a secure website. Shippers maintain individual carrier scorecards that automatically factor service into whether or not carriers receive loads.

Lower Columbia Transport, a 23-truck carrier based in Livingston, Wash., logs in to a secure website each day to view load tenders and enter pickup and delivery information from Transplace, a third-party logistics service (3PL). The carrier automatically receives loads based on pre-determined rates and on the condition that the carrier maintains 98 percent on-time service, says Lower Columbia Transport President Allen Ellis.

“With Transplace, the loads you receive are based upon your service, not the personality of an individual,” Ellis says. Before using Transplace, “when we took somebody to lunch, we would see a volume increase. If we had not seen that person for a while, the volume would change.”

Shipper collaboration, carrier benefits
In addition to using Internet-based systems for bid processes and to automate freight transactions among a community of carriers, some shippers are collaborating with other shippers to offer “continuous moves” or dedicated routes to carriers in turn for more competitive rates.

This type of collaboration is more likely to be offered to carriers through 3PLs since a 3PL is, by nature, a consortium that leverages routes and volumes of different shippers to produce price efficiencies, says Matt Menner, director of transportation and sales for Manhattan Associates.

Before using Transplace, Lower Columbia Transport hauled outbound loads for its main customer in the Northwest to Southern California and found its own backhauls to Washington. When this customer outsourced its logistics to Transplace, the carrier began to make continuous moves for Transplace’s clients into the Los Angeles area and back to Washington, Ellis says.

Transplace automatically tenders round-trip loads to Lower Columbia Transport through a secure website. Pickup and delivery times are based on roundtrip moves, and origin and destination points change on a daily basis, Ellis says.

Enabling this type of collaborative logistics requires more than a neutral technology network since very specific requirements must be worked out among parties, such as pickup and delivery times and other “rules of engagement” among shippers.

BestTransport recently formed a shipper collaboration service to identify and show shipper clients contiguous routing and complementary volume opportunities and introduce these routes to carriers. Currently about 5 percent of the loads in the system are moving through continuous moves, says Rick Frio, vice president of professional services for BestTransport.

System Transport’s Peterson says that he has had opportunities through BestTransport to do continuous moves for shippers, but “we opted out of it because of better rates elsewhere. It was our choice not to do it,” Peterson says. “The opportunity is there. It will work out. Like any technology, it takes a while, but the more we use it the better it gets.”

Nistevo, which markets itself as a collaborative logistics network, holds meetings for representatives from carriers, shippers and 3PLs to discuss opportunities to create continuous moves, the company says. Before using Nistevo, General Mills Inc. – one of the founding members of Nistevo – collaborated with its dedicated fleets to build continuous moves with outbound and inbound freight in its network, says Tony Jolly, operations manager of dedicated fleets for General Mills.

“At first was between us and the carrier,” Jolly says. “But the next level of collaboration was with other shippers.” General Mills loads its freight into Nistevo on a daily basis, as do other Nistevo clients. Its dedicated fleets log in to Nistevo and can do geographic searches for loads to fill other legs to make profitable runs and assign them to a tour. The carrier, General Mills, and other shippers negotiate the rules of engagement and all parties have visibility to the loads assigned to a tour, Jolly says.

“We sit down with carriers and build schematics, which are seven-day or 14-day tours,” Jolly says. “The schematic must meet certain criteria to keep the carrier whole and meet certain productivity goals.”

Easier said than done
Online communities of shippers and carriers, such as BestTransport and Nistevo, can be used to analyze data to identify complimentary shipping lanes and volumes to offer carriers dedicated routes in turn for pricing discounts. But one of the main reasons why this type of collaboration is far from being widespread is the dynamic nature of transportation.

“I would venture that if you were to interview 20 different supply chain managers, all would love to have collaboration, but they would also say, ‘I’m not exactly sure how that’s going to happen,'” says George Grossardt, vice president of alliance services for Schneider Logistics. Allegheny Ludlum’s John Sample agrees. “In today’s climate of low staffing levels, shipment locations, just in time shipments and carrier shortage, it is difficult.”

Outside the 3PL environment, Grossardt believes Internet-based systems, such as Nistevo, have limited success at bringing shippers together to collaborate. “The theory makes sense, but it gets down to very pragmatic problems,” he argues. “Shippers may agree to share capacity on complimentary lanes to get a price reduction, but if one is holding up truck that you need at a shipping location, you have to go to a carrier at a higher rate. But who pays the difference?”

Although personal relationships are required to hammer-out the details in shipper-to-shipper collaboration, the Internet continues to power shipper-carrier relationships by enabling multiple parties to share information without personal relationships tainting the process of identifying and executing win-win relationships.

“I tell people that you don’t get freight anymore by going to the traffic manager and taking him to lunch,” Burch says. “Now everything is on the table.”

The Truckload Carriers Association is sponsoring an April 22 audio conference regarding online freight bidding. For more information, visit this site.

A winning combination?
In general, online bid auctions have failed to generate the savings they are capable of generating for shippers, according to researcher Clint Plummer. Plummer recently completed a research paper, “Bidder Response to Combinatorial Auctions in Truckload Procurement,” in pursuit of a degree at the Massachusetts Institute of Technology (MIT).

“Pricing discounts given by carriers are mostly dictated by the amount of deadhead and layover times incurred, more so than by the volume of freight awarded,” Plummer says. Recognizing this fact, several sophisticated bid packages allow carriers to structure “combination” or “conditional” bids. Carriers can submit a rate for a single lane on the condition that they are awarded a complimentary lane at a certain price and volume. In practice, the combination bid structure has had little effect on pricing discounts, Plummer says.

Based on interviews with truckload carriers and a statistical analysis of 13 major bid packages involving 644 carriers, Plummer says that few carriers take the time to make bid combinations, except for the largest truckload carriers that use proprietary software to analyze bid packages. One reason is the large number of requests for quotes (RFQs) that carriers receive. Carriers lack the resources they have to commit a great deal of time to an auction, he says.

Out of the 644 carriers, about 30 percent submitted combination bid packages. This group of carriers submitted between two and seven lane combinations and the vast majority of the packages were small, containing between two and four lanes. In general, the discounts carriers gave to packaged lanes tend to be around 5 percent, which is typically not enough to win a lane since chances are, some carrier will submit a cheaper discrete bid – around 10 to 15 percent discount, Plummer says.

If combination bidding is not the optimal solution, then what is? According to Plummer, the main factor of a bid package that produces the most competitive rates is the amount of detail provided about each lane, including the day of the week, the time of day and the season in which freight will ship. After all, even if carriers are awarded packaged lanes, their asset utilization does not necessarily improve since freight does not become available when the carrier has a truck available.

For more information on Plummer’s research, visit MIT’s Master of Engineering in Logistics program at this site.