Why chasing transport carrier volume discounts through one carrier may end up costing more than using multiple carriers Freight Controller

Why chasing transport carrier volume discounts through one carrier may end up costing more than using multiple carriers

“If I give all my freight to the one carrier, won’t I get a better price and therefore save money?”

This is one of the most frequently asked questions we receive when discussing the benefits of a multi carrier dispatch system and transportation strategy.  It’s a perfectly reasonable question considering that one of the fundamental laws of economics is about the power of scale and bulk purchasing power.

Like most questions in business there is not always a straight forward, easy answer.  There are subtleties that need to be taken into account.

It is true that in most cases a carrier will provide a customer with a lower unit price due to a higher volume of business being purchased, however there are varying levels of volume discounts available and these discounts may not necessarily be worth the trade off in other areas of your purchasing.

Smaller vs. Larger shippers and Complex vs. Simple shippers

In our experience, companies with modest freight expenditures gain the greatest leverage by consolidating all the purchasing with one or two carriers.  On the other hand, those companies with medium to very large freight expenditures have the ability to “share” their freight expenditure across several suppliers whilst still delivering significant freight volumes to individual carriers.

What constitutes modest expenditure, versus medium or significant expenditure, is difficult to define as a black and white answer. Your freight profile, or the level of transport complexity if high, may necessitate having several different carriers to complete the task.  As a general rule freight expenditure under $10,000.00 per month could be considered as modest, while expenditure above this and up to $100,000 per month, could be defined as medium.

The best ways to illustrate the concept of having a multi-carrier strategy to drive costs below those that would otherwise have been achieved by consolidating all expenditure through one carrier, is to highlight a case study we have recently come across.

Case Study

This particularly company was spending about $50,000 per month on express transportation services with a national express carrier transporting cartons and skids around the country.  The customer felt that there might be some value in having a multi carrier strategy and asked us to complete a review accordingly. They wanted to maintain a similar level of service to their current arrangements i.e. national express. 

As part of the preliminary review, three other prospective carriers were asked to put forward a price schedule.  After re-calculating the company’s recent consignment history it was interesting to see that one of the prospective carriers price outcome was approximately 5% higher, while two of the others were 1.8% and 4.5 % lower overall.  This indicates that the incumbent carrier’s pricing was very competitive and all carriers were fairly close.

While there were some modest savings on offer, many customers may conclude that a saving at this level is not worth the effort of changing carriers. However, upon closer examination of the analysis you could see that there were clearly certain areas and consignment types where one carrier had better pricing than the others and visa versa. 

As a result, we took the output from the two best prospective carriers and modelled them so that we selected the best option for each consignment.  We found that there was a very significant saving of 20% with one carrier carrying just under 60% of all consignments. 

Carrier Negotiation

Now at this point many people might conclude that it’s all well and good to show this in a model, but in the real world the carriers are not going to be prepared to share the account.  Well, what we did next was to speak with the two prospective carriers about this scenario and one of them indicated that they would be perfectly happy to share the account because it still represented a significant amount of new revenue and that their proposed prices would stay as originally quoted.

The other prospective carrier indicated that they would be happy to share the account, but as a result of the lower potential revenue they said that they would need to change their pricing slightly. Their kg rate was increased by approximately 4% but they also indicated that there was a possibility that if they could be guaranteed $25,000 per month they would keep their rates as is.

To be conservative we decided to ignore this statement and simply re-run the analysis using the higher proposed rates.  Because many of the consignments were carton deliveries, and the carrier had not altered their basic or minimum charges, after factoring in the small price increase on the kg rate, the overall increase in the transport cost was approximately 2%.  We then ran the analysis again selecting the best carrier option and found that the effect of the price adjustment by the second carrier was negligible and made a difference of less than 1% to the overall outcome.

The message is clear from the analysis that on this occasion, despite forgoing some of the volume based discounts, by sharing the account with two carriers and selecting the least cost carrier option while maximising the strengths of each particular offer, the customer achieved a significant benefit far greater than could be achieved by simply replacing one carrier with another.

Automated least cost carrier functionality

Now clearly when moving forward to implement this strategy and achieve the potential outcomes it is absolutely critical that the company use a multi-carrier dispatch system that allows you to select the least cost carrier for each consignment.  This can be done by either having their warehouse operators select the best option as they create the con note (using a least cost pricing tool), or by automating a consignment import and using a least cost module to select the best option before finalising the consignment note.

If you are interested in learning more about least cost carrier tools such as Freight Selector  please refer to this previous blog article.

Conclusion

The above example highlights that volume-based discounts are seldom sufficient in their own right to negate the benefits associated with selecting carriers based upon their service and price.  Many carriers will focus on particular geographic areas of operation, or certain freight types to provide a niche offer, and therefore offer more competitive pricing under certain circumstances.

If a customer has sufficient volume of freight to negotiate with several of these carriers then its normally a better financial outcome than simply consolidating all freight with a single carrier in an effort to maximise any potential volume discounts.  Of course, there are many other factors that lead to the optimum selection of a carrier or carriers to supply your service, but when examining volume discounts only, there are other ways of achieving a better outcome . 

At least it’s worth reviewing the situation.  You never know what potential benefits may come of it.

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