Freight buying — complexity is increasing and sourcing strategies need to adapt

In this guest post, Alan Gleeson, Head of Sales and Marketing at Keelvar, examines how sourcing optimisation for freight is fast becoming an essential strategy to maintain price competitiveness.

One of the chief beneficiaries of the growth in e-commerce in recent years is the wider freight sector. And while drones may be some time off (although it could be sooner than we think with both Google and Amazon already making significant progress) the freight industry has seen a range of innovative entrants in recent years. To date much of the innovation has been on the dispatch and operations side, be it GPS tracking or route optimisation. Companies like Scurri and Shutl have secured funding, supporting their attempts to make the delivery process more efficient.

However, attention is now being turned to the upfront sourcing side, with some of the leading buyers of freight transport services looking at how they source as they look to combine carriers (delivering the goods) across lanes to maximum effect. The reason is simple. Sourcing optimisation is a key driver for delivering 5 percent to 15 percent improvements in results, and given the volumes being transacted the amounts in question can be quite considerable.

Many freight buyers still rely on relationships and spot markets for ad-hoc purchasing despite the increasingly large volumes being transacted. As volumes increase, across multiple origin: destination pairs, the process gets more complex.  More scalable techniques are required, both to operate at greater speed and to enable buyers to leverage spending power. ‘Phoning around for quotes’ is no longer an adequate strategy for growing companies. Nor is it sufficient simply to seek the best option for each lane individually (this approach fails to capture supply-side economies and leaves the shipper vulnerable to contracting with too many carriers when they should be building partnerships).

From a carrier’s perspective, a key challenge is filling available capacity, with the need to ‘balance their networks’ being paramount, as they seek to operate efficiently and close to full capacity. Hence, a carrier bringing goods from China into Europe will be particularly keen to secure business going the opposite way, and will thus be prepared to bid aggressively on business on the return leg if they have the means to do so.

Utilising Sourcing Optimisation

Optimisation enables both parties to engage in a manner that allows large shippers to leverage their scale and market power, while simultaneously enabling carriers to ‘balance their networks’ offering aggressive discounts as part of the process.

Consider a manufacturer (a shipper) regularly transporting ocean cargo from Europe to many Asian ports. Using sourcing optimisation, they can list all their volumes and origin / destination pairs as ‘lanes’ (lots or line items on a price schedule).  Carriers can then bid on these discrete lanes, while also having the ability to bundle attractive combinations together so they can meet their needs of balancing their networks. If one carrier has a lot of business going one way, they can simply bid aggressively on a lane coming back increasing their odds of success, while also balancing their networks. A clear win: win for both parties to the transaction. When you have multiple carriers bidding (who are all seeking to balance their networks) and large shippers with significant volumes, the gains from optimisation can be impressive.

The Need to Align Corporate Strategy and Sourcing

While price is an important factor, it is not always the primary business driver for shippers and logistics companies. Some carriers are more dependable than others when it comes to collection and delivery times. Sourcing optimisation helps freight buyers explicitly to bias the award of contracts to favoured carriers through explicit business constraints that are included. It does this through the utilisation of quality scores as part of a Most Economically Advantageous Tender process (MEAT).

In summary, using optimisation it is possible to unlock value as carriers offer more expressive bids describing synergies. It also helps shippers and freight forwarders to determine the optimal blend of trusted and favoured carriers. The increase in freight movements and complexity of the industry is driving the adoption of powerful sourcing optimisation engines to manage freight buying. And the earlier adopters are utilising this approach as a key source of competitive advantage.

 

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