What’s the hottest topic in supply chain right now? If my e-mail inbox is any indication, it’s transportation. The story isn’t about the impact of crude oil prices, as they have settled below $100 per barrel after peaking at nearly $114 on April 29. Instead, the transportation hot topics are DVDs, pricing models, and best practices.
In the world of movie rentals, Netflix has caused quite a stir among customers and the media this week. The company has announced that prices will rise by as much as 60 percent per month for customers who want access to traditional DVDs and streaming video. What is the culprit? Transportation costs are the issue, according to a CNNMoney.com article. The article quotes Netflix CEO Reed Hastings that the company spent between $500 million and $600 million on DVD postage in 2010. The U.S. Postal Service will be hard pressed to replace the transportation revenue if these first class postage shipments disappear.
A related Associated Press article indicates that it costs $0.75 per disc to mail a DVD versus $0.05 to $0.10 to deliver a movie over the Internet. Hence, it is easy to understand why Netflix is changing their pricing model to push customers toward their Internet streaming model. Transportation savings go directly to their bottom line, providing additional resources to build out Netflix’s streaming capabilities and library of online movies. Will customers buy into this new model? Only time will tell, but you only have to look at the success of the Apple iTunes store to make a high probability prediction.
Dissatisfaction with transportation pricing is not limited to Netflix. In the less-than-truckload (LTL) sector of the trucking industry, little has changed with the traditional and confusing tariff system that is based on freight classification. More than half of the LTL trucking companies surveyed by my colleagues at Auburn University in their current LTL pricing study are dissatisfied with this system. The trucking companies believe that the system is antiquated and inflexible, according to a Journal of Commerce article about the study.
In contrast, only a quarter of the customers shipping freight take issue with the system as they continue to enjoy heavy discounts off the base rates. According to the soon-to-be released Auburn University research report, many of the respondents who indicated they were “satisfied” with the system included comments explaining they were satisfied with the system not because it is an ideal or high-quality system, but because the current system has been in place for so long that they have learned to make it work. This confirms that the current system is deeply entrenched, requiring those operating in the system to take an imperfect process and adapt to it so that it meets their needs.
This customer perspective falls into the category of “better the devil you know than the devil you don't know.” Unfortunately, there is little consensus as to a better pricing alternative. As the graphic indicates, LTL carriers prefer a pricing system that provides some level of rate certainty, but shippers are strongly in favor of a market-driven system.
Only a small proportion of survey participants show much interest in a pricing system where product density serves as the basis of freight rates. The lack of interest in this system frustrated one respondent, who said, “The U.S. for the most part is the only one that uses a freight classification system where the rest of the free world uses a density based program.”
Before the pricing system can be modified to reflect the realities of 2011, the lack of trust between shippers and carriers detected in the study must be resolved. According to my colleagues, this concern seems to outweigh the belief that pricing methods must be changed. Ultimately, a trusted industry leader must emerge and cautiously lead the way to more logical pricing.
The third interesting e-mail to land in my inbox this week was a link to the recently released American Shipper / Retail Industry Leaders Association Transportation Procurement Benchmark Study. The report outlines the results of a survey that was completed by 325 shippers and carriers on topics ranging from freight buying practices to rate trends. The 33-page report also highlights what top organizations are doing to differentiate themselves from average and subpar shippers.
The good news coming out of this study is that freight rates have not skyrocketed in the first half of 2011 as some experts had predicted. While most shippers are paying more for transportation, only 12 percent have been hit with double-digit rate increases.
In contrast, the best-in-class organizations have managed to keep their rates in check. The recipe for avoiding rate increases is to properly evaluate carrier bids during contract negotiations. This requires shippers to use a multidimensional evaluation of carrier bids that include price, service, and risk.
Another key attribute of top organizations is their centralized procurement strategy. Leveraging total volume during negotiations helps shippers secure stable contract rates. Centralization also allows shippers to develop a single set of harmonized requirements, develop network-wide plans, and match inbound and outbound volume.
So what do these three studies mean to the typical freight buyer? Unless you have an electronic product like Netflix with an alternative delivery channel, you need to understand carrier pricing methods, become an advocate for more logical and equitable rate systems, and adopt best practices for transportation procurement. The outcome will be better relationships with your carriers and rate stability, two important issues in an environment where capacity could quickly become constrained.