Three Reasons Your Freight Rates are Higher Than the Market
Logistics managers can get complacent about their freight rates, and this is a problem. With so much else to manage in the day-to-day, it’s easy for some to assume that they’re getting “around what everyone else is paying” and that’s good enough.
However, that’s rarely the case for companies that are not actively managing their freight agreements. Many shippers who look closely will find their rates are not competitive and that their overall logistics costs are too high. The good news is understanding why this can happen is easy, and preventable.
Here are three reasons your logistics costs are higher than they should be, and what to do about it.
The Market Changes . . . Often
Many factors influence freight rates and keep the market in constant flux. The current capacity crunch is one of the reasons that freight rates have increased over the last year — transportation is a cyclical market like most are. So, when the market leaders (a.k.a. large carriers) feel it’s possible to start pushing up rates, other carriers usually follow.
Right now, with the logistics market in its peak shipping season, capacity is extra tight. But soon it will be a buyer’s market. There are also signs the driver shortage is easing, or even overstated. Once peak season is over come January, it will be a good time to revisit your carrier agreements and see if there’s an opportunity to find better rates.
Lack of Visibility and Technology
If you don’t have a holistic view of what’s going on in your logistics operation, it’s impossible to know where improvements can be made. Most shippers that lack this type of visibility due to inadequate logistics technology and processes have no knowledge of their current costs or the ability to effectively “go to market” in the hopes of lowering rates. You can’t manage what you don’t measure, as the saying goes.
Worse yet, the day-to-day of shipping is probably still very manual for these companies, so decision-making around routing, carrier selection, and costs is done uninformed by real data. Shippers operating this way have no baseline of what their rates currently are, much less what they could be. Putting processes in place to gather and measure data is the first step for companies in this situation.
Not Aligning Logistics
When a company’s logistics capabilities and planning do not match up to its mission and where it wants to go, costs won’t just be too high, but growth will also be hindered. The logistics partners that companies work with, like their carriers and warehouses, need to have capabilities that align with what the company is looking to achieve.
A great example of this in practice is Amazon’s ability to provide one- or two-day delivery. This ability is the result of a deliberate plan to create the necessary logistics infrastructure to provide this level of service. Misalignment in this way is understandable as small companies grow, but it’s also something that should be revisited often along the way (just like carrier rates).
In order to know if its freight rates are competitive, every company needs to be aware of where its costs are today and what capabilities it will need in the future. The market and businesses themselves are always changing, so complacency or assuming the current rates are good is never acceptable. This means the timing is always right to evaluate your freight agreements to make sure you are getting the best rates possible.