Imagine your company as a vessel navigating the vast ocean of freight transportation. When waters are calm, you might not pay much attention to your route or methods. But when storms brew and undercurrents strengthen, reassessing your navigation strategy becomes essential to avoid losing direction or worse — running aground.
The freight market is gradually heating up, much like the proverbial frog in slowly boiling water. When environmental changes occur imperceptibly, complacency often follows. For astute shippers, now is the critical moment to evaluate and adjust supply chain strategies before costs spiral out of control.
Underlying Drivers of Rising Freight Costs
Operating a truck today undoubtedly costs significantly more than it did several years ago. Despite these rising operational expenses, shippers have largely avoided substantial freight rate increases. What explains this phenomenon?
- Carrier Efficiency Improvements: Through optimized operations and customer relationship management, carriers have dramatically enhanced their cost control capabilities. They can now more accurately identify high- and low-value freight and implement differentiated pricing accordingly.
- Economic Constraints: Recent periods of sluggish economic growth have limited carriers' ability to raise rates, giving shippers leverage in freight negotiations.
However, as economic recovery becomes increasingly evident, this balance is shifting. When GDP annual growth rates exceed certain thresholds, capacity tightens and carriers adopt more aggressive pricing strategies. The latter half of 2013 serves as a clear example — when GDP growth surpassed 2.5%, the American Trucking Association's freight index rose accordingly, with shippers and freight brokers facing sharp rate increases in the truckload spot market.
Data-Driven Best Practices for Freight Cost Management
While no one can predict with certainty how long the economic recovery will last, forward-thinking shippers are taking proactive steps to secure truck capacity at reasonable rates. Consider these best practices:
1. Optimizing Sales and Procurement to Reduce Freight Costs
Many companies implement lean inventory management to reduce stock levels. However, savvy businesses carefully consider how lean strategies affect freight expenses. While smaller, more frequent shipments and higher inventory turnover offer advantages, companies must find the optimal balance between lean requirements and overall freight costs as rates continue to climb. This requires deep analysis of historical data and predictive modeling to determine ideal inventory levels and shipping frequencies.
Data Analysis Applications:
- Historical Data Review: Collect and analyze years of sales, procurement, inventory, and freight data to identify key cost drivers.
- Predictive Modeling: Develop freight cost prediction models based on historical data to forecast expenses under various inventory and shipping scenarios.
- Scenario Analysis: Simulate different strategies to assess their freight cost impact and identify optimal solutions.
2. Refining Carrier Bidding and Sourcing Processes
Overemphasis on "core carriers" can lead to higher costs, particularly when shippers compel these carriers to handle freight outside their optimal networks. Best-in-class companies adopt a "right carrier" approach, matching carriers to shipments based on their networks and lanes. For less-than-truckload (LTL) procurement, evaluate the value of customized base rates in managing expenses. Evidence suggests shippers who dismiss base rates (assuming carriers will simply adjust discounts accordingly) often lose substantial sums. Selecting appropriate base rates, or customizing them, can yield significant LTL cost savings.
3. Becoming a "Carrier-Friendly" Shipper
This approach means building mutually beneficial relationships with carriers by understanding their needs and improving their operational efficiency and profitability. Examples include providing accurate shipment information, reducing load/unload times, and prompt payment.
4. Leveraging Technology for Freight Optimization
- Transportation Management Systems (TMS): Automate freight processes to enhance efficiency and reduce costs through order management, carrier selection, shipment tracking, and payment processing.
- Freight Analytics Platforms: Analyze shipping data to identify savings opportunities and optimize strategies through features like rate trend analysis, carrier performance evaluation, and lane optimization.
- IoT Technology: Monitor shipments in real-time to increase supply chain visibility and reduce loss/damage risks.
5. Establishing Cross-Functional Collaboration
Effective freight cost management requires coordination across sales, procurement, and finance departments. Sales can adjust strategies to minimize rush orders; procurement can optimize buying schedules to reduce small shipments; and finance can streamline payments to improve carrier satisfaction.
Executive Focus on Freight Costs
Corporate leadership is paying unprecedented attention to freight expenses. At recent CEO conferences, managing transportation and supply chains emerged as top priorities, with some executives ranking cost reduction among their three most critical objectives.
For some, this represents an opportunity; for others, a wake-up call. Regardless, committing to best practices and assembling the right team will position your organization to effectively manage and reduce annual freight costs — welcome news for you and your executives alike.
Conclusion
As the freight market heats up, shippers must proactively optimize supply chain strategies to control costs. Data-driven analysis can reveal savings opportunities, improve carrier selection, boost efficiency, and foster mutually beneficial carrier relationships. With executive leadership providing increased support and resources, companies that adapt to market changes and continuously refine their freight strategies will gain competitive advantage and achieve sustainable growth.