In transportation, there’s a fine balance between securing competitive market rates and avoiding rates that are unsustainable. Many shippers have experienced awarding a lowball price on a lane that looks great on paper — that is — right up until the carrier starts rejecting loads because someone else will pay more. On the other end, a 100% (or near 100%) service level is the aspiration of many shippers, but if that requirement leads to paying double the market rate, that isn’t sustainable either.
The whole “sweet spot” mentality is about finding the middle ground between what a shipper is willing to pay and the carrier’s ability to service the load. You would think this is a fairly clean-cut task, especially with the abundance of data available today, but as the market is constantly changing and shifting — it’s hard to keep up.
Here are a few tips & approaches that can help shippers find (and keep) their sweet spot:
Validate Rates from RFP
This seems straightforward enough, but there are a few key details related to Request for Proposal (RFP) bid validation that can make an impact when looking for differences between rates that will withstand the terms of the contract and rates that won’t.
When most shippers think of validating pricing, the process usually starts by benchmarking rates with a third-party index. While this is an important step in the process, additional measurements should be taken to ensure you’ve found the sweet spot of rates.
Some bids are so large and complex it can be difficult to evaluate pricing beyond what is submitted through the RFP. The rates are taken at face value, and there are rarely meaningful conversations with carriers on how and why the rates were established. A good first step in your RFP review would be to flag “outlier” bids. That is, bids that have a statistically significant gap between where the average bid lies or those that seem to be far off from averages. There could be a perfectly valid reason for the gap, but doing some due diligence will increase the likelihood of identifying a rate that falls into your sweet spot, versus rates that are doomed to fail.
A few follow-ups to this include:
- Validating that the carrier made the right operating assumptions on the business.
- Asking probing questions on the competitive advantage a carrier might have on a lane. This includes things like having a perfect backhaul, a well-placed terminal or access to a private fleet.
- Understanding the carrier’s overall approach to the bid. Identify whether a carrier is trying to buy their way into a book of business to establish rapport or carve out niche lanes where they have a true competitive advantage.
- Giving the carrier a chance to validate and correct their bid submission. This helps to avoid the old “mis-bid” or “fat-finger” in which the carrier submitted a rate at an unintentional price point.
Make sure to explore reasons for stand-out or low pricing from new carriers. Taking the time to do this before awarding the business will help ensure that you have found the sweet spot of pricing that will work for you.
For more tips & advice on how to effectively execute an RFP as quickly and efficiently as possible, follow our RFP 101 guide.
Maintain & Monitor KPIs Regularly
Just because you’ve found your sweet spot doesn’t mean your pricing will stay there. Between internal changes within your business and shifting market conditions, pricing is something that needs to be evaluated constantly.
Stay in your sweet spot by regularly reviewing Key Performance Indicators (KPIs). There could be dozens of KPIs that can be used to evaluate rates, but two are absolute must-haves: On-Time Delivery (OTD) and Tender Acceptance (TA).
Many shippers rely on carriers self-reporting metrics, while other shippers have developed internal programs to manage this themselves. Whichever your method, it’s important to have a regular review period at least once a month to monitor performance. These check-ins will provide some indication as to the effectiveness of your rates. Too low of a tender acceptance or on-time delivery should prompt a conversation with the carrier to better understand the challenges within your partnership.
Monitor Internal Operation Performance
Staying in the sweet spot also means being in tune with what’s going on operationally within your organization. Many operating assumptions go into rating a lane, including things like loading and unloading times, hours of operation, drop/live loading & unloading and frequency of canceled shipments. Shippers do their best to communicate these operating details, but sometimes even the best-laid plans change.
As a good partner, it’s important to recognize sizable gaps between operating assumptions and operating realities. Trying to resolve those challenges is a good first step, but sometimes these challenges cannot be overcome. Rather than forcing the carrier to continue to take the freight, revisiting the pricing to align with the operational realities is the best strategy to take.
The sweet spot of rates can sometimes be fluid. While not ideal as a broad strategy, adjusting the sweet spot based on material changes to operating realities is the best way to go.
Establishing and maintaining the sweet spot of rates is a tough challenge but necessary to maintain the integrity and longevity of the rates you establish. Benchmarking rates, validating through the RFP process, maintaining & monitoring KPIs and adjusting for operating realities are all part of the equation. While time-consuming, this activity is a valuable use of time when considering the alternatives of excessive spot market exposure.