Recently I posed a question to the professionals who lurk in the Supply Chain Management section of LinkedIn Answers. I was interested in whether in their estimation, shippers train their transportation carriers behavior. Specifically I wanted to know whether carriers become so price focused as a result of competitive pressure that service suffers.
LinkedIn Answers Question: Do you think shippers have trained their carriers to be too rate focused vs service focused?
The answers I got back were wide and varied. Several common themes emerged. I list them here.
1. I got accused of asking a leading question! Being a "carrier guy", some folks thought the way I phrased the question was possibly pejorative toward shippers and maybe telegraphed my own opinion a little. In hindsight, I can see how they thought that. My intention however was to get a 360 degree view of an issue that has a wide variety of perspectives.
2. A number of people, especially those who had spent time on both sides of the business said they thought that this issue works on a pendulum basis. This was input I got from Consultant Clyde Usher, President of Applied Insight:
"When customers believe they have reached their service goals with a current provider, they begin to try to reduce cost and increase performance to create added value. When looking for new services they are more concerned about performance than cost. Bid requests for current services are concentrating on performance and cost. Shippers complain about the rate swings because of it's impact to their budget. Customers are wary of performance promises, because the carrier measures internal performance rather than performance to the customer.
Both the shippers and carriers have created the adversarial relationships based on "what's in it for me". Creating mutual KPI's and processes with regular reviews allows both parties to concentrate on their core business and their value to each other. This will also reduce cost for the carrier and shipper, while increasing value for the shipper. Until both parties are truly interested in a mutually beneficial relationship that shares responsibility for rates and performance, the pendulum will continue to swing."
3. One of the other factors pointed out was how difficult it is to innovate when you are the incumbent carrier. Richard Palarea, COO of PA Associates put it this way:
"From the standpoint of the incumbent carrier, they are being told that the only way to keep the business is to meet the reduced-rate offers being thrown at them by the competitors. At the same time, they have a toolkit of subject-matter and vertical industry experts, automation (IT) experts, reporting tools and other areas of optimization that they would like to use to enhance the customer relationship along the lines they were originally told were important (I.e.: “we want a partnership with our carrier”). The irony is that customers who need those services the most rarely see any of what is available because they don’t allow their account executive to go deeper with them anywhere past price and service issues."
I will add to Richards opinion by saying that my own experience is that incumbent margins can become so thin after a number of bid cycles, that the desire by a carrier to invest in risk taking or innovation is weakened because the business no longer has an appropriate return on investment. Outside carriers have nothing to lose by presenting innovative ideas. Innovation is not risk, it is investment, but one that has to be self funding.
4. Another key element I saw was the issue of Talent and Experience. Young account executives often do not have sufficient supply chain experience to look for innovative ways to protect their tariff rates. When shippers think in terms of efficient movement of goods through an entire supply chain and the carrier rep is only thinking about filling the ship or selling X amount of 10:30 Express service, the conversation inevitably devolves to how cheap can the rep make his rate for in order to make his quota. The fact is the rep can protect his interest by helping the shipper look at other areas of the supply chain where potentially even larger savings can be had. This often comes down to supply chain training and fluency in the wide and disparate products that many of the integrators and larger carriers offer.
Carriers and integrators hurt themselves when training is only about "product". It must be about Supply Chain if the product presentation is going to make sense in the larger context.
"Sadly, whether due to training, short tenure, territory turnover, management change, other factors or a combination of these, the carriers' account managers, whether young sales reps or even national account executives, rarely develop relationships that afford them the opportunity to foster mutual understanding with client shippers. In my view, the ability to make the leap, and work together on increasingly understanding the shifting priorities of business partners, brings competitive advantage to the parties, benefiting both shipper and carrier." - Scott Sigman of Vanguard Services
Relative to Scott's point, talent and training investment is a two way street. Shippers must invest in training their junior and mid level managers in supply chains and not just in single modes of transport. Carriers are resources of both market information and supply chain delivery. Savvy shippers will develop relationships in a way that leverage that knowledge by asking carrier executives what they see and what they are learning about the market generally. Those kinds of relationships start with carrier and shipper managers having open dialog.
5. The Push for Results "This Quarter" drive many relationships. Tom Donovan a senior executive at Trans Global Logistics put it this way.
"A Senior Ocean Carrier Exec responsible with P&L responsibility at a Trade level, speaking at the TPM Conference in Long Beach this Spring stated only 30 of their 1400 Service Contracts had true performance elements in the Agreements. While everyone on both the Carrier and customer side preach the Service Aspect, its more lip service than reality.
Customers are motivated by this Quarters/this Years Results, while Carriers know their offering is largely a commodity. Until the discussion becomes strategic - more about taking cost out of the equation, or gaining efficiency it will stay that way. Very few Companies utilize their Supply Chain as a Competitive differentiator - those that do are willing to engage their providers accordingly."
Relative to Toms point above: I think carrier executives often suffer from the same Quarter on Quarter performance pressure and have been known to roll over to gain volume at the expense of remunerative rates.
Where my concern comes out is in the area of auctions and procurement based on price alone. Despite claims by most very large shippers that service is a factor, the auction model definitely drives the carrier relationship toward a price only thought process. Yes, transportation is thought of as a commodity but the commodity really is SPACE. Space on a ship, aircraft, truck or rail car. Paperclips are also a commodity. Both can be bought with an auction. The issue is that the "space" moves. How well that "space" moves directly impacts the shippers sales relationship with his own customer.
"Getting that purchased space, which the shipper has filled with his product, from one side of the planet to the other is still more art than science."
Those who subscribe to the bid or auction model claim that invitation to the bid is based on service and that ability to perform is a prerequisite to bidding. Fair enough. However, for the incumbent carrier, it amounts to revenue erosion. That's the slippery slope where I think that Shippers may incite a mind set that is not positive for an innovative business relationship.
I consistently see that the best sales companies are really supply chain companies.
Those companies whose senior management realize that the ability to dynamically move product quickly to market will have a
competitive advantage. Senior level relationships between carriers and customers can drive relationships
beyond price and into innovation, but not without price as a basis
point. That discussion tends to break down at lower levels in both
sides of the business.
My favorite business deals always involve scenarios where a clever solution leads a competitor to wonder "What the hell just happened?" Most of the time that wasn't a rate issue. It was a deal made by a shipper and a carrier who both knew each others business and needs.
To those who participated in my LinkedIn question...THANK YOU.
Your continuing feedback here is welcome!
Eric
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