Freight procurement first supply chains

Read more about different freight procurement strategies. When to choose fixed contract tendering or go for spot rates?

Freight procurement first

When buying freight services, procurement managers can use different strategies to get the services they are looking for. Either they want to leverage their volume and fixed contracts for larger periods in time, either they want to play the market and buy case by case. Or, a combination of these scenarios, where a portion of the volume is secured in fixed contracts and some are open to spot business. Let’s compare the different strategies side by side. 

Fixed contracts

The process of fixed contracts entails long term agreements with the carriers. On recurring basis (e.g. yearly) you would launch a freight tender or collect rate cards from carriers. A freight tender would divide your volume in sizable packages on which the carriers can quote. An example for LTL volumes: when having frequent volumes to Germany, you might want to divide the country up in zones – let’s say south and north – and define different brackets that divide volumes in groups, each with a possible adapted rate. The different carriers can then fill out the bid sheet and indicate lead times. Additionally, you might want to share volume predictions for these buckets, so that a bidder knows what he is up. When all bids are in, the procurement manager can then simulate the different quotes and see what is the best fit. This process can be repeated a couple of times (bidding rounds) to get better rates and allocate volumes to the various bidders.

Pro: 

  • Leverage your volume in the contract – bidders get a % share, so they will give a better commercial offer
  • Lock/ensure supply in contracts - I need # trucks a week, so agreements are made upfront, especially handy in a tight market
  • Fixed budget - if your volume is predictable, so can be your budget

Con:

  • Variance - Difficult to cope with variance in (freight) demand
  • New lanes - What with freight outside of tendered zones?
  • Participation - Some carriers indicate they do not want to participate in tenders as this is often cost-only.


Spot rates

The strategy of the spot rate market is plain simple: when you have a freight, you buy it on the market there and then. This can be either to a fixed pool of carriers, or open for carriers to find. The methodology behind it can differ; collect offers with a limited time frame, post your load on a board or run an auction-like process. The latter process often leading to price bidding only. The acceptance of 3rd party bidding on the other hand, can leave the door open for less qualitative, even fraudulent parties to load your goods and god knows what might happen to your goods. Putting these remarks aside, either spot request process will be more intensive than a fixed contract tender as you would go on the market each time a transport is needed. The spot rate procurement process can provide several benefits such as flexibility, and potentially lower prices, but can also come at a cost: increased uncertainty of available capacity, potentially higher prices if the market is tight and so on. It might also be questionable if your service providers will seek a long-term relationship with you if you play them out each time against their peers.

Pro: 

  • Market – prices can follow market fluctuations more closely
  • Variability – you can cope more easily with a varying/unpredictable shipping pattern
  • Granularity - You allow carriers to fill their empty trips with additional loads, for example a return trip, or other combination which is less the case with pre-tendered freight patterns


Con:

  • Uncertainty – you might face a no-ship
  • Market – prices follow market fluctuations, a tighter market can affect prices negatively
  • Process – The procurement process is more intense, as you need to go to the market each time.
  • Intimacy – Service suppliers might not seek a long-term relationship with you
  • Quality – quality control on the provided or the to-be provided services might be more difficult 


Day-to-day operations

Integrating this in your operations is the next hurdle to take. There are many enterprises where print-out rate sheets are the norm and planners are bound to mail and phone to get their transports booked. We found that procurement processes are often too decoupled from day-to-day operations. It can be worrisome for procurement managers controlling that all agreements are followed, and rate cards are complete. In organizations where freight cost makes up more than 10% of the total goods value, every penny counts. 

Transmate helps you integrate the various procurement scenarios into your day-to-day operations. The cloud platform helps managers track missing rates, perform freight tenders with a couple of clicks and launch spot rate requests. The simple UI allows you to delegate and track freight allocation in the organization and make costs truly transparent. 

Imagine the scenario you have frequent freight from Belgium to Spain. You can launch a tender to get different offers in. Transmate’s tender module let’s you start a freight tender with a couple of mouse clicks: define the scope of the tender, load tender volumes (this can be generated from historical shipping volumes on the fly), invite carriers and send out the RFQ. Next the bids come in and you would run some simulations using the built-in analysis tools to get the best-fit partner. The rate cards are available for use. When a shipment comes in the system, it finds the allocated rate card(s) and proposes these partners for the shipment. 

Pre-tendered allocation workflow

Alternatively, a planner could launch a spot rate request to a (limited) pool of carriers with a fixed deadline. The incoming bids are evaluated for the shipment and the planner can decide which partner to assign the load to. 

Spot request allocation workflow

Or a mixed process, combining pre-tendered freight with spot rates. In both cases predefined allocation rules and workflows can be set up to minimize planner involvement and send out bookings when conditions apply.

Putting it all together

Transmate’s architecture allows you to link your existing ERP to transfer the shipments to the platform or use the built-in TMS to create shipments. Freight allocation can be run either in the user interface or as an automated workflow. In both cases bookings can be sent to the carriers and data can be sent back to your ERP. The freight allocation module can be run in combination with freight optimizers to get optimal solutions. 

Transmate’s freight allocation platform gives procurement managers full control over their freight procurement process, oversee contract adherence or spot rate processes. By integrating the procurement processes with the day-to-day operations, overall our customers reduce their administration overhead by 20% and can save up to 5% in freight costs by better and correct allocations. The centralization of all rates in a single platform allows the distribution of all active rate cards within your organization.

Want to know more how freight optimization can help your business? learn more here


Philip Poppe
Marketing strategy & innovation
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