Do "Favored Shippers" Really Receive Better Pricing and Service?

Transcription

1 Do "Favored Shippers" Really Receive Better Pricing and Service? WHITE PAPER C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 1

2 In brief Anecdotal evidence and some qualitative research suggests that "favored shippers" companies for which carriers prefer to haul freight obtain better pricing and service. But do they? In this paper, Iowa State University researchers explain how they sought to understand the voice of U.S. truckload carriers and quantitatively measured the effects of favored shipper characteristics on transportation costs. Their results determined which characteristics actually make shippers favored in the transportation marketplace. Contents Top Shipper Characteristics Carriers Cited as Important to the Price/Service Decision 3 Data Collection and the Two Model Project 4 The High Cost of Dwell Time 5 Regional Results 5 Future Work 7

3 The characteristics of favored shippers the type that carriers prefer to haul freight for have been debated for some time. Anecdotal evidence and some qualitative research suggest that favored shippers benefit from better pricing and service. However, no known studies have evaluated whether being a favored shipper is actually measurable. Nor did any known research define which characteristics resulted in favored status in the market. Researchers at Iowa State University and C.H. Robinson's TMC division decided to work together to find out. MOST IMPORTANT SHIPPER CHARACTERISTICS 1 DWELL TIME/ASSET UTILIZATION 2 CONTRACT TERMS AND LIABILITY 3 DRIVER EXPERIENCE Top Shipper Characteristics Carriers Cited as Important to the Price/Service Decision To better understand which shipper characteristics should be included in a quantitative study, the researchers conducted semi-structured interviews with nine truckload carriers of varying sizes in the roles of sales and operations lead. They defined three top issues of concern: 1. Dwell time/asset utilization. Carriers most frequently commented on shipper and consignee dwell time and the influence shippers have on the carrier s ability to utilize their drivers and assets (trucks and trailers). Comments included were concerns about shipper location (e.g., congestion and distance from the highway), drop trailer opportunities, appointment setting, and load/unload times. 2. Contract terms and liability. All carriers mentioned liability concerns related to either the freight or the drivers who are on shipper/consignee property. Payment terms, actual payment time, and detention (driver and trailer) were also commonly discussed. 3. Driver experience: Several carriers mentioned concerns related to the driver s experience at the shipper and consignee. These ranged from the check-in process and parking, to driver lounges and restrooms. In general, smaller carriers were more likely to discuss driver issues than larger carriers. Using shipment data and econometric modeling, the researchers quantitatively measured the effects of these characteristics on transportation costs. C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 3

4 MODEL ONE:» Actual Load Attributes Studied: Line haul rate paid Lead time Load date Miles Origin location Destination location» Origin and Consignee Attributes Reviewed: Payment terms Dwell time Customers (identified only by customer number) Tender to ship time (lead time) Appointment type/appointment setting information Hours of operation Whether or not drop lots are utilized Related information (drop lot security, driver-related attributes like restroom accessibility, waiting rooms, etc. and general congestion information) Shipment Data and the Two Model Project This research used two models to test the relationship of origin and consignee attributes on a shipper s favored status in the U.S. truckload transportation market. Model 1 focused on multiple attributes that carriers said might make a shipper more attractive to serve (see sidebar). Model 1 tested whether those attributes influenced price and/or service. 64,607 truckload shipments with a length of haul of 250 miles or more 117 unique origins in 48 origin zones 107 unique destinations in 53 destination zones» RESULTS:» The first model found that individual shipper attributes offered by the interviewed carriers did not significantly influence price or service.» A reasonable explanation of why the model did not show a significant relationship between shipper attributes and price or service is because the attributes were highly specific relative to overall price or service changes.» Model 2 was developed to measure shipper attributes at a more aggregated level.» A strong correlation was found to rate paid. Previous research on lead time, lane aggregation, and procurement cycles showed that the vast majority of a truckload rate can be attributed to the origin/destination pair and mileage. The remaining contribution is explained by all other attributes that impact pricing. It is difficult to model many of the individual attributes, due to their apparent influence level and the ability to create a large enough database of multishipper corridors and volume. The researchers found success by aggregating three attributes into the efficiency attribute we call "dwell" and creating model 2. Model 2 used a larger dataset and one measure of a favored shipper attribute improving the carrier s efficiency, as measured by origin dwell, destination dwell, and drop trailers to test the relationship to transportation rates and service. Every transaction was a unique truckload shipment As in model 1, limited the study to van shipments moved over 250 miles 77 origin zones, 78 destination zones, and live loads/unloads represented 364,744 total observations, 21% with origin dwell time of more than 2 hours Researchers were unable to isolate the magnitude of dwell time variability from the magnitude of dwell time alone. As a result, in the model discussed here, dwell time includes both variability and time.» RESULTS» Two hours was found to be a reasonable industry standard as maximum dwell time.» Shippers and consignees with variable dwell times see higher costs than those with consistent dwell times.» Geographic regions have different tolerances to dwell times. Dwell time is an important measure that influences a carrier s ability to utilize assets and compensate drivers. This attribute directly or indirectly includes attributes used in the previous study (e.g., appointment type, hours of loading/ unloading operations, and drop lots). Model 2 shows a positive and significant relationship between dwell time and transportation rates. C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 4

5 TABLE 1 DWELL TIME IMPACT ON FREIGHT RATES Hours Origin Destination 2 +$9.83 +$ $ $ $ $ $ $ $ $59.60 EXAMPLE: COST OF DWELL TIME AT ORIGIN $ COST OF DWELL TIME AT DESTINATION $ 29.80= $ ADDED TO THE AVERAGE LINE HAUL RATE $ 1,134 IN THIS STUDY (NOT INCLUDING DETENTION OR OTHER ACCESSORIALS) The High Cost of Dwell Time Table 1 shows that a two hour average dwell time at the origin increases the freight rate for every load shipped from that origin by an average of $9.83 (in addition to any detention charges). This rate continues to increase with dwell time, if a shipper detains trucks at origin by three hours on average, they can expect to pay $14.74 more per load than if the origin dwell time is less than two hours. Moreover, the cost of dwell time at the shipper's facility is added to the dwell time cost at the consignee's. For example, if a shipper detains a truck for three hours at the origin and a consignee detains the same truck for three hours at the destination, the dwell time of the origin-destination pair increases the total freight rate for that shipment by $44.54, not including any detention charges. The effect of dwell time on rates is driven by two factors: average dwell time and variability in dwell time. Several models were tested to determine which factor (average time or variability) had the most impact on dwell time. Results suggest that variability in dwell time causes a greater percentage of the overall increase in rates, but researchers were unable to quantify the differences. The dwell time results assume that shipper and consignee dwell times were relatively stable over the course of the study. Carriers often determine freight rates annually, and the rates reflect the carriers expectation of what dwell times are, given their past experiences. Shippers and consignees who consistently have long dwell times and are able to reduce their average dwell times will not likely see immediate cost reductions. Carriers may wait to confirm their experience of shorter dwell times before they consider how these dwell times influence current price or future price increases. A similar model was run to evaluate the effect of dwell time on transportation service, but the results were not significant. Many factors influence transportation on time service, most of which simply cannot be quantified into an econometric model (e.g., weather delays, driver issues, equipment breakdowns, and congestion). Therefore, quantifying the impact of dwell time on transportation service becomes difficult, as the overall impact would be relatively small compared with the many other factors involved. Regional Results Similar models were run for different regions of the United States to test whether the effect of dwell time on freight rates varies by region. Origin markets were combined to form six different models based on regions (Midwest, North Central, Northeast, Pacific, Southeast, and Southwest). Shippers across the country who keep dwell time to less than two hours typically do not see increases over normal freight rates, but in excess of two hours, shippers do see the impact in their pricing. The study ran similar models for the same six regions to test whether carriers might tolerate longer dwell times in some regions than others. As seen in Table 2, the two origin regions with the longest mean origin dwell times are in the Southeast (2.3 hours) and the Southwest (1.9 hours). Interestingly, the coefficient on the origin dwell C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 5

6 time (see Table 3) was not significant in these regions, probably because there is so little freight available in these markets that carriers are willing to wait (e.g., shippers are not penalized for longer dwell times). The regional mean destination dwell times were more consistent, but the increases in freight rates associated with destination dwell time varied by region (see Table 4). TABLE 2 ORIGIN AND DESTINATION REGIONAL DWELL TIME RESULTS Mean Origin Dwell Time Standard Deviation of Origin Dwell Mean Destination Dwell Time Standard Deviation of Destination Dwell Midwest North Central Northeast Pacific Southeast Southwest Table 3 shows the effect of origin dwell time on freight rates by region. Note that detaining a truck by an average of two hours in the Pacific increases freight rates by $54.91 on average for each load associated with that shipper. In the Midwest, detaining a truck by an average of two hours has, on average, a $44.77 cost per load. But in the freight-deficient Northeast, the impact of detaining a truck for two hours costs a relatively low $6.85 per load. TABLE 3 ORIGIN REGIONAL DWELL TIME IMPACT ON FREIGHT RATES Dwell Time in Hours Midwest +$ $ $ $ North Central +$ $ $ $80.75 Northeast +$6.85 +$ $ $17.13 Pacific +$ $ $ $ Southeast Not sig Not sig Not sig Not sig Southwest Not sig Not sig Not sig Not sig Table 4 shows the effect of destination dwell time on freight rates by region. The Pacific was the only region where destination dwell time was not significant. This suggests that carriers are willing to haul freight into the Pacific region and wait to be unloaded, without penalizing the shipper with higher rates. The largest line haul rate penalties for consignee dwell time are in the Southwest and the Southeast. If carriers go to those destinations, they are less willing to wait to be unloaded. Additional takeaways can be seen when evaluating the results in Tables 3 and 4. First, the Pacific region had the highest origin dwell time effect on freight rates of all the regions, but the Pacific region s destination dwell time effect on C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 6

7 TABLE 4 DESTINATION REGION DWELL TIME RESULTS Dwell Time in Hours Midwest +$ $ $ $26.80 North Central +$ $ $ $45.19 Northeast +$ $ $ $40.36 Pacific Not sig Not sig Not sig Not sig Southeast +$ $ $ $60.17 Southwest +$ $ $ $62.19 freight rates was not significant. This reflects the Pacific region s freight-rich nature, where carriers want to position assets. These carriers will accept long unloading dwell times, but they expect to be loaded quickly. Conversely, if a carrier sends a truck to the Southeast, they want to be unloaded quickly (high destination dwell time effect on freight rates), but they are willing to wait to be loaded (results for origin dwell time in the Southeast are not significant). A second takeaway is that the effect of origin dwell times is generally higher, but more variable between regions. Carriers increase their rates much more when waiting at origins in the relatively freight-rich regions (i.e., Pacific, Midwest, North Central). Carriers cite many attributes that may result in shipper of choice status. Research shows that keeping the driver moving and generating income is more important to these carriers than keeping a shipper as a customer. Future Work Although this research did not show a significant relationship between specific shipper and consignee attributes and freight rates, significant and large relationships were found between both origin and destination dwell times and increased freight rates. Further study could be done on other attributes. Carriers say they look at two primary metrics when they price: how to get more revenue-generating miles and how to get more revenue-generating hours. Other attributes may not model to have a correlation with rates, but there may still be a link between those attributes and pricing. For instance, carriers can t generate revenue without reliable drivers. Today, it is so difficult to attract new drivers to the industry that carriers may favor shippers who do more to make the driving job more attractive so the carrier can keep good drivers. All of the carriers interviewed for this study said that, all things being equal between two shippers, they will choose the one who keeps the driver happy. For these carriers, keeping the driver is more important to them today than keeping a shipper as a customer. When a shipper consistently provides a bad experience for drivers, it might not show up immediately in the rate at the shipment level. But carriers might reject those loads more often because they don t want their drivers to have a bad experience. Future work could predict the effects of dwell time on specific lanes and for specific customers, as well as more market specific characteristics. C.H. Robinson Do "Favored Shippers" Really Receive Better Pricing and Service? 7

8 7 WAYS TO REDUCE CARRIER DWELL TIME 1. Leverage live load flexibility. Freight may be ready early for pickup. If a dock door is open and the shipper can proactively communicate this to their live load provider, they can obtain a truck before a scheduled appointment. Live loading provides the flexibility to deal with fluctuations in demand. It enables coordination between manufacturing, shipping, and the carrier to accommodate freight when manufacturing is ahead of schedule, or when shipping falls behind. Designate a dock door (or a percent of time for multiple doors) for live load activity or combined drop trailer/ live load freight. This strategy enables the shipper or consignee to dramatically reduce the amount of time the driver is on their property. 2. Pre-stage freight on shipping dock. Proactively prepare for carrier arrivals so they can get in and out faster. 3. Offer appointments for loading and unloading. Put an appointment or notification scheduling process in place to maximize the use of dock doors and people and to increase efficiency. Stay as close to designated times as possible. Also monitor the receivers facility characteristics and what the carrier encounters on the delivery end. 4. Palletize freight. Palletized freight can be loaded and unloaded faster than loose pieces. 5. Maintain adequate staff for loading and unloading. A cascading effect quickly occurs on dwell time when dock staff is insufficient to handle scheduled appointments. Shippers should ensure that adequate staff is on hand at all times. 6. For large facilities, provide a good map or directions to the appropriate dock door. To reduce frustration and enable faster loading/unloading times, provide carriers with a map and directions to the appropriate dock door for their shipment. 7. Use drop trailers. Shippers can load drop trailers according to their timing and schedules. The carrier arrives, hooks up the trailer, and goes, with a minimum of wait time. Easily the best solution in high volume facilities. Kevin McCarthy, C.H. Robinson director of Consulting Services, has over 25 years of logistics experience. He has an MBA from the University of Minnesota Carlson School of Business with an emphasis in Management Information Systems. Chris Brady, general manager, Latin America for C.H. Robinson s TMC division, holds a Business Administration degree from the Richard T. Farmer School of Business at Miami University. Steve Raetz, director of Supply Chain Integration at C.H. Robinson, has 25 years of logistics experience. Steve holds a B.S. in Mathematics and Teaching from Minnesota State University, Mankato. Bobby Martens is an Associate Professor of Supply Chain in the Iowa State University College of Business. Before earning his Ph.D., Martens worked as an account manager at Schneider Logistics. About us C.H. Robinson helps companies simplify their global supply chains and understand their landed costs. To help build smarter, more competitive supply chains, skilled supply chain engineers and logistics professionals combine a deep knowledge of market conditions, practical experience, and proven processes. From local truck transportation to global supply chain management systems, from produce sourcing to consulting to logistics outsourcing, C.H. Robinson supplies a competitive advantage to companies of all sizes. For more information, please visit or our Transportfolio blog at Charlson Road, Eden Prairie, MN C.H. Robinson Worldwide, Inc. All Rights Reserved.