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The topic for discussion is a perpetual question that haunts logistics managers and finance teams across enterprises across industries and sizes. As I have experienced during my days as a logistics manager, the first avenue for any cost reduction tends to trickle down quickly to transportation spend. It’s a common assumption, a good one to its benefit, that there is always some scope of reduction in their current transportation spends. There is a catch, however. This may not be true for all organizations. At its core - this question boils down to whether the price I am paying is the right price for the value I am getting? And when it comes to transportation - the value is not just on delivery of goods, but the timeliness and reliability of the delivery as well.

This blog series is meant for logistics heads and managers who are trying to reduce their transportation costs. I will explore the notion of bottom-up pricing and how you can use it for establishing reference prices for your network. This will help you assess if you are paying the right price for the right service, and can be a powerful tool for negotiating with your carriers. The blog series will cover the pricing from an Indian perspective, but the methodology can be used across all geographies.

Let’s focus only on the first vector of the equation - is the price right for delivering goods from point A to point B. The most common tool that most logistics managers have at their disposal is a benchmarking exercise: Ask a small sample of carriers operating on the lane/in-region for the rate against a select vehicle type. Once the rates are available, these are compared with the existing rates to identify the ‘potential’ for a price reduction.

You may have already noticed a few complications.

  • ny rates received are not truly indicative of market prices. Some carriers would provide inflated prices - already including buffers for negotiation. On the flip side, some carriers might provide lower rates to create a hook and attract customers, which might not result in operational rates.
  • Each carrier would have different inclusions in their base price, rendering a like-to-like comparison almost impossible.
  • Commercial constructs work differently for different carriers - some carriers might exclusively work on an FTL basis, while others will provide PTL rates (Per KG/Per CFT/Per Case)
  • Carriers also bake in costs of their key terms - that they usually operate on. For instance, If the carrier is expecting longer payment cycles, it would want to build in a buffer for working capital blockage.
  • Carriers typically would not be forthcoming in providing rates when they know that the effort spent will not potentially result in business.
This means that benchmarking in itself is a behemoth task to accomplish, primarily due to two reasons. One, the data itself is difficult to collect. And two, because the data collected as such is extremely hard to normalize - rendering any comparison ineffective.

Frequently brokers are used for collecting this data. While it is definitely faster, I am not a huge fan. Two reasons. One, rates acquired by brokers might be unreliable for all the reasons stated above. Two, while broker rates are effective to validate sudden surges in pricing, they don't serve as effective benchmarks for long-term contractual rates.

Hence, an effective methodology is bottom-up pricing for your lanes. This acts as a second reference point for evaluating your prices. The subsequent blogs in this series will cover what I mean by bottom-up pricing, the factors to consider, and the methodology for the activity. Explore our freight audit and payment solution here.

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