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.
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