Benchmark is an over-used and often misunderstood term. Merriam-Webster defines benchmark as “something that can be used as a way to judge the quality of other, similar things.” Not a bad definition, but a little imprecise for transportation purposes. In the world of transportation, professional benchmarks can mean three different things to serve three different use cases, including benchmarking in relation to:
- Internal KPIs / OKRs
- Carrier performance
For our purposes, we are going to stick to benchmarking transportation rates and contracts from the carriers, but look for more content in the future on the other benchmarking use cases.
Transportation rate benchmarking can help facilitate two goals:
- General market direction
- Increased visibility into the strengths / weaknesses of various contractual cost drivers
To assess the general market direction and trends over time of transportation costs and shipping rates, typically for budgeting and pricing purposes, macro benchmarks are the correct metrics to track. Any individual shipper’s rate experience can skew the outlook, so market averages give a clearer picture of rate directions. For example, the fall of 2020 / spring of 2021 was a very dynamic rating environment. Carriers forced rate increases of 30+% on some shippers, while others saw cost savings of 6%-8% come out of sourcing projects. The market as a whole actually trended upward at about 8%-10% (exclusive of the 2021 general carrier rates increase). Using either of these anecdotal results as representing the market at large would have given a distorted outlook. From a market rates direction perspective, using overall market benchmarks is the more conservative approach to freight rate benchmarking that provides more accurate, reliable expectations.
The Top Four Recommended Freight Benchmarking Practices
Assessing specific contractual terms and overall strength of carrier agreements is more challenging and potentially more valuable. Below are the top four recommended freight benchmarking practices:
- Don’t listen to Bob – If you’ve heard it once, you’ve heard it a hundred times. “Bob works in an adjacent industry, and he says his average cost per package is half of mine.” First, Bob probably doesn’t know his actual average cost per package. Bob’s spend might be 10x your spend. Bob may be shipping ball bearings while you’re shipping ping pong balls. Do yourself a favor – don’t pay attention to Bob.
- The right tool for the job – Some modes lend themselves well to cost per mile (CPM) or cost per package (CPP) benchmarks, while others do not. Benchmarking CPM and fuel serves the use case for truckload for example. However, much of the cost of an LTL move lies within ten miles up the pickup and delivery points. Because of this, LTL cost-to-serve is driven much more by the five-digit ZIP codes of the O/D pair; the freight class and the interplay of freight class; minimum shipment charges; and FAKs – making benchmarking through classic variables a poor fit. A better method would be assessing the carrier’s cost to serve versus revenue.
- Deep, not wide – From a carrier’s perspective, different shippers have different revenue and margin profiles. And make no mistake, revenue and margin are the primary drivers of pricing decisions. Therefore, we can conclude that peer-based benchmarking is the only way to gain an understanding of how we compare to “the market” – and defining the peer group for benchmarking is just as important as the benchmarks themselves. Many shippers believe that their pricing should be aligned with shippers of their size and that their peer group is based on annual spend alone. While annual revenue is a component of pricing, it is not the whole story. Topline revenue is only a positive for the carriers if it’s profitable topline revenue. Other shippers want to look specifically at freight payment industry contemporaries.
Here we are getting closer, but still missing the mark. Bear in mind that, aside from occasional and short duration forays into vertical-specific sales initiatives, carriers don’t care what’s in your package/shipment. Benchmarking against industry peers can help you understand if you have a competitive edge on cost structure, but industry-based benchmarking is a poor tool in evaluating the strength of your carrier pricing. The key to effective peer grouping is using the criteria that affects carriers’ cost to serve for each mode, in conjunction with top-line carrier revenue potential, to establish the peer group.
- Evaluate the total but understand the details – It is important to evaluate the individual components of carrier pricing agreements. However, it is equally important to understand that carriers will often subsidize one area of an agreement with another. There are multiple reasons for this. Carriers may have an expectation that list / tariff rates in one area will outpace others in general freight cost increases, making it more favorable for carriers to discount those areas that are expected to grow at a slower rate. A shipper’s discounts on a specific surcharge may already exceed the market, making it an easier internal sell to strengthen other areas to remain competitive overall. Carriers’ internal initiatives may call for “holding the line” on charge X, making it necessary to find other areas of negotiation during a sourcing effort. The point is, while it is important to understand the individual freight cost drivers, one must also look at the strength of pricing agreements in total. The question that needs to be answered by effective benchmarking is, given a shipper’s volumes and shipment characteristics – how does a shipper’s pricing compare to their peer group?
Transportation benchmarking is a deep pool in the shipping industry, and we’ve barely scratched the surface in this article. However, hopefully this freight benchmarking overview gives you some things to think about. Contact us to learn how enVista can help you better understand and optimize your carrier contracts, freight payment and transportation spend.
About The Author
Joe Wilkinson is the Vice President of Transportation Consulting at enVista where leads its Transportation group. He brings over 20 years of industry experience with a background in providing cost savings and cost containment in the transportation arena. Wilkinson specializes in negotiating transportation agreements and contracts across all modes, evaluating cost impacts of modal/service level changes and optimizing and increasing efficiencies of transportation and logistics activities