Those who can secure space and explain cost increases are rewarded in a tight capacity environment
Over the years, we have read hundreds of articles about the motivations and thought processes of the asset owner/service provider in transportation. We have read an equally large number of articles about the motivations and thought processes of the freight broker/logistics agent. During most of the economic cycle we hear about how much the service provider or broker “values the relationship,” which is an indication of who is normally in control. During most of the cycle, especially during those periods in which capacity far exceeds demand, there are many buyers of transportation that won’t take the phone call or give the service provider the time of day. We don’t understand that behavior, but that’s a subject for another article.
As a former distribution manager back during that time frame when the year started with the numbers 1 and 9, we understand the realities and demands of the job, but still marvel at those who buy freight services and feel entitled to abuse the service provider. That said, far too little attention is given to the motivations and thought processes of the distribution manager, the buyer of transportation services. Given the fact that throughout trucking demand is exceeding capacity and both spot and contract rates are accelerating strongly, we thought it was a good time to review the industry from the buyer’s point of view.
What are the basic motivations and thought processes that drive the decision making of the transportation service buyer? The standard answer exists for a reason: “Price will get you in the door, service will keep you there.” This is true for any buyer of any service, but especially true for the buyer of transportation services because it gets right to the heart of the most basic underlying motivating factors: being the positive variance in the budget; having an explanation for being the negative variance in the budget; getting everything picked up and delivered on time.
Being the positive variance in the budget – depending on the sophistication of the internal controls and systems, most distribution managers have a regular (weekly, or at a minimum monthly) review of how they are performing from a cost perspective. Anyone who has been in the role can tell you how good it feels to sit through that meeting in which you are one of the positive variances in the budget. This is even more rewarding if you hadn’t sandbagged the budget number and you are still the largest positive variance. It probably enhances your year end bonus. It draws complements from those throughout your company and draws positive attention from those above you in the organizational chart. Everyone enjoys being the positive variance in the budget because it feels good to be recognized and complimented by your colleagues and superiors, and probably helps the balance in the personal checkbook, but that is where the fun ends. Why? Because part of the reward of being the positive variance in the budget is that the lower number quickly becomes your new hurdle rate, and incremental opportunities to bring down costs are almost always increasingly difficult to achieve.
Being the negative variance in the budget – Same meeting, different situation. Being the negative variance in the budget is never enjoyable, but if you are prepared with a full explanation of the factors driving the negative variance, and better yet, some benchmarking data that suggests the negative variance would be even worse if it wasn’t for the amazing job you are doing, may provide the opportunity to earn respect and demonstrate a level of competence that is hard to otherwise demonstrate. Translation, if you are going to raise rates on your customers, help them manage the process inside their organization by arming them with data that allows them to fully document why they had to pay you more. Simply put, being the negative variance in the budget is allowed if there is a reasonable, well-documented explanation.
Getting everything picked up and delivered on time – Whether they are the positive variance or negative variance in the budget quickly becomes irrelevant if service failures begin to become a daily occurrence. Being the positive variance in the budget is good, and being the negative variance in the budget is bad, but either way you will probably remain employed. Don’t forget that the most powerful motivator of human behavior is pain. Losing your job is a painful experience, and buyers of transportation who can’t get things picked up and delivered on time lose their jobs. In the current environment, rates are going up dramatically and almost all transportation service buyers are going to be the negative variance in the budget. That is the part of the economic cycle we are currently in. It won’t last forever. It never does, but the service provider who is able to provide capacity and help explain why it costs so much will create relationships with customers that should last longer than this economic cycle will.
Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.