Commentary: Avoiding self-defeating bid procurement

   In a transportation procurement study published in June by American Shipper, in partnership with Council of Supply Chain Management Professionals and Retail Industry Leaders Association, 50 percent of large shippers cited a lack of return on investment (ROI) as the number one inhibitor to their adoption of bid procurement technology. This is a shockingly high percentage compared to other supply chain management applications, which are routinely justified based on ROI. However, when you look at the low level of bid procurement automation and the lack of sophistication in many procurement systems in the marketplace, the lack of ROI is not surprising. In fact, many companies’ transportation bid procurement processes focus on variables that foster self-defeating reactions from carriers.
   The problem with manual processes, spreadsheets and rudimentary procurement systems is that they focus almost exclusively on price at the expense of service-based variables such as service level and capacity guarantees. During the depths of the recession, when companies concentrated exclusively on cutting costs just to survive, this was understandable. But now companies are balancing cost with customer service considerations to maintain their customer base and grow revenue. The bid procurement process must support this balance between cost and service. When using the right technology, this process will create the incremental value that produces solid, measureable ROI.
   The bid procurement process began as an organized way to secure more favorable rates from carriers than the haphazard “dialing for diesel” practices of the past. Using manual processes and spreadsheets, shippers collected information on each of their lanes and sent it to carriers for bids. Contracts were awarded to the lowest bid on each lane or group of lanes. Shippers with larger or more complex shipping requirements sometimes automated this process with first-generation bid procurement systems.
   While there is nothing wrong with getting the best price available for any service, what frequently happens is that shippers use the bid process to hammer carriers over time for lower and lower rates. But carriers are in business to make a profit just like the rest of us. So they provide an aggressive bid to secure the business, but make trade-offs on service levels and capacity. When it comes time for execution, they will assign their assets to wherever they can earn the highest rates, potentially leaving your load high and dry. You then have to scramble to tender to other carriers or the spot market—at higher rates. Thus, the whole process can become self-defeating.
   Part of the problem is that, with manual processes, spreadsheets or standalone bid procurement systems, there is no way to enforce the rates agreed to in the bid process. For all but the simplest shipment operations, manually verifying rates at the time of shipment is virtually impossible and the cost of enforcing compliance through freight payment services can quickly negate the savings from lower shipping rates. A better process is needed to drive real, sustainable ROI by integrating bid procurement with transportation execution.
   The self-defeating practice of hammering down prices on the front-end followed by a lack of enforcement and compliance on the back-end must be replaced with a more collaborative “win-win” process based on information sharing and analysis that will drive measureable and sustainable ROI. There are four basic components to a sustainable bid procurement process:

• Collaboration — For any relationship to be sustained, it must be mutually beneficial. The bid process must offer the shipper competitive rates with reliable service, while allowing the carrier to make a reasonable profit. This requires shippers and carriers to work collaboratively to understand shipment needs, costs, asset utilization and other factors impacting price and service.
• Bid package tools — Collaboration cannot exist in a vacuum. Shippers must provide carriers with tools that enable them to understand the shipper’s bid package service level and capacity requirements. This allows carriers to know what they are bidding on and can intelligently respond with what they can commit to the shipper. 
• Modeling and analysis tools — Shippers need modeling and analysis tools so they can effectively evaluate carrier bids. This should include “what if” capabilities to analyze the tradeoffs between competing bids to select the most advantageous overall solution based on expected shipment patterns. For example, redundant coverage of important lanes can reduce risks, but is also more expensive and can impact capacity commitments. Analysis can help balance the cost of service, risk, and capacity commitments to arrive at the optimal solution.
• Integration with transportation management — Without an enforcement capability, the bid process is merely a theoretical exercise. Therefore, the procurement process must be integrated to your transportation management system (TMS) so its optimization engine incorporates the bid rates at execution time and the system’s freight payment process enforces the bid rates on payment. Integration with TMS also provides more robust data and analytic tools to inform the modeling and analysis process.

   Using the four components just discussed and the right supporting technology, shippers can conduct effective bid procurement processes that will generate incremental value and real, sustainable ROI. The process has three steps:

• Upfront analysis — This entails gathering and analyzing all information pertinent to your total shipment environment. For example, what are the volumes, specifications, direction and timing of each lane and all surrounding lanes? This analysis can uncover opportunities for backhauls and continuous moves that improve asset utilization and reduce rates. This information is used to create bid packages, giving carriers more comprehensive data and tools with which to formulate their bids.
• Bid analysis — In this step bids are sent to carriers and responses are analyzed using modeling and “what if” tools, as described above, to determine the optimal selection of bids based on price, service and capacity considerations. 
• Enforcement — The selected bids are loaded into an integrated TMS automatically (or manually if this integration doesn’t exist, which is more costly and error-prone). The TMS then uses the bid rates when optimizing shipment plans and tendering loads. The freight payment function of the TMS enforces the bid rates in the invoice and payment process.

   Using this three-step process, shippers will maximize the value of bid procurement by properly considering all important variables and options, collaborating with carriers, and enforcing the results.
   Attempting to perform the extensive, multi-variable analysis manually is virtually impossible, but spreadsheets and traditional bid procurement systems don’t offer much help. They tend to focus solely on price as the determining factor in bid selection, which often has negative consequences and can be self-defeating. These rudimentary systems do not provide the multi-variable modeling and analysis tools that uncover the best opportunities for savings, improved service and sustainable ROI. They are also seldom integrated into a TMS that can enforce the commitments made in the bid process.
   New integrated bid procurement and TMS do exist, and provide the combination of sophisticated analysis and bid enforcement advocated here. These advanced systems provide tools to uncover opportunities, allow for collaboration with carriers, and integrate the results into transportation operations. This combination of an informed, collaborative approach with advanced technology will produce measureable, sustainable ROI.
  
Fab Brasca,
Vice President of Industry Strategy,
JDA Software
Toronto, Canada