Whether your company is a big or small player in terms of shipping volumes, and regardless of your chosen transportation modes (road, rail, ocean, air), the health of your bottom line depends in no small part on the competitiveness of your freight prices.
As you will know, though, if you are active in freight and shipping management, your freight prices depend on many variables. So how can you be sure you’re getting the best freight rates possible?
The answer is to benchmark your freight, of course.
At Logistics Bureau, we want to help you with that, so we’re publishing this brief guide to help you if you haven’t already included freight benchmarking in your management strategies or want to benchmark more effectively than you are now.
In addition, it will imbue you with some knowledge about best practices—and the secrets to freight-benchmarking success.
What is Freight Benchmarking?
There’s no dark art to freight benchmarking. Indeed, it’s a very straightforward concept. It simply means checking your company’s rates paid for freight transportation against those borne by its peers in the same or similar industries and shipping scenarios.
However, while it sounds simple in theory, it’s not so straightforward in practice, primarily because it can be challenging to access reliable freight rate information.
For that reason, freight benchmarking services are seeing increased uptake by shippers. They provide intelligence about real-time market rates, enabling a company to identify and compare results with peers and competitors that are very similar.
At Logistics Bureau, we capture, analyse, and exploit freight benchmarking data to help us when we provide freight contract negotiation services for our clients.
The intelligence we gather enables client companies to negotiate with carriers from a stronger starting position and ensure they don’t fall victim to inflated tariffs, which is easy to do when companies begin talks without sufficient freight pricing data.
How Can Your Business Benefit from Freight Benchmarking?
There are several advantages to understanding your freight costs compared to the market generally. Here is an overview of the most valuable benefits:
More informed freight spending: Because freight benchmarking involves the analysis of carriers and the rates paid by companies using them, it gives you an evolving picture of clarity about your freight spending. Benchmarking enables you to answer questions like “am I getting levels of service that justify the prices I’m paying?” and “what is a reasonable range of rates for our company’s typical shipping scenarios?”
Better freight rates for your trade lanes: Whether you ship freight by air, land, or sea, your shipments will travel along specific routes or groups of routes, known as trade lanes. Freight benchmarking enables you, over time, to get a handle on pricing norms for the trade lanes you use. As a result, you will be able to set target rates for vendors and ensure you don’t pay more than is reasonable for shipments along a given lane.
Improved ability to predict and manage trends: After you’ve spent a while working with freight benchmarks, you’ll get a feel for the directions of seasonal rate fluctuations and other pricing trends. You’ll have a better idea of when rates move up and when they move down. The benefit of this is that you’ll be in a more proactive state when unforeseen events or crises arise with minimal warning. That will help you weather such storms more effectively than your less-aware competitors.
Enhanced decision-making: Benchmarking is an activity that focuses on your freight history and the rates you have paid historically, along with current pricing and carrier performance. The insights you receive will help you decide which carriers and trade lanes to use and when. It will also make it easier to determine, for example, if you should opt for contract rates over spot rates or vice versa.
More advantageous contractual terms: Regardless of the freight modes your business uses, the knowledge gained from benchmarking will improve your ability to negotiate balanced contracts with carriers and ensure that you don’t agree to terms that disadvantage your business.
That’s what drives our recommendation, when we execute freight tendering projects, to precede our client’s contract negotiations with a benchmarking process.
Freight Benchmarking: How to Do it Right
Although freight benchmarking is not a complicated process, it may prove challenging because the data your company needs is unlikely to be readily available.
In reality, few freight and shipping teams have the time, resources, and clout to extract information from their peers about freight costs, let alone from competitors.
However, that doesn’t mean it’s impossible. Indeed, today’s advances in digital technology have made freight rate KPIs much more accessible—but that accessibility comes at a cost.
What Are Your Freight Benchmarking Options?
You will typically have a couple of options available if you wish to benchmark your freight rates. Firstly, if you plan to benchmark as a one-off exercise now and again, you might engage a specialist team of consultants to execute a project for you.
Several supply chain consulting firms offer freight benchmarking services, which, although quite costly, can ensure access to vast volumes of pricing data valid for any industries, geographies, and trade lanes you care to explore.
Alternatively, you can procure access to a digital freight benchmarking platform. The range of such tools is growing along with demand, so you should be able to find one that matches your budgetary and capability requirements.
The Pros and Cons of Procuring a Benchmarking Tool
Of course, unlike working with a consulting firm, direct access to a benchmarking platform won’t give you the advantage of specialist expertise to help you select the KPIs, benchmarking criteria, and data that you wish to use for platform interrogation.
Instead, you’ll need to have a data scientist or analyst within your team to make practical sense of the available information and help you interpret it.
You’ll also need to procure the most suitable platform for your freight benchmarking needs. For example, most software products focus on a specific freight mode, so a tool ideal for air and ocean freight benchmarking might not be of any value for benchmarking road and rail freight costs.
Aside from choosing a tool that covers your preferred freight modes, you’ll also need to pay attention to reporting capabilities, precision, reliability, agility, and other desirable attributes.
In short, rushing into purchasing a benchmarking platform may leave you disenchanted with the results once you start using it.
So do you have the resources to undertake a thorough selection and procurement project and the right people to operate your benchmarking tools? That’s the first question to ask.
If the answer is “yes,” you’ll have access to unlimited opportunities for fine-tuning and continuously improving your freight cost profile. If “no,” it might make more sense to engage a consulting firm to help you with freight benchmarking.
4 Best Practices in Freight Benchmarking
Does your company intend to find its way through the freight benchmarking process without any external help? If so, it will be beneficial to gather knowledge of the best practices that experienced benchmarking specialists recommend
A detailed set of guidelines is beyond the scope of this brief guide, and would, in any case, be better imparted during a real-world project as they are applied. However, we can at least summarise a few of the best practices here, to give you a jumping-off point for further research and introductory discussions with your project team.
1: Share Results With Relevant Stakeholders
As you begin to realise intelligence generated by freight benchmarking, disseminate the knowledge among ALL stakeholders who can use it. When helping our clients with freight contract negotiations, we find, all too often, that the wrong people hold much of the knowledge that matters.
That’s especially true when a specific department owns a benchmarking project. So, for example, if you use a benchmarking platform, your IT department might be accountable for interpreting and visualising the data.
At the same time, that IT team is unlikely to be acting on the benchmarking output, so appropriate stakeholders from the broader business, especially those in procurement and logistics management, should be involved in the benchmarking process as much as possible.
2: Take Care in Identifying the KPIs to Use
Like all benchmarking and performance measurement processes, freight benchmarking can utilise a wide range of metrics, and the sheer abundance of KPIs can be overwhelming. Furthermore, many of them might not be actionable in your business—or only actionable when results are combined with other specific metrics.
In some cases, it might even be possible to inadvertently use metrics that counteract one another, frustrating your efforts to understand your freight profile and cost performance.
To avoid issues like these, you’ll need to be careful to use only relevant and actionable metrics in your operation—and it’s not always obvious which ones they are.
3: Choose Your Comparisons Carefully
Benchmarking is all about comparisons, but results become skewed and lose their value when the comparisons lack relevance. So when you set out to benchmark your freight rates, spare no effort in choosing which peer companies you include in your analysis.
That doesn’t necessarily mean you need to use only competitors or peers that operate in your industrial sector. Still, it would be best to look for companies of similar scale, with similar freight-volume profiles, using the same trade lanes as your company.
One of the primary benefits of using a consulting partner to assist with benchmarking, as opposed to direct use of software, is that your partner will have the experience and expertise to identify appropriate peer groups to benchmark against and provide the data for comparison.
4: Use Standardised Metrics
This final point is related to choosing the right metrics for your operation but bears separate discussion as it is crucial for obtaining meaningful and actionable benchmarking results.
The metrics you select to measure your company’s freight cost performance are only helpful if you can also apply them to those companies against which you will benchmark.
This selection process can be tricky, so it helps a lot to work with external specialists who have access to mountains of proprietary freight data and can provide standardised KPIs to compare your company’s performance accurately.
As a quick and simple illustration of this, a road freight benchmarking project might require the use of the following KPIs:
- Freight cost as a percentage of sales
- Freight cost per kilogram/100 kgs/tonne
- Cost per kilo/100 kgs/tonne per kilometre
If we take the cost per kilo per kilometre KPI as a comparison metric, your benchmarking platform, or consulting partner, would need to hold the following data in its database, for all your company’s freight bills, and those of the peers against which you will be benchmarked:
- Shipment origin and destination
- Shipment weight
- Freight charges
- Mileage covered by the shipment
A digital freight benchmarking product from a software house will likely provide you with access to masses of such data.
However, only a comprehensive service from a specialized benchmarking partner will be able to help you quickly and easily isolate the most relevant peers, data, and metrics, and get your project up and running smoothly. That’s due to the presence of experts who have completed countless projects similar to yours.
Freight Benchmarking and Contract Negotiation: Our Services
At Logistics Bureau, we offer a comprehensive freight contract negotiation service to aid you in achieving maximum value from the carriers with which you partner—and fixing realistic rates for road, rail, air, or ocean freight.
We can begin by benchmarking your company’s freight rates to establish current performance, then helping you review your carrier contracts.
We’ll help you find carriers that are best suited to your business needs, and negotiate balanced freight contracts that work to your advantage, improving competitiveness and increasing the cost-efficiency of your supply chain.
The best news of all is that we can conduct all our services for you online, sparing you from the logistics complexities and expense of hosting consultants at your facilities. Alternatively, if you prefer to have consultants on site rather than working for you remotely, we’ll be happy to arrange that too.
To learn how our consultants can help you get freight costs down and extract value from your contracts, check out our freight contract negotiation page and use the form to book a FREE initial consultation.
Editor’s Note: The content of this post was originally published on Logistics Bureau’s website dated April 05, 2022, under the title “Freight Benchmarking: What Is It? Why Do It?“.