Friday, August 15, 2014

Transportation Rates – Are You Getting A Good Deal?by Paul Gurizzian

Whether you are buying a new set of golf clubs for your weekend leisure or transportation services for your day job, you want a good deal. The question of whether or not you are getting a good deal on your transportation purchases can be difficult to answer on your own.


To help our motor vehicle service parts clients answer this question, we at Carlisle have built a transportation rates benchmark database for the U.S. market. This database includes, on a blind unattributed basis, the rates that auto and heavy equipment OEMs pay for truckload, parcel, and, more recently, dedicated delivery service (DDS). (For DDS, we calculate all-in costs per stop, costs per mile and costs per dealer, rather than rates, per se). For parcel, the rates are zone-specific, and for truckload the rates are for specific high-volume lanes. In short, the benchmark rates are highly relevant and comparable to help you determine if you are getting a good deal.


Well, what have we found? Enormous variability in rates! And, before you ask, the rates are not simply correlated with volume. That is, if you are a big OEM, do not take comfort that you have low rates. Conversely, if you are a small OEM, do not accept that your rates should be higher.


The graph below shows real world benchmark results for five motor vehicle OEMs buying truckload services from Tennessee to the Carolinas/Georgia. This data is normally expressed on a cost per mile basis, but to protect confidentiality in this blog, the Y-axis values are not shown. The key takeaway from this chart is that OEM 1 is paying nearly 90% more per mile than OEM 5. This disparity is similar to results we found in other benchmarked lanes.


Another example below, but this time for DDS, shows a similar disparity. Here, we see that OEM 1 is paying about 70% more than OEM 5 on both a per mile basis and a per stop basis for standalone DDS service. Once again, the Y-axis values are hidden here to protect confidentiality. Carlisle calculated these “rates” by dividing annual OEM standalone DDS spend by the relevant miles traveled and serviced dealer points. By the way, we see a similar disparity across OEMs for shared DDS and DDS-like, too.


So what could be contributing to this disparity in rates? Why are some OEMs laughing all the way to the bank, while others are crying in the poorhouse? There are a number of reasons; some structural, some operational, and some performance-driven. A starter list of drivers includes:
  • Negotiating savvy and strength
  • Purchasing process
  • Carrier contract terms
  • Supplemental services performed by carriers
  • Carrier performance requirements
  • DDS route design
  • In the case of DDS, delivery volume per dealer
Bottom Line: If you are responsible for buying transportation services or for the profit and loss of your aftersales business, the observations above are potentially very important. Let’s do some simple math to demonstrate this importance.


According to our North America Parts Benchmark data, the typical service parts OEM spends between 4 and 11 cents of each parts sales dollar on inbound and outbound transportation. The average here is 7 cents. Let’s say, conservatively, you are like OEM 3 or 4 in the first graph and are 15% higher than the low cost purchaser. In this situation, you may be leaving one point of pre-tax margin on the table, just in transportation rates. On a billion dollars of parts sales, this translates into $10 million in annual profit. Are you getting a good deal?

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