Is your company using the general carrier's rates? If so, you may be missing out on cost-saving opportunities by not negotiating. Knowing how to negotiate freight rates can convert your freight cost savings straight into profits.
To negotiate freight rates effectively, shippers need to know where to apply leverage. With the best negotiation skills training, a carrier can bargain with shippers for better rates and services. Anitra Choi from MeowEssay written below about the dos and don'ts of freight rate negotiations.
Understanding Freight Rates and the Market
Understanding freight rates and the market is crucial for effective freight rate negotiation. Freight rates are influenced by various factors, including fuel prices, demand and supply dynamics, shipment weight and density, distance, and service type. Fuel costs can cause rates to vary significantly due to market fluctuations. Supply and demand dynamics play a pivotal role in freight rates, with rates increasing during periods of high demand and decreasing during periods of low demand.
The weight and density of shipments can impact costs, with heavier and more compact shipments resulting in lower costs per unit of weight. The distance of shipments can also impact costs, with longer shipment distances generally incurring higher costs. The type of service required can impact shipping costs, with expedited shipping and special handling often coming with additional charges.
Market conditions, such as geopolitical conditions, transportation costs, and fuel prices, also influence freight rates. Large volume carriers typically implement freight collection, allowing them to provide competitive rates while maintaining cash flow and control over shipping schedules. The party that ships the goods is responsible for negotiating freight rates before the shipment is sent out.
Prepare for Freight Rate Negotiations
Before you get to the negotiating table, know what you need and what's available. Review market trends in the shipping industry. Study the effects of currency rates, politics, and economics on the industry.
Identify your volume needs and budget. Understanding your shipping volume and frequency is crucial as it influences your leverage during negotiations. Do you expect to increase your monthly shipments? Will you need a standard service-level agreement (SLA)? What will be your primary logistics key performance indicators (KPI)? Some of the essential KPIs you might want to include in your SLA are:
- Mutual inventory management: Tracks shipments
- Returned materials authorization: For refunds and credit by your customers
- Quality assurance upon receipt
- Freight auditing and cost reduction: To reduce rates as you increase the shipment volumes
Compare Prices
With many sources of market data and rate indexes, carriers can find competing quotes fast. Before meeting with your carrier, find out what their competition is charging. Some price factors to compare include:
- Insurance
- Lead times
- Accessorial charges
- Transit requirements
- Weights and dimensions
- Origin and destination zip codes
- Spot rates, contract rates, and special project rates
When you train yourself to know the carrier’s competition, you’re more likely to earn concessions during negotiations. Leveraging multiple carriers to compare rates and services can optimize shipping costs and enhance your negotiation power. The carrier may be more willing to reduce some fees if they think you might shift to their competitor. So, use your research skills to identify points of comparison that will get the carrier’s attention.
Don't Pay for What You Don't Use
It's wise to know the level of service, price, and security you want. Discuss with your carrier the types of services they provide and pick what's relevant to you.
For example, do you need extensive customer service, or do you just need to transport your shipment from Port A to Port B?
Do you only ship during certain times of the year? Then why pay for the whole year? Can you compromise on speed to pay lower rates?
Tell your carrier what's important to you and point out what's unnecessary. The carrier may be able to trim down the extras and save you some costs.
Read the Fine Print
Look for hidden fees or inflexibilities that don’t support your needs. Understanding various hidden fees, specifically fuel surcharges, is crucial as they can significantly elevate overall logistics costs. Some examples of fine-print items are:
- The time allowed for delivery and pickup
- Charges for holiday and weekend deliveries
- Demurrage charges
- Fees for cash on delivery
The fine print offers an extra opportunity to reduce your costs. For example, you can negotiate down accessorial charges such as packing and unpacking fees.
Quote for All Your Needs
Quite often, a carrier will ask for a quote for one shipment or a subset of shipments. For instance, an electronics wholesaler may ask for quotes on shipping TVs from Asia to Europe. Asking for quotes for all your business needs can motivate the carrier to offer a better solution and more competitive rates.
In our example, the electronics wholesaler may fare better by asking for quotes for fridges and stereos, too. The wholesaler may also diversify destinations by asking for quotes to Australia and to the US. The carrier is likely to provide better tariffs if they know the wholesaler is bringing shipping business to many destinations.
Look Beyond Freight Rates
Businesspeople realize that though freight costs matter, sometimes other business factors take precedence. Understanding and managing operating costs associated with shipping and freight negotiation is crucial to effectively negotiate better rates and save money for the business. For instance, are there operational issues you have faced with the carrier before? Like, have you had billing disputes or delays in refunds? Does the carrier have a reputation of delivering goods in damaged condition?
If the carrier has a high rate of complaints and inefficiencies, you’re most likely better off looking for another carrier. If the carrier is working on resolving inefficiencies, negotiate a concession where every negative incident attracts a penalty to compensate you. For example, if the carrier loses your package, they pay the price of the package plus a penalty for losses.
Build Relationships
Your carrier is a crucial component of your supply chain. Demonstrating reliability and offering volume commitments can lead to favorable rates during negotiations. When negotiating freight rates, use your people skills to build positive long-term relationships. Training in how to build positive connections and shared interests can help prevent future delays and price hikes.
It is especially important to remember the supply and demand between shippers and carriers is always changing. You might have a choice of carriers now, but with a slight weather change, politics, or economics, the supply could change.
Leverage Group Buying
For most small and medium-sized businesses, it's challenging to use your shipping volumes to negotiate lower rates. By joining a buying group, you can leverage the collective buying power of the group to score discount shipping rates.
A top advantage of group buying is that skilled negotiators can lock in rates for six months or more. More extended contracts make it easier to budget and predict your shipping costs.
The Role of Freight Brokers and Logistics Platforms
Negotiate a Master Carrier Agreement
A master carrier agreement is a private contract that applies only to you. The carrier doesn't offer the same terms to their other shippers. The master carrier agreement usually takes precedence over the regular tariff. So, when you negotiate a master carrier agreement, your carrier won't be able to change tariffs or other terms without your approval.
Handling Objections and Counteroffers
Handling objections and counteroffers is a crucial part of freight rate negotiation. Encountering objections and counteroffers from carriers is a natural part of the negotiation process. Listening carefully to the carrier’s perspective and understanding the reasoning behind their objections is essential.
Maintaining a composed demeanor and using objections as opportunities to further clarify the shipper’s stance and value can address these effectively. Presenting alternative solutions that align with goals and the carrier’s limitations can address objections. Counteroffers should be expected and prepared for by understanding the walk-away point and areas of flexibility.
