Caveat Emptor: Know Your “True” Cost of Service.

When communicating, nearly everyone uses some form of shorthand (a simplified manner of communication). It’s efficient and accurate enough for most situations. That said, it’s also fraught with pitfalls.

Nowhere is this truer than in logistics and transportation. Forget for a moment not knowing or understanding the whole host of acronyms used in that industry, and most industries for that matter. Instead, let’s focus on the single most used phrase in transportation, “low-cost carrier”.

Why? Because, in my experience the low-cost carrier is often the most expensive carrier. And that’s a major problem in the $2 trillion transportation industry.

It’s universally understood that the total cost of transportation consists of shipper-handling, pickup, linehaul, delivery, consignee-handling, billing, and collections. I agree, but these are direct, hard costs.  What’s ignored are the indirect, or soft costs? What are soft costs?

Let’s focus on the costs related back to the “low-cost” carrier. These indirect costs fall into three buckets: time, service, and stress. In transportation, there are five main instances where these buckets apply.

1. Insufficient, wrong, or no communication
2. Lack of commitment or “give back”
3. Incorrect truck equipment
4. Late pick-up or delivery
5. Unsafe driving or securing of freight

It’s no surprise that these costs are rarely factored into the cost of service. In fact, most shippers don’t even really acknowledge them as costs. What might surprise you is that any of these soft costs can easily dwarf the total direct costs.

To support my point, I would like to walk through a real-world example. Here is the setup.

CASE STUDY

A manufacturer of landscaping equipment, based in Atlanta, received an expedited order on Friday afternoon from Home Depot, their largest customer. They needed a direct delivery to a Home Depot in a Chicago suburb with a delivery window of Sunday between 8:00 pm and 9:00 pm CST, in time for a major promotion starting the following Monday morning.

The order would amount to 12 skids weighing more than 20,000 pounds. The equipment was to deliver 500 feet away from the receiving dock in the Home Depot parking lot (a common practice for large sale items). This required a liftgate on delivery.

Liz, the Logistics Coordinator, was given the order information from Sales around 5pm. Because it was late in the day and it was scheduled to deliver on Sunday night, she was stressed (she was attending a wedding that weekend for her brother). She typed up the RFQ and hit send on an email blast to a mix of more than 20 carriers and brokers. She received 5 responses within 30 minutes.

Here were the all-in bids…

1. Carrier 1:         $2,750 for a 53’ dry van
2. Broker 1:         $2,900 for a 26’ straight truck with liftgate
3. Broker 2:         $2,950 for a 53’ dry van with liftgate assist on delivery
4. Broker 3:         $3,000 for a 53’ dry van with liftgate assist on delivery
5. Carrier 2:         $3,200 for a 53’ dry van with liftgate assist on delivery

Because Liz’s company required her to select the low-cost carrier (assuming they could make service), she awarded the shipment to Carrier 1. Liz was both happy and confident because she could go home for the weekend knowing that an asset-owned carrier won the business. But here is how it played out…

Lack of commitment or “give back”

Carrier 1 committed to the load; however, they did not tell the Logistics Coordinator that the driver lived in Louisville, KY and would be dropping the trailer and relaying it with another power unit (tractor). The second driver would be leaving Louisville with the freight on Sunday morning, plenty of time to make service. Unfortunately, that driver was more than 4 hours late due to a late delivery for another client. Now they were cutting it close with no room for error.

Insufficient, wrong, or no communication

Carrier 1 accepted the load without any clarifying questions (this will come into play later). Carrier 1 never provided any status updates along the route; Liz was in the dark for the entire journey. It wasn’t until the Carrier delivered on Sunday night that Liz received an email notification.

Incorrect truck equipment

Carrier 1 never saw the requirement for a lift-gate on delivery (the others added $150 to their bid price), the difference between the Carrier 1 and Broker 1 rate. This forced the consignee (Home Depot) to receive the freight on their dock and reposition all the freight back into the parking lot, which added 2 hours to the process, greatly upsetting the warehouse people (by the way, they were already receiving overtime at time and a half).

Late pick-up or delivery

Carrier 1 picked up on time but was technically 2 hours late on delivery as driver 2 got a flat tire in Gary, IN and had no slack time available due to the relay. This led to a 20% chargeback from Home Depot, wiping out any profit on the purchase.

Unsafe driving or securing of freight

Carrier 1 and both drivers had excellent driving records. However, they did not properly “block and brace” some of the freight, and two pieces of equipment ended up with bent drive shafts. This led to significant claims from Home Depot.

When you total up your costs for Carrier 1, it looks as follows:

- Pick-up and deliver $2,750

- Home Depot chargebacks $4,000

- Claims for broken axles $750

- Warehouse personnel overtime $500

- Upset customer Unknown

- Undue stress to Logistics Coordinator Priceless  

Total   $8,000 + untold damage to the brand

I realize this might be an extreme example to prove a point, but it happens more frequently than you might think. In my experience, 9 out of 10 shipments execute like clockwork. However, it’s that single shipment that can go totally sideways and wipe out any savings that you thought you were enjoying by always selecting the low-cost provider.

Here’s what a best-in-class service provider would have done…

First, they confirmed the need for a lift-gate on delivery and included that in the bid price.

Second, they fit the asset to the freight, sending in a 26’ straight truck with liftgate.

Third, they utilized best practices on securing this expensive freight.

Four, they included a link for real-time tracking, but also sent texts to Liz, the Logistics Coordinator, on pick-up, midway point on linehaul, and final delivery.

Fifth, the driver went direct, arriving in Chicago on Saturday afternoon and spent the extra time sight-seeing in downtown Chicago.

Sixth, they arrived 2 hours early, allowing the Home Depot team to unload them early. Another flawless load delivered. The shipper and customer were pleased as punch! The service provider sent the final invoice on Monday morning for $2,900! They also sent a follow-up email with a short survey. The carrier received a perfect score of 10 on their net promotor score.

MORAL OF THE STORY

There is a cost of service and a “true” cost of service. These can differ dramatically, so understand both the direct (hard) and indirect (soft) costs. Caveat emptor.