The Keys to Successful Shipper – Carrier Freight Contracts

Tight capacity is driving shippers and carriers to take a hard look at the value of freight contracts. Shippers are seeking rate stability, good service and capacity commitments.  Carriers are looking at securing the most attractive yields on their assets and consistent volumes on lanes that fit with their core competence. One method of helping both parties achieve their goals is by capturing the key elements of the business relationship in a well crafted contract. To create truly Win-Win freight agreements, there are a number of core principles that need to guide these discussions.

Pricing is one Key Element of the Total Package

Shippers are looking for competitive rates. Carriers are looking at offering rates that are competitive, so long as they produce a satisfactory return. Competitive rates are a starting point, a way of filtering and ranking potential carriers in terms of cost savings or cost containment.

One of the critical guiding principles in the carrier selection process should be to evaluate potential business partners across a broad set of variables. These requirements should include size and type of fleet, safety rating, energy efficiency, service performance, and EDI capabilities. A good contract should spell out the shipper/carrier expectations and requirements for each of these items. Rates are very important and will ultimately be a determining factor but they should be partof the total package.

The contract should spell out the length of the award and the level of rate increases in future years. All rates, accessorial charges and fuel surcharges should be spelled out in the appendices.

Freight Characteristics

Both parties need to make sure that the freight tendered meets the characteristics as described in the rate request or RFP. The density of the freight, pallet configurations and ease of loading are critical attributes. Shippers that are “carrier friendly,” with fast and efficient loading/unloading processes, make it easier for carriers to make money. The pricing agreement must be consistent with the precise characteristics of the freight. Otherwise carriers are going to be seeking rate increases just before or after the agreement is signed.

Volume Commitments

Freight rates are often tied to volumes. Shippers that offer full truckloads or truckloads of LTL as compared to sporadic LTL or small parcel shipments offer more value. Many shippers seem to have a problem with the notion of volume commitments. Since shipper volumes are tied to customer demand, this can be a tricky
item to negotiate.

Certainly it is important for both parties to havean understanding as to the volume expectations surrounding the proposed rates. Where high volumes are involved (and where the pricing has been developed on the basis of these volumes), the shipper needs to find a way to make some sort of volume commitment. This can take several forms.

One approach is to offer a minimum but significant volume commitment that can be tied to business levels. If a customer is lost, the volume may need to be adjusted and the rates may need to be increased. Some companies award business on the basis of primary and backup carriers with the split (e.g. 90/10, 80/20) reflecting the volume allocation and rate differential.  As a minimum, there should be specific wording as to the volume and or ranking of each carrier.

Capacity and Service

Capacity is tied directly to volumes and yields. Shippers making volume commitments are entitled to expect capacity commitments from their carriers. While this can be solidified in a contract, other variables come into play. Smart shippers and carriers utilize scorecards to measure performance. These metrics can be captured in SLAs (service level agreements). One measurement of capacity commitment is the load acceptance/load
refusal metric. If performance is below expectations, this can be as a result of several factors. The shipper may be providing more loads on specific lanes and/or at specific times than was expected. The carrier may have overcommitted or found another account that has higher yields on some of the shipper’s lanes. It is most important for the two parties to have an open and honest discussion up front as to what each expects from the
other and for these expectations to be captured in writing. If volumes or load acceptance performance deviates
from expectations, good contracts contain some sort of progressive discipline/dispute resolution process to rectify the problem.

On time service should be dealt with in the same manner. Prior to signing a contract, there should be a full understanding of the pick-up, drops en route and delivery parameters which are sometimes not fully spelled out in the RFP. Since deliveries to more remote locations may involve the use of interline partners, there must be an understanding of the hand-off process and the frequency of the interline delivery schedules (which may not be daily to all locations).

Good Contracts can lead to Longstanding Business Relationships

A well constructed and complete freight agreement can provide both partners with peace of mind and a solid business foundation. A weak contract can lead to disputes, hard feelings and sub-optimum financial rewards for both sides. For companies that lack experience in this area, it is highly desirable to reach out to experienced professionals who can guide you through the process.