THE RELEVANCE OF SMALL AND MEDIUM SIZED TRANSPORTATION COMPANIES

By Patrick DiLeonardi – President PDS Transportation, Inc. and PDS Express, Inc.

When did transportation get so complicated?

Having been in the transportation industry for over 30 years, I’ve witnessed a significant amount of change.  The basic premise of transportation has always been to move goods from “Point A” to “Point B” and charge a fee for moving those goods, which covered all associated costs and allowed for some profit.  It has always been a fairly easy business model, but large-scale transportation companies and 3PL service providers have turned this basic business model into a convoluted spaghetti bowl of surcharges, discounts and miscellaneous miscellanea, which has severely complicated our industry.

Would Someone Just Tell Me What It Will Cost From POINT A to POINT B?

This is such a simple request that many customers have, but often times the customer can never get the simple answer.  This is because transportation companies are now “selling” on a continual basis.  Straight rate quote comparisons are too dangerous for the larger carriers.  There will always be smaller carriers with lower overhead in the marketplace that have the ability to undercut the straight rate.  So instead of giving you the rate, they begin by selling, and the new sales pitch includes that all too famous “rate discount”  and bundled services for preferred customers.  I’ve seen customers get rate discounts as high as 92%.  Seriously, how can any business model justify a 92% discount?  More importantly, how can any “right minded” logistics professional on the “buy” side not get suspicious when they hear “92% discount”?  The scary fact is that the “discount diversion” seems to be working.   The apparent reason for its success stems from the fact that many “buyers” of transportation services are charged with saving their organizations money on the transportation line of the income statement.  However, these objectives are often loosely written.  The big carriers know this and utilize the “discount diversion” to secure exclusive annual contracts.  In short, after a review of the business is conducted the sales focus turns to discount rates, and the fact that they will develop quarterly reports which detail the savings provided so that the “buyer” can proudly display these phantom savings to management.  In the end, the transportation line on the balance sheet becomes irrelevant.  What company ships the exact same items to the same destinations with the same frequency year after year?  If volume is increased, the assumption is that transportation will increase.  But the real problem is the fact that the metrics for true savings measurement are not in place at many organizations, and the “discount diversion”, in conjunction with exclusivity contracts, has served as a useful tool in dissuading buyers from real rate comparison.

Why Is My Invoice So Complicated?

When carriers deal in the world of heavy discounts, they have to make up that revenue somewhere.  So now come all of the surcharges, special handling and miscellaneous miscellanea charges.  Complicating the invoice, or more accurately, piling on additional costs, seems to be taking over our world.  It goes without saying that a client’s discount is not applied to these extra costs.  I think the trend started with AT&T back in the 1980’s, but has spread like wildfire.  Transportation companies have kept pace with this trend and now issue invoices that are often indecipherable due to both the complexity with which rates are calculated and the number of line items related to a single shipment.  Remember, we’re still talking about getting goods from Point A to Point B!  It isn’t that complicated!  How many pallets?  Weight per pallet?  Distance from Point A to Point B?   These are the 3 basic questions necessary to determine rate.  Of course if there is any special handling, express delivery, etc., these items are typically detailed on both the quote and the invoice.

To illustrate our new complex world, try shopping for a new set of tires for your vehicle.  On a recent search, I was pleased to find tires for a vehicle priced at $90/tire.  Not too bad, $360 for 4 tires (before tax) and of course I expected a few additional charges.  What I found when I hit the “GET QUOTE” button was 8 additional line items totaling $142!  The company in question also advertised “FREE INSTALLATION”, which was detailed on the estimate as “FREE”, however they did manage to “pile on” expenses that brought my pre-tax cost per tire to $126. A full 28% of my total pre-tax cost was add-ons.

Isn’t That What a 3PL Provider Is For?

Here’s my take on 3PL providers, and it’s not necessarily pretty.  While I’m sure that there is a place for these organizations, I’m absolutely amazed at the rate that they have infiltrated the industry.  In short, I equate the 3PL service provider to that of a personal shopper.  It is an outsourced luxury that will always justify its means, but only because these organizations create their own system of checks and balances.  Because 3PL’s are an outsourced resource, organizations have already given in to the fact that their internal structure was incapable of comparatively shopping for the best rates, or the internal organization lacked scale for operational efficiencies.  But don’t think for a minute that the big national carriers aren’t playing the same game, yet on a slightly different playing field!  Since it’s origins, the transportation industry has been plagued by underhanded strategies to forward monopolistic tendencies.  Corporations entrust 3PL providers to make recommendations, and once again, provide cost savings on the transportation line of the P&L.  It comes down to trust, and the 3PL providers successfully sell hard to instill that trust.

Value Added Resource is the buzzword they all use, however, once again this is difficult to measure.  While there can certainly be savings in terms of personnel, it would be interesting to examine the real savings associated with utilizing a 3PL provider.  Let’s be clear, 3PL providers do work for some organizations, and there are plenty of documented “success stories” to back this up.  These successes are built mostly through larger organizations that have much more complex operating strategies.  For most medium to small scale businesses, or larger businesses needing basic Point A to Point B service, 3PL’s often dismiss small to mid-sized transportation companies due to the fact that they have incentive laden kick-back agreements with the national carriers.

The Case For Small To Medium Size Transportation Companies

In the simple illustration of the movement of goods from Point A to Point B, size becomes an irrelevant factor.  What is relevant is proximity.  Small and medium sized transportation organizations have been enabled by technology to offer services that are at the same level with larger national carriers.  Furthermore, the majority of these organizations have significantly less overhead and are willing to work on tighter margins.  They understand that they must offer services at a lower rate than national carriers, and they do.  The Achilles heel of these organizations is the fact that they don’t “play the game” as well as the large nationals.  Typically they utilize a straight forward bid process which details all of the costs, with no hidden fees and full disclosure of any/all surcharges.  In short, this strategy often results in lost business, even though a post-audit would reveal that the smaller firms bid was actually lower.  An additional factor which negatively impacts the free transportation marketplace is the trend, being forwarded by large national carriers, toward exclusivity contracts.  Any seasoned logistics professional on the “buy” side should know that these contracts significantly limit a firms ability to effectively control transportation costs.

The exploration and true evaluation of small to medium sized transportation companies will yield cost savings for most organizations, especially in instances where the small to medium sized transportation company is in close proximity to Point A, or has scalable business in and around Point A.  The additional benefits that these firms supply is a heightened awareness of the importance of customer service as a value added resource and a more straight-forward approach to full disclosure bids and invoices.  Let’s remember, transportation is not rocket science!  Point A to Point B for a price; don’t let some big national carrier convince you of anything different.

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