Every company using transport and logistics services wants to drive down costs, with tenders typically the key tool being used. But a narrow focus on tendering brings only short-term gains. The road less travelled is to opt for a collaborative approach aimed at fostering long-term relationships. These open up opportunities to achieve benefits to the environment, and the bottom line.
When products and services are merely seen as commodities, ‘getting the best deal’ is just another way of saying the lowest price. Consumers as well as businesses are primarily driven by cost, and when goods or services truly are commodities, this makes sense. Why pay more for something that’s no different from a cheaper alternative?
The truth of this is often seen in transport and logistics services. For straightforward demands, a simple tender process may be the most appropriate way of agreeing a contract, and testing market conditions. While price is key, switching costs also have to be considered. This is one reason why the relationship between shipper and logistics service providers (LSPs) is continued in more than 60% of tender processes, research by ABN AMRO Bank shows.
But there is another price to be paid for relationships exclusively based on cost – one that is not recognised enough. In the transport and logistics sector, requirements on providers tend to be sophisticated and call for a tailored approach. Many shippers are also keen to not only cut costs, but to reduce their environmental footprint. To achieve this, collaboration and partnerships are the way forward.
Real collaboration can be a game-changer
Hubert Franck, the Michelin manager responsible for sourcing European logistics services was looking for a way to reduce the company’s costs per tonne moved, and more. “I wanted a durable relationship with partners, whatever the market is like. Usually when the market is slow, it isn’t difficult to find a transport company. Basically, they’re crying out for work. But when the market goes up, these companies want to renegotiate. A longer-term commitment to work together can change the game for the better for all involved,” he said.
Having identified the need for a collaborative approach with service providers to meet his company’s logistics demands, Franck worked with Vos Logistics and several other operators to arrive at precisely the right relationship model. Franck found new ways to increase efficiency – by avoiding empty kilometres and waiting time for drivers, for example, and by designing smart loops instead of point-to-point deliveries.
Durable relationships call for commitment on both sides
The high-value needs of big companies like Michelin can only be met by a select group of operators. Scale is obviously important, but quality of materials, environmental standards and the flexibility that allows for building a relationship are also key. A durable commitment can only be assured through adequate investment capacity and continuous progress in operational quality.
This sort of relationship asks a lot from the shipper, not least because it involves a closer link between transport and logistics services and the value cycle of the shipper’s company. To avoid the transporter wasting time, in-house logistics has to be connected flawlessly, and when European loops cover several countries, planning and execution depend on close attention to detail on both sides. Top management commitment is crucial, in both the contracting and operational phases.
Getting operational performance up to speed is demanding – success means the process will run like a finely tuned but complex machine. The sort of long-term relationships that make this possible, built on trust and commitment, also lead to better understanding of mutual needs, more dedicated staff (e.g. by allocating teams of drivers who know their clients), and fewer incidents and accidents.
The potential gains to be made from reducing empty kilometres through cooperation are significant, both financially and environmentally. Currently, around 30% of Europe’s truck capacity drives empty.
There are other kinds of optimisation best achieved through a collaborative approach. The use of eco-combi trucks – already operating successfully in Scandinavia and the Netherlands – is a potential enabler for further efficiency in international transport, while the potential of multimodal transport in Europe offers room for further development. To develop these concepts and convince governments of their worth calls for a mutual approach between shippers and LSPs.
Partnering works for both planet and profit
We are all increasingly aware of the need to transition to a low-carbon economy, and for a growing group of companies, this is an important objective. In the transport and logistics sector, this can only be achieved through partnerships taking a long-term view.
Switching to liquefied natural gas (LNG), which is 20-30% cheaper than diesel and much cleaner, offers financial and ecological gains. But running routes on LNG not only requires the trucks, but fuel station infrastructure too. We are working with several companies in consortia on a joint approach to expand the European LNG network: overall costs can be lower due to a lower variable component (fuel), despite higher fixed truck costs. But the bigger picture is that partnering to realise a shared ambition should usher in cleaner, cheaper and quieter transport. This is only the first step towards truly carbon-neutral transport – in the longer term, replacing LNG with biogas is only a small step away.
Partnerships will also help in other areas. Connected trucks are a first step towards driverless trucks, which are currently being tested by OEMs. Regulation may have a way to go, but I have no doubt they will be most successfully integrated when demand and supply sides in our sector are able to build on the experience of a collaborative approach.
Collaborating for a cleaner and more prosperous future
It is worth stressing that tendering will still have an important role to play. “This way of working does not replace tenders, which in some cases deliver just the kind of solutions I need. It is the combination of instruments that helps me make the most of my portfolio of activities,” Franck said.
But I believe the potential cost savings to be gained from collaborative initiatives will add up to a double-digit percentage, which conventional tenders could never capture sustainably.
Success in transport and logistics will depend on remaining proactive and riding new waves of innovation, and working in partnership is a precondition to doing so effectively. This requires a differentiated approach to sourcing, and embracing collaborative loops alongside straightforward tendering. Working together in this way, shippers and carriers will build the foundations for the kind of relationships that can propel the transport business into the future.