September 11, 2012
technology review | Freight Rate Forecasting

How Invacare slashed its freight spend

Prior to starting LTL contract talks, home healthcare products maker Invacare did a detailed lane-by-lane analysis of its carriers' tariffs. The result: big savings.

By James A. Cooke

Shippers who rely on trucking service don't have it easy these days. Truck rates keep going up, and haulers seem to have the upper hand when it comes to pricing.

But that's not to say they're completely without options. In many cases, there are still a few things shippers can do to hold down costs. For instance, one is to figure out on which lanes a carrier wants or needs business and then leverage that information during contract negotiations.

It's a simple concept, but one that's tough to execute, largely because of the amount of work involved. Generally speaking, it requires the shipper to comb through multiple freight tariffs to find the lowest rates on individual lanes.

Matt Knittle, director of corporate logistics at Invacare Corp., however, found a shortcut. Rather than pore through the tariffs manually, he used software to conduct a freight rate analysis with an eye toward determining which shipping lanes offered some negotiating leverage. He then used that information in his contract talks with trucking companies. The result was over a million dollars in savings with no degradation in service.

"I used this tool to get negotiating power with the carriers," says Knittle.

Based in Elyria, Ohio, Invacare makes wheelchairs, bariatric equipment, disability scooters, respiratory products, and other homecare items. Last year, it generated $1.8 billion in revenues from business in 82 countries. The company, which has manufacturing plants in Florida and Ohio, as well as in China and Mexico, operates a network of 10 distribution centers to supply its customer base of medical equipment providers.

What prompted Knittle to begin scrutinizing freight tariffs last year was intensifying rate pressure that threatened to wreak havoc on Invacare's shipping budget. Up to that point, the company had enjoyed reasonable success in managing its shipping costs. Over a five-year period, it had pared its ranks of less-than-truckload (LTL) carriers from 15 to three core carriers, all super regionals capable of making next-day deliveries. The carrier consolidation, coupled with good negotiating skills, helped Invacare keep freight costs down for several years.

By 2011, however, that tactic had pretty much run its course, Knittle says. "We had saved over $10 million in transportation over 5 years from pure negotiations, but that was the last water out of the well. It was pretty dry," he explains. "We were at a point on the rate negotiations side where we could not get more done without more intelligence on the market and systems to analyze the various rate bases that exist in the market."

The problem facing Knittle was that the tariffs he used for all of his existing carriers relied on one common rate base, which was itself an outdated pricing structure.

To be specific, Invacare was still using the Southern Motor Carriers Rate Conference (SMCRC) tariff system to determine rates, and then discounting as much as 50 to 60 percent from the benchmark price. But most truckers have their own rate tariffs that reflect their unique costs and freight densities on specific lanes.

To get the best pricing, Invacare had to match its own freight requirements against multiple carrier rate bases, Knittle says. Truckers vary their pricing lane by lane, he explains, charging higher rates on lanes with heavy demand and offering price breaks on lanes where they want business.

"If FedEx Freight, for example, has lanes they're heavy in, they won't give you a good price if they don't need the volume," Knittle says. "And if there's a lane where it needs the capacity, the tariff will state that."

"You can get better pricing by mixing and matching carriers within lanes and within ZIP codes," he adds.

But examining multiple freight tariffs to identify the lowest rates on individual shipping lanes was far too big a task for a human to take on. "It's impossible to do this manually because there are too many variables and too much volume," says Knittle. "You'd have to have six tariffs loaded onto your computer and then rate a shipment on each one."

That's where the software came in. In the fall of 2011, Knittle brought in RateLinx, a developer of freight analysis software, to assist him with the analytical process.

RateLinx offered a software application that could analyze carrier tariffs by lane. Knittle loaded six months' worth of data—about 100,000 shipments—into the RateLinx model. The software used the historical shipping data as the basis for determining average shipping volumes on lanes.

It then priced Invacare's freight movements on specific lanes against the individual tariffs published by the company's three core carriers as well as by three new carriers—another super regional and two small regionals—that also offered next-day service. Knittle says he added additional carriers to the freight analysis because "we felt the need for some improvement as some of our carriers had been with us for a long time."

The software model identified which of the six carriers would operate most cost effectively on each of Invacare's freight lanes. Armed with a lane-by-lane freight analysis, Knittle assembled a proposal for each of the six carriers to haul designated portions of Invacare's freight and began negotiations with them.

For the most part, the carriers went along with the proposals, Knittle says. "It helps their profitability because you're putting them [in places] they want to go to," he explains.

As for Invacare itself, Knittle reports that the company saw a big payoff—savings of 7.5 percent on an annual LTL transportation spend of approximately $25 million.

"This approach brought some needed savings at a tough time in a competitive freight market," he says.

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

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