Most industry publications and noted experts tote the concept of multi-sourcing as the next “best practice” in supply chain management. There is a multitude of literature on the subject, mostly insisting that if a business doesn’t at least dual-source, that it is behind the times. While the advice may prove to be sound, it is not a necessary fact. The fact is that each business is unique. While a business may fit the mold specified by a particular expert source, the recommended solution may not be the optimal solution for their supply chain.
First, let’s take a step back and understand why dual or single-sourcing your shipping carrier is an important supply chain decision. Traditionally, businesses chose one carrier, using them for all of their shipping needs. The longer a carrier receives all of your business, the better the carrier understands your service level requirements and can build a rapport with your internal team. However, as you become more dependent on one shipper, you may find that the incumbent is less willing to discuss pricing concessions or may even escalate prices. One of the most popular reasons for dual-sourcing is to mitigate risk. In 1997, UPS was threatened with a labor strike, sending the parcel world into chaos. The 15-day union strike against one of the largest carriers is still felt by shipping professionals today.
A recent article authored by Mike Williams entitled, “Is Dual-Sourcing Right for You?” illustrates some guidelines for businesses looking to optimize their shipping strategy.
Source: Parcel Magazine, March-April 2012
The best method when sourcing single or multiple shipping carriers is to first, understand that a limited supply base creates many challenges. Knowledgeable of their competitors’ strengths and weaknesses, the biggest players in shipping know how to tailor their proposals to appear favorable, making negotiations and achieving cost savings difficult. Secondly, you must understand you r own business’s needs. The goal is to create a shipment profile for the business, focusing on highest-cost shipments and the most frequently used shipment types and zones. This will best prepare sourcing professionals to negotiate with carriers.
If a company is interested in possibly dual-sourcing their shipping network, they can ask suppliers to provide three price proposals, one for 100% of the business, one for 70%, and one for 30% of the business. When analyzing proposals, procurement needs to understand that because tariff rates or list pricing is different for each carrier, just looking at discount percentages alone won’t provide the entire cost picture. Other areas that should be compared include service type, zone analysis, and additional charges. Optimal negotiation strategies include leveraging that you are presenting a single supplier with an opportunity to gain additional business or that you are seeking to leave your current carrier. If you already utilize multiple carriers and are negotiating a new contract, you may indicate that the supplier has a chance to win additional business, that you are seeking bids for your business and that you are ready to leave because the competition’s willingness to provide aggressive pricing.
If you find a dual-carrier strategy appropriate, it can ensure that you will always have a carrot available to motivate suppliers and stimulate competition. It also prevents you from gravitating to one technology or business process that can limit your choice of carriers down the line. Further, it allows you to quickly adapt should service levels fall or pricing escalate.