How to Increase Profits on Your Shipper Contracts

It has become a standard exercise to provide rates in response to a Request for Proposal (RFP) from your shipper customer or prospect. While an RFP can offer you a great opportunity to develop your business, you may need to consider whether winning the bid will help or hurt your bottom line.

With that in mind, you have three main bidding strategies to choose from:

  1. Win the entire bid. If the shipper’s business is attractive and it fits well with your existing business, then go for it!
  2. Win only a portion of the bid. The pricing for the entire bid may not be profitable for you, but certain lanes might dovetail well with your existing business. Pursue those. Wait and see if you can add lanes on more favorable terms later, as other providers drop out.
  3. Lose the bid, but make a good showing. A well constructed bid can be a good way to introduce yourself to a new customer or to enhance your relationship with an existing customer. Also, if your competitors’ bids are too aggressive, some of them may fail or walk away from the contract, giving you a second chance at a higher rate.

Tactically, there are three critical aspects to bids: execution, pricing and margin. The final decision may include intangible factors, too, but you still need to accomplish these three steps:

1. Execution: A successful bid package includes more than just rates.

If your bid is well constructed and answers the customer’s needs precisely, you may win even if your competitors offer lower rates. Most shippers understand that they are buying a professional service that must be performed correctly to support their supply chain. You will need to explain how you can serve the customer’s specific needs, as defined in the RFP. Be sure to state all your assumptions — including your basis for calculating mileage, rates and surcharges — because RFPs can be a bit vague. If you are offered the opportunity to clarify aspects of your bid, check the RFP for guidelines and contact information.

2. Pricing: Get the rates right.

Start by pricing the lanes where you have a reliable source of capacity. Now benchmark your pricing matrix against the prevailing rates in those lanes. Use DAT RateView to analyze both the contract rates and the spot market “broker buy” rates for any of 20,000 lanes. For lanes that you don’t know well, look up a 13-month rate history that helps you to evaluate seasonality and volume in each lane, or download hundreds of rates at a time to complete your bid worksheet. If your current business doesn’t dovetail well with the lanes represented in the bid, try to develop TriHaul routes (three-legged routes with added profitability), or use other creative dispatch tactics to handle new lanes.

3. Margin: Create a pro forma model to balance revenue and cost.

Now you need to understand the expected return on your bid. One of the best ways to do this is to create a “pro forma” model. This is basically a spreadsheet that tallies up your expected revenues and costs. (If you are not a whiz with spreadsheets, ask a co-worker or financial analyst to walk you through this process.) List the different loads in your bid, and multiply by the expected number of loads per year by the price per load (which is the rate per mile times the number of miles.) Remember to include fuel surcharges and accessorials, where applicable. The total of all those payments will be your revenue estimate.

Separately, add up all the costs needed to support that revenue: truck payments, fuel costs, maintenance, etc. Don’t forget indirect costs or “overhead” such as rent, electricity and payroll in your office, parking lot or other facility. (To prorate indirect costs, divide the total by the number of trucks in your fleet, and then multiply by the number of trucks used to satisfy this bid.)

Decision: Does the bid support your business goals?

Now evaluate the results of your analysis. Is this customer important to you? Will this piece of business improve your profitability? Does it support your growth goals for next year? You can use your spreadsheet tool to consider different sets of assumptions and their outcomes. Does your evaluation change if Electronic Onboard Recorders (EOBRs) become mandatory during the contract period? Create different scenarios. (Hint: copy your spreadsheet onto a new worksheet and change only one or two variables at a time.) Rate each scenario by the likelihood that it might occur (Is it 50% or only 25%?) and multiply the result by that percentage. Now you have a model for the value that this RFP might provide under different circumstances. Later, you can return to this set of worksheets and plug in your actual values, to analyze your performance compared to your original plan.

For a more detailed discussion of RFPs and bidding, download the white paper: “Win by Losing: How to Respond Effectively to a Shipper’s RFP“, that I delivered at a recent industry conference.