Tender in Logistics: from Purchasing Freight Rates to Optimising Logistics Management
The main goal of any tender is to get the most profitable price for the purchase of goods or services, that is, buy the subject of purchase of the required quality at the lowest price. Tender has always been used as a cost-cutting tool, and so far, the price remains the key factor in tender evaluation. Nevertheless, goal setting and tendering practices are changing.
How has the goal and tendering practices for procurement logistics changed in the last 3-5 years? How do customers’ requirements for bidders develop? The specialists of Tender Department, TELS Group of companies shared this with us.
Objectives of logistic tenders
Many customer companies still use the bidding tool to achieve “simple” goals while purchasing transport and logistic services (TLS):
- Purchase of low freight rates. Tenders are held for each transportation direction. A pool of carriers-winners is formed at the end of the bidding session, and load volumes are distributed between them for the tender period. Thus, the companies are trying to minimise the logistics costs by optimising logistic processes.
- Marketing research of the market. The company holds a tender not clearly intending to change the contractor. The customer receives information about market offers and checks the correspondence of prices offered by the current contractor to the market level by means of the tender. As a result, the contractor may eventually change.
- Expansion of the pool of carriers. A broader “subs bench” of logistic contractors gives the companies more confidence in stable satisfaction of their logistics requirements.
- Bargaining chip toward current contractors. It allows to show current contractors their willingness to change them unless they “try hard” and / or reduce the prices.
According to TELS experts, there has been a distinct evolution of tender objectives by large and part of medium customers over the last five years. Some companies hold tenders to achieve the following goals:
- Purchase the package of services for reasonable budget. In this case, the freight rate in each direction is no longer a key subject of bidding. The customer tries to create a reasonable budget for the package of services, including customs clearance, insurance, marking, etc.
- Stabilise budgets for logistics. While bidding and coordinating contracts, the customer fixes contractor’s obligations, which allows to keep the logistic costs within rigid limits in unstable market conditions.
- Optimise the number of contractors. Having many contractors is not profitable in terms of labour costs – many contracts, many contacts and much cooperation. It is better to have 4-5 contractors covering a wide range of services who can be interchanged easily in certain problem situations.
Obviously, the “new” objectives of logistic tenders represent a more advanced approach to optimisation of business logistics:
- working hours in logistic management are reduced;
- optimisation of logistic budgets is delegated to experts without paying for logistic consulting services;
- logistic costs are planned more accurately.
Changes in tender practices
The main changes in tender practices for procurement logistics:
- The number of tender steps has increased. Tender Department of TELS Group of Companies had used two-step templates until the middle of 2016: the first step usually implied the exchange of all the necessary information as well as the presentation of requirements and proposals; and the second step implied the final bidding and the agreement of the conditions.
The current standard is a three-step tender consisting, as a rule, of:
- the questionnaire period when companies request information from a potential contractor to make the list of bidders;
- preliminary bidding when the participants receive the requirements and make proposals;
- negotiations with the likely winners of the tender, final bidding and the agreement of the conditions. Each tender is different in detail and each company has i own tender practice, but such is the basic scheme for most TELS’s customers today.
Markets also have their own peculiarities. For instance, it is important to have a Kazakhstan-based contractor for customers from Kazakhstan. They often ask for detailed lists of all the carriers who will be involved in the transportation of their goods, almost with car numbers and drivers’ names. It’s actually impossible for forwarding companies to provide such information months ahead since they work with a great number of transport companies with a large aggregate fleet of vehicles (TELS has about 120 thousand cars). Determining the driver and the car involved in transportation of goods 3-6 months ahead is something beyond freight forwarders’ practice.
Risks and opportunities for tender cooperation
The main benefits and risks of tender cooperation for freight forwarding companies are clear – along with load volumes obtained for the tender period they run the risk of reducing the planned profit due to the growth of carriers’ freight rates. Although it can be the other way around.
Strategic partnership for the customer and contractor implies mutual understanding of each other’s interests and preference of long-term relationships to “here-and-now” profit. If freight rates hover around 10-15%, the conditions are usually not revised as the parties build the risks in their budgets. The proposal to revise the rates changing significantly (20-30%) is considered appropriate. Such large price fluctuations are rare, although the most recent case dates back to the first half of 2017 against the growing freight market and the shortage of transport capacity.
Another risk is the shift of load volume “peak” periods, which has not been initially planned by a company-customer or about which they have not informed the contractor during the bidding. Freight rates are naturally much higher in peak seasons than the average annual rates included in tender agreements. It is more difficult to fulfill the obligations in such circumstances (with less carrying capacity available on the market) and the transportation margins decrease significantly down to negative. It is difficult to insure against such situations, so each case is handled individually.
The general conclusion is that tender as a cost-cutting tool has wide capabilities for achieving various objectives, but TELS experts recommend the customers of logistic services to use tender practice for comprehensive optimisation of business logistics using contractor’s knowledge and expertise.