Should “services” be purchased like commodities, in particular, logistics services like transportation and customs brokerage? It’s a popular practice, and yes it can be effective in some cases, but there are pitfalls to watch out for.
To begin with, let’s look at the basic differences in terminology. One dictionary I consulted defines “commodity” as “an article of trade or commerce, especially a product as distinguished from a service”. A “service”, on the other hand, is defined as “an act of helpful activity; help; aid: to do someone a service”. Seems like the proverbial comparison of apples to oranges, although commodities and services are often treated in a similar fashion.
When do buyers treat logistics services like commodities? From a service provider’s perspective, it’s most evident in the RFQ (Request for Quotation) or RFB (Request for Bid) process. Both of these processes are well suited for commodity purchasing; typically a buyer identifies the commodity with a description (quality standard), along with other pertinent requirements, and sellers submit prices. Requests for support services such as transportation, delivery, and customs clearance in the case of international shipments, may be listed in the terms and conditions of the governing document (if at all).
Frequently however, they are not; price negotiations in the transaction are often limited to the commodity itself, with transportation and customs clearance services being decided after the fact.
And because they are negotiated after the buyer, or seller, may have agreed to a commodity sale-price they already consider too low, they want the lowest possible price for any services necessary to complete the sale. What follows is a flurry of telephone calls or e-mails where the buyer, or seller, tries to secure those services at the lowest possible cost (i.e. the commodity approach), without consideration to any mitigating factors that might affect the transaction, or impact the ability of the service provider to provide an efficient level of service (i.e. the “value add” approach).
There are many examples of the types of service requirements that are often overlooked, or not clearly specified, when buyers and sellers are simply looking for the lowest cost service. And when those factors arise “after the fact”, service providers are faced with a difficult choice – either absorb the associated costs (with an impact on our profit margin), or re-quote our original price (never a popular option, and one that buyers frequently refer to as “nickel and diming”).
Factors that tend to be omitted, overlooked or mis-stated during the request for transportation services (and that can subsequently affect the timeliness, or cost) of a shipment include: availability of a loading dock at origin and destination, requirements for appointments, (actual) load weight and dimensions, packaging, unitization (loose or palletized, flush or overhanging), pallet size, government regulations (eg. hazardous goods or otherwise regulated), temperature control, insurance/declared value (that might require the carrier to obtain additional coverage before the shipment is moved), electronic data transmission requirements (eg. EDI), equipment type (dry van, flat deck, high cube), special handling, driver assist and inside delivery (eg. high-rise buildings), to name a few.
For international shipments there are also factors to consider regarding the customs clearance process, such as availability of documentation (certificates of origin, commercial invoices and Free Trade certifications), harmonized code classifications, shipment value, and the identity of the customs broker responsible for clearance.
And, perhaps most importantly, whether for carriage or customs clearance, the responsible party must ensure that an account has been opened with the applicable service provider, including an adequate credit limit.
As service providers we often ask “what’s more important – cost or service”? Buyers often respond by saying “service”, but the deciding factor in obtaining the business often turns out to be “cost”. Understandable, but quality of service plays an important part. Just ask any shipper or receiver who selected the lowest quotation and then experienced delays because important information was not relayed to the carrier or customs broker when the quote was requested. The service provider often takes the blame, even though delays could have been avoided by elevating the value of the transaction to a true “service” rather than a commodity.
If we ask a lot of questions during the quotation process we’re not trying to be difficult, or look for ways to “pad” the price. We’re simply trying to ensure we have information to provide shippers and receivers with a level of service that is seamless and efficient, and adds real value to the buyer’s supply chain process.
Laurie Turnbull is a supply chain consultant with Cole International Inc., a leading international logistics company providing customs brokerage, warehousing and global freight forwarding services. All posts by Laurie Turnbull