Benchmarking freight rates and procuring cost-attractive transportation services

• DOI: https://doi.org/10.1108/IJLM-01-2015-0030
• Pages: 194-205
• Published date: 13 February 2017
• Date: 13 February 2017
• Author: Seong-Jong Joo,Hokey Min,Carlo Smith
• Subject Matter: Management science & operations,Logistics

Benchmarking freight rates and

procuring cost-attractive

transportation services

Seong-Jong Joo

College of Business, Central Washington University-Des Moines,

Des Moines, Washington, USA

Hokey Min

Department of Management, Bowling Green State University,

Bowling Green, Ohio, USA, and

Carlo Smith

College of Business, Central Washington University-Des Moines,

Des Moines, Washington, USA

Abstract

Purpose –The purpose of this paper is to help shippers determine a negotiation yardstick for transportation

price and formulate wise transportation outsourcing strategies by examining the presence of freight rate

differentials for shippers and identifying their main causes. This paper also develops a framework for

benchmarking freight rates based on the actual data.

Design/methodology/approach –This paper proposes an additive dummy regression model to determine a

statistical significance in shipping charges between different shippers. Unlike the traditional least square

analysis, the proposed model is designed to avoid a biased assessment of the impact of an explanatory variable.

Findings –Through a series of empirical data analysis and hypothesis tests, the authors discovered that the

fixed portion (minimum base charge) of shipping charges differed depending on the shipper’individual

contract, while the variable portion (fuel or accessorial charge) of shipping charges remained the same

regardless of the shipper’s individual contract. As such, shippers who are unaware of flexible but

unpredictable transportation pricing practices and unprepared for freight rate negotiation can suffer from

higher shipping costs as compared to their peers. Thus, the authors conclude that the success of

transportation outsourcing, carrier selection, and freight rate negotiation strategies tends to rest on the

shipper’s ability to understand transportation cost structures and then determine the benchmark freight rate

considered “fair”and “reasonable”for a given service.

Originality/value –This paper is one of the first to examine shipping cost differentials between different

shippers and determine what causes such differentials. In doing so, this paper attempted to assess the

potential impact of freight rate negotiation and carrier selection strategies on shippers’transportation costs in

current deregulatory environments where shippers were given a greater freedom to negotiate freight rates

with carriers and an increased opportunity to save their transportation costs.

Keywords Transportation, Pricing

Paper type Research paper

1. Introduction

The passages of a series of landmark transportation deregulatory acts such as the Motor Carrier

Act of 1980, the Surface Freight Forwarder Deregulation Act of 1986, the Negotiated Rates Act

of 1993, the Trucking Industry Regulation Reform Act of 1994, and the Interstate Commerce

Commission (ICC) Termination Act of 1995 brought sweeping changes in transportation pricing,

carrier market entry, and operating territories in the transportation industry. In particular, these

acts allowed the shipper to enjoy the unprecedented range of bargaining room for freight rates

and exploit transportation cost saving opportunities. For example, between 1977, a year before

the ICC started to relax its control over the industry, and 1982 two years after the Motor Carrier

Act of 1980 was introduced, rates for truckload-size shipments fell by about 25 percent in

inflation-adjusted terms. The General Accounting Office found that freight rates charged by

The International Journal of

Logistics Management

Vol. 28 No. 1, 2017

pp. 194-205

© Emerald PublishingLimited

0957-4093

DOI 10.1108/IJLM-01-2015-0030

Received 30 January 2015

Revised 26 June 2015

Accepted 3 August 2015

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0957-4093.htm

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