The high costs of bargain hunting

BrandonFriedFT

Brandon Fried is the executive director of the U.S. Airforwarders Association.

I love a bargain as much as the next person. If there is a quarter to be saved by buying three cans of peas instead of one at the grocery store or driving an extra mile to save a nickel on a gallon of gas, I’m usually your man – until the bargain backfires­­.

I recently purchased an inexpensive swimsuit, and it turns out that was one bargain I should have avoided. The cheap elastic waist band snapped as I was coming out of a public pool and resulted in an embarrassing situation. Yes, saving money can be fun and there is no better feeling than a good deal, but a good deal gained at the expense of quality, could wind up costing more than the initial savings.

Recently, a group of shippers called for greater transparency in air cargo industry performance to improve service quality. It seems that they received low rates but poor service from multiple forwarders that were cutting costs, which resulted in several problems, such as freight shipments that weren’t being delivered.

Those of us who are students of economics know that selling a product or service with little or no profit margin is rarely sustainable without large volume and strict expense control. In most cases, the only workable strategy is to demand lower shipping costs from carriers and cargo handlers so that the forwarder can preserve a small profit. It is truly a race to the bottom as each party sacrifices service quality to maintain the customer at the agreed-upon cheap price.

Some shippers are now realizing that saving a nickel might work when buying a gallon of gasoline, but may not be a smart strategy when it comes to company deliveries. Shopping for the lowest price rapidly becomes self-defeating because the forwarder usually fails to cover costs required to deliver invaluable service.  Service quality ultimately suffers and shippers get what they pay for: poor service at a cheap rate.

Shippers know that, when considering freight transportation options, air cargo has never been the least expensive alternative, especially against the less expensive ocean and surface modes. Flying air cargo is expensive, and substantial cost saving efforts usually result in a reduction in service. Forwarders and their airline partners need to work together in finding a balance between price and quality that preserves value while addressing the current overcapacity situation.

The first step in achieving this balance for forwarders is to come to the realization that air cargo is not a commodity but a crucial tool in the toolbox. Not all shippers have the same needs, so it is important that forwarders understand delivery requirements at the beginning of the discussion with shippers to avoid future disappointment. Forwarders are in the business of dealing with solutions and not transit schedules, so air cargo may be part but not the only way to get the job done.

Surface transportation options compete for air traffic, and while impossible to match ocean and truck costs, airlines must continue to offer pricing options that narrow the gap as much as possible. While air cargo is usually the choice when time is of the essence, carriers must realize that the fast delivery is not always the same thing as delivering the most value. This means that both forwarders and airlines must collaborate in developing products focusing on solutions tailored to meet specific shipper challenges.

Recent pharmaceutical and cold-chain service offerings are perfect examples of forwarders working together with airlines in developing products that deliver value to shippers with specific needs. Forwarders have discovered that their customers need temperature control throughout the shipping process and airlines have been answering the call by revamping freight facilities and procedures to accommodate these deliveries in transit. This is a solution that de-emphasizes price while focusing on the air cargo value proposition of speed and careful handling.

Airlines and forwarders need to also understand that when making a service commitment to a shipper, meeting the agreed-upon delivery time is essential. Shippers are communicating your promises to their own customers and place their business relationships in jeopardy if you fail to deliver as promised. They need to understand that while air cargo rates can fluctuate, using a trustworthy and experienced forwarder is more important than saving a nickel a pound because, as with cheap swimsuits, you get what you pay for.

 

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