Group Dynamic

Competition, old-style, is changing. Foes at one level are friends at another, forging alliances to expand service territories or fatten up skinny margins through economies of scale. In this age of Big Box buying and selling, pile on enough volume and you can squeeze the breath out of your costs on virtually anything you need, from tires to pushpins for the company bulletin board.

Or, if you’ve got goods to move, freight haulage.

Meet Bryan O’Gorman, the logistics manager at E.D. Smith & Sons, the maker of jams and jellies based in Winona, Ont. O’Gorman’s company is one of the founding members of Cross Canada Logistics, a freight transportation buyers’ group comprised of nine food companies representing about $100 million in transportation expenditures in Canada.

While food producers and distributors compete intensely for every last dollar of business or bit of shelf space from the grocery chains across Canada, as a group they can combine volumes strategically and negotiate better rates and more efficient transportation arrangements with common carriers, courier companies, and railway companies that haul their goods. CCL counts among its ranks multinational producers like General Mills and smaller operations the likes of E.D. Smith & Sons-a testament, supporters say, to what buyers’ groups are all about: they allow shippers of any size to better balance their purchasing power against larger, and sometimes oligopolistic, competitors.

The effort was worth a neat half-million dollars to E.D. Smith & Sons in the first year alone-an enormous percentage on the company’s annual transportation costs, and certainly well worth the roughly $25,000 a year the company pays to be a member of CCL.

Indeed, CCL has saved members more than $10 million on transportation costs since 1995, according to group president and founder Dr. Richard Lande, a Burlington, Ont.-based transportation lawyer. Lande has developed several transportation groups in recent years, specializing in freight segments ranging from automotive goods to refrigerated groceries. Each operates on a non-profit basis and is owned entirely by its members.

“These groups don’t exist to consolidate loads,” he says. “They combine volume. I think it creates a situation where everyone throughout the supply chain can win: the shipper, because it’s negotiating its rate based on a high volume of traffic, and the carrier, because it can count on having lots of freight to move. There’s real value in that. The rates are dynamically priced, but that doesn’t mean that the carriers can’t make a profit.”

On the last point some truckers would beg to differ. “Buyers’ groups recruit carriers to provide discount rates, plain and simple,” says one senior executive at a large for-hire trucking company.

“Number one, I’m not interested in adding the capacity needed to make those rates work. Number two, I deal with enough intermediaries, brokers, and consolidators, thank you very much. Why should I turn to one of them when I can go to shippers individually? Adding another party creates potential for deals to go sideways on you.”

Initially, some carriers do feel threatened by buyers’ groups, Lande concedes. “Some boycott us,” he says. “But the environment for buying transportation is changing. So often now the person who makes the decision to give carriers freight isn’t the traffic manager. It’s a third party: a consolidator, a broker, whatever. You can’t be a purist.”

In fact, Lande is beginning to blur the traditional makeup of a transportation buyers’ group. The Cool Group, established by Lande less than a year ago, concentrates on refrigerated, frozen, and fresh food transport and has seven shippers and eight trucking company members. To make things more interesting, one shipper-member has its own fleet of trucks which it offers to the group for back-hauls.

“There is a relative shortage of refrigerated capacity in North America and particularly in Canada,” Lande explains, “so it’s hard for individual shippers to secure discount rates. The profit margins are so small in this sector that transportation often is a major factor in whether you can service the market or not.”

But the demand for refrigerated and frozen and fresh foods is certainly there, Lande says. “This is a way to serve that demand by encouraging supply of refrigerated trucking.”

Each of Lande’s buyers’ groups is managed like a co-operative, with a board of directors comprised of the managers of logistics and finance at the member companies. He says three principles should guide these groups:

1. Democracy. “You shouldn’t be obliged to use the group for more than what you yourself want,” Lande says. “Some others don’t have the right to opt out of services the group is purchasing.”

2. Internal discrimination. Some buyers groups employ a direct proportion rule, whereby all members-large or small-obtain the identical rate negotiated with carriers. Each member gets the same percentage reduction in rates negotiated with that carrier, from whatever its own previous rate had been. With one price for everyone, Lande says, the ones that already had low freight rates would not necessarily receive much benefit.

Instead, the smaller companies, which usually are charged higher rates, would hit the jackpot. Most buyers’ groups work this way, and it’s not really fair to the larger members.

Lande says a more equitable method is an “internal discrimination” formula, in conjunction with a joint memorandum of liability.

This caters to the large members-it permits the companies that bring volume to the group to benefit from lower differentiated rates. Members do not each get the same freight charge from a chosen carrier, and member shareholders are obliged not to engage in side deals.

3. Rate confidentiality. The buyers’ group aids in negotiations between the carrier and shipper, so one shipper does not know the rates another shipper in the group is getting.

Indeed, the initial attraction for shippers centres on much cheaper transportation rates, says Stan Aranoff, partner and financial vice-president of Dorfin Distribution Inc. in Montreal, a packaging company that distributes to grocery chains. But what Aranoff likes now is that CCL “has moved to negotiate telephone rates, to choose a preferred courier service and a customs broker. We keep moving on.”

Furthermore, the CCL staff provides reports on legislative and regulatory changes that affect shippers and their carriers. It conducts benchmark surveys-two or three a quarter-that examine freight rates paid by members versus rates paid in other lanes and circumstances (in any given report, each member knows only his own rates). Surveys also are done for members on a more specialized, individual basis.

The payoffs from those “softer” benefits, say members, are tangible: E.D. Smith won a 10% reduction in one such rate with CCL help last summer, according to O’Gorman. Aranoff says Dorfin Distribution replaced a carrier last year on the basis of a CCL survey of rates and service. And group members tap one another as resources on issues such as pallet control and return, salvage, cross-docking, claims, and warehousing.

“What began primarily as a freight-buying group now is one for resources,” O’Gorman says. “The benefits are not only in cheaper rates based on combined volumes, but in benchmark surveys and building up shared knowledge and experiences on a broad scale.

“We have much in common, and can save by working together.”

Presumably, O’Gorman and other CCL members would extend the same sentiment to trucking companies.