Since last summer the warning signs have been there that shippers would be facing tighter capacity and increased transportation costs this year. Did all shippers respond to the warnings? Have shippers taken their freight out to bid or are many of them still standing on the sidelines? What actions can shippers take to better prepare for whatever market conditions lie ahead?
Afraid of Rate Increases, Yet Already Paying More
In the second half of last year there were many factors impacting capacity in the trucking industry. Tim described this as a perfect storm, including actual storms — hurricanes Harvey and Irma — as well as the looming impact of the electronic logging devices (ELD) mandate, an expanding economy, driver shortages, and other factors. This tightening capacity should have prompted shippers to go out to bid to secure their place in line, but it didn’t work out that way. Why?
Tim explained that all of the uncertainty in the market actually had shippers standing on the sidelines, many of them concerned that going out to bid in those circumstances was just asking for a rate increase. Tim says that, “As the year went on, however, our customers were finding that their routing guides were broken, carriers were not living up to their commitments, and more of their freight was going to the spot market. So even though they weren’t putting their freight out to bid because they were afraid of rate increases, in reality they were incurring cost increases in other forms, sometimes higher than if they had gone out to bid. It was also very inefficient because they had to spend time and effort searching for trucks in the spot market to take their loads.”
Shippers No Longer in Denial
As the dust has settled in Q1 of this year, many shippers have now gone out to bid through procurement processes. Tim says shippers evaluated whether the normal cyclical process would swing back in their favor and after concluding it wasn’t, decided to lock in rates and capacity. Tim notes that, “Although contracted rates this year may be higher year-over-year, if you compare them to actual spend over the last six months, there is probably little difference.” He also explained that rate savings are only one factor in these decisions. Efficiency of operations in securing capacity, as well as customer service issues, are also important, especially if you’ve had to go deeper into your routing guides or out to the spot market to cover loads. “Without that consistency of having reliable carriers on certain lanes, they are seeing dips in service.”
Tim cited an example of a customer that found they had gone to the spot market for 30 percent of their loads last fall, and that on some of the highest traffic lanes they were paying as much as an 81 percent premium over normal rates on those loads. Within 30 days of a procurement event in Q1, they had already reduced their use of the spot market to 3.6 percent. “If they had gone out to bid a little bit earlier, during that time when spot market tenders had risen to 30 percent, they could have saved approximately 6.6 percent month-over-month,” said Tim.
Procurement’s Not the Only Answer
Tim cautioned that securing rates and capacity through the procurement process is not the only way to reduce freight spend. He suggests engaging your carriers in a dialogue on what opportunities they see to reduce inefficient shipments. He also suggests looking at internal stock transfers between facilities for ways to combine shipments both internally and with external shipments. Another suggestion is to work with customers to determine their flexibility in delaying or speeding up shipments so they can be combined into more efficient loads.
What other suggestions does Tim have for reducing freight spend and improving collaboration? How can shippers become “preferred shippers” to their lead carriers? (Hint: it’s not just when times are bad.) And what questions should shippers ask themselves to prepare for inevitable changes in the future? Watch the rest of my conversation with Tim for additional insights and advice on this topic, then post a question or comment and keep the conversation going!