Bucking the Trend in Transportation – Simultaneously Cap Rate Growth and Beat Capacity Constraints

If you’ve ever paid $10 for an Uber ride to the cocktail lounge in the evening and then a “surge priced” $50 for the same distance Uber ride back to your home only a few hours later around closing time, you understand the dynamics troubling shippers in today’s capacity constrained transportation market. In an environment where transportation is at a premium, customers often find themselves at the whims of those possessing the means to provide transport in a timely fashion. Like the couple who needs to get home to relieve their babysitter, shippers under pressure to maintain supply chain velocity are forced to pay the premium for expedited transportation.

These days, truckload capacity is in exceptionally high demand, driving rates to ecstatic heights. While shippers have always had periodic exposure to the spot market for expedited shipments, in this constrained environment, they’re being forced to rely on it with greater regularity as tenders are more frequently rejected. In 2018, tender reject rates have reached as high as 25% in late July, and although they’ve fallen to nearly 14% more recently, that’s still a significant volume of freight moved via the spot market.

Unsurprisingly, carriers are feasting on their advantage in this atmosphere. Many are leveraging technology to time their offers of capacity to optimize profitability. Though they’ve always relied on internet load boards, posting services and other tools determine when and where loads are available, today they’re leveraging these technologies to “lie in wait” for opportunities to optimize their margins. Shippers unable to efficiently and effectively communicate with their carrier base are still “dialing for trucks” while the clock ticks down on their “must arrive by date” and they’re paying the highest premiums.

Sadly, the outlook for relief in terms of either easing capacity or falling rates remains troubling. In August, the Cass Freight Index reflected a 6 percent increase on shipments, a brutal 17 percent increase in shipper expenditures, and 10 percent hike in truckload linehaul rates. Journal of Commerce’s William Cassidy urges shippers to avoid setting their hopes too high for any relief in 2019. Cassidy writes, “After rising by double digits in 2018, US contract truckload rates could rise a more modest 5 percent on average in 2019.” While the projected reversion to that modest 5% increase would be welcomed and feel like relief in comparison, rates at this level will still eat into a shipper’s margins and drag on profitability.

Bucking this trend is a daunting proposition and even those large volume shippers that are already embracing powerful logistics IT solutions to more efficiently manage spend, like transportation management systems (TMS), fleet tools, optimizers and others, are still frequently overpaying greatly for spot moves.

With the trend firmly favoring ongoing rate pain for shippers despite investment into tech solutions, what, if anything, can a shipper do to buck the trend and bend the cost curve back downward toward a sane level of spend?

The Solution for Capping Rate Growth and Beating Capacity Constraints

A better, more proactive and effective means for bucking the trend is remarkably simple, and although it still involves technology, it does not represent anywhere near the complexity or investment of time and money commonly associated with logistics IT software implementations. The strategy involves leveraging a competitive bidding process or reverse auction for the most expensive type of freight movement – spot market/expedited freight.

Ingeniously simple, the formalization and automation of competitive bidding enabled by a modified version of tender automation like that found in most contemporary TMS solutions, permits growing numbers of logistics departments to effectively drive down costs on one of the largest cost centers in logistics – the spot market.  

The strategy relies on competitive bidding technology to distribute expedited bid requests, electronically, to all the carriers available in a shipper’s existing base of vetted, on-boarded carriers. Once tenders are submitted, a shipper has visibility into all the bids proffered by participating respondents, so a shipper can select the best quote from among the responses received. Forcing carriers to compete against one another in what is essentially a reverse auction provides a real incentive for the carriers to present the lowest bid to win the job and it provides shippers with a far more accurate view of the actual market rate for expedited freight in any given lane.

Consider the potential savings. Using a hypothetical annual transportation spend of $40 million as an example, with a tender turndown rate of 25%, $10 million worth of freight must be moved at premium pricing on the spot market. If a competitive spot bid tool can save even 3 percent on $10 million, that saves this shipper $300,000 a year. Thankfully, we don’t have to rely on hypotheticals to prove the concept because there is actual hard data revealing just how well these tools and strategies perform.

As part of a blind study performed by UltraShipTMS, data was culled from three discrete shippers who’d been using this strategy and tool. The data captured from a two-week period in early 2018 reflected the impressive results of leveraging competitive bidding to manage expedite/overflow shipments.

At the end of the two-week term, a combined 2,912 shipments were moved by the three participating shippers over the spot market, yielding savings of almost $29,000. The average spread between the first bid received and the final bid ultimately awarded was a respectable 5.7%. Extrapolating these savings across the entire year, these shippers saved more than three quarters of a million dollars on spot market shipping alone. Imagine how much each is saving over the course of a year!

For more details and the detailed data from this study, register to view the instructive case study.

Anthony VitielloAnthony Vitiello is Director of Marketing at UltraShipTMS. He enjoys a 25 year record of success marketing enterprise automation software platforms to some of the world’s largest companies. A published columnist and prolific blogger, Mr. Vitiello is responsible for generating and curating UltraShip’s Supply Chain Collaborator blog and the company’s burgeoning library of technical papers, business case studies, e-newsletters and other materials.