Truckload rates and capacity should not create concerns for shippers managing a proper procurement strategy during the first half of 2020. However, pending legislation and rising fuel costs, as well as unpredictable economic and climate trends create challenges to a shippers’ ability to control cost. Emerging brokerage offerings can add confusion to these market complexities and to your overall strategy.
By managing budgetary goals and carrier relationships alongside efforts to identify opportunities for advantageous strategy shifts, organizations can avoid stark disruption-caused pendulum swings that cripple profitability.
Proper Procurement: Contract Relationships vs. Spot Market Opportunities
Barring any huge economic changes, contract rates will hold steady during the first half of the year. As 2020 proceeds, expect moderate increases due to three catalysts.
- Capital investments by carriers to cover capacity obligations
- Insurance increases on the horizon
- Equipment leaving the market prompting premium costs for available assets
With spot market rates still well below contract rates, it will be tempting to chase savings opportunities. It is important to be mindful of the potential penalties that may result from such a move. Shippers budgeting sales quotas based on low spot market rates can quickly find themselves upside-down when a dramatic shift swings those rates sharply higher.
Conversely, long-term contractual rates provide a level of predictability. Resisting the urge to dump a contracted partner might mean paying a higher rate, but transportation costs will remain static. Of course, there are limitations.
Any network should have a blend of contract and spot capacity if volume permits. A proper balance allows a shipper to be surgical with freight placement in a spot market, while preserving carrier loyalty by maintaining volume levels.
By understanding your motivations, including product pricing, budgetary goals and sales strategies, your procurement partner can determine the right methods for effectively distributing freight in the marketplace.
Procurement Practices to Consider
Even in a stable market, consider a few different strategies depending on your business and shipping characteristics.
- Instead of planning an RFQ season once a year, consider alternatives.
- Issue an RFQ by lane.
- If there is seasonality to your freight, consider a quarterly or seasonal RFQ where carriers can commit to a capacity allocation and you can avoid premium costs during off-season volume dips.
- Consider an RFQ based on location to secure favorable pricing in certain geographies.
- If you have year-round freight consistency, lock in a contract rate at a low point to maintain advantageous pricing for an entire 12-month timeframe. If at some point during the year you are paying premium cost on certain lanes and other parts of your network are healthy, strategically identify areas where your rates are most out-of-market and take it to the carrier community.
Efforts to weigh these opportunities benefit from technology-based procurement tools that improve planning by modeling the variety of scenarios that exist. This includes an online portal where carriers can provide real-time response and receive real-time feedback.
Be Wary of the Hype
Capacity concerns certainly continue to exist, but doomsday scenarios removing significant levels of capacity overnight is rare without some level of notice.
Multiple market indicators hint at the potential for dramatic disruption.
- Trajectory of Class 8 truck sales
- Historic freight patterns
- Seasonal patterns
- Economic indicators
For instance, if long-term year-over-year GDP growth is slow in the 2 percent range – as it has been – it is reasonable to expect continued growth but not at a level where a flood of freight creates market-wide capacity constraints.
Legislation can impact capacity levels, but there are rarely surprises in regulations. These measures require significant planning time that create a long runway ahead of any market swing.
While market shifts occur, weather events, legislation or other events are generally only added catalysts for an impending market swing that has already taken root due to other trends.
With that in mind, shippers are wise to plan for controllable costs, such as rate per mile, and be prepared to experience uncontrollable costs, like fuel. Focus on what you can control, and stay apprised of what is happening in the market to react when the unexpected occurs.
The Brokerage View
- Transportation brokerages are walking a fine line of culture and employee retention, striving to create a competitive workplace environment without cut-throat tension. Many grapple with how to increase volumes while margins suffer, and how to balance the need for high individual productivity and the human needs of their workforce. Until they crack that cypher, turnover rates will remain high.
- Some brokerage operations are trending toward an asset-like, or even asset-light, with an appetite for contracting freight versus operating in a spot market. Some are placing leased trailers in the market while relying on their power-only carriers to fulfil the shipment. If a broker is moving toward contractual pricing, put potential penalties in place for high tender rejection numbers or adjust service agreements to reflect more of a “must-haul” agreement.
- The emergence of digital brokerage platforms, while intriguing, still have yet to be completely vetted for cost or service effectiveness. These opportunities are primarily limited to dry van capacity and to markets with the highest shipping volume. Quasi-algorithms may work in certain lanes, but only if cookie-cutter freight is involved.
There are distinct advantages to working with brokerages. In most cases, a brokerage relies on small- to mid-sized carriers that are not significantly impacted by capital expenditures. The bench strength of a brokerage carrier is generally strong, and often broker-carrier relationships are strong enough to create an asset-like environment. They may have carriers that run almost exclusively for them, and they may be able to honor contractual pricing even in drop-trailer scenarios.
Brokerages are also quick to respond to market shifts in the non-contractual space. When the spot market goes down, their rates go down to ensure they capture volume. Large asset providers require time to react to pricing swings.
Understanding the balance of business appropriate for allocation to a brokerage versus contracted freight can improve transportation cost management.
Final Factors and Tips for Truckload Success
Ongoing legislation regarding the transportation industry can always have an impact on the truckload space.
Increasing carrier insurance costs are affecting a carrier’s profitability and may impact a shipper costs as they try to recoup these premiums.
Higher fuel costs – and higher fuel taxes – may create regional bumps in rates, particularly in Washington, Michigan and Ohio.
Small to mid-sized carriers may struggle if large fleet providers drop rates to regain volumes lost in 2019.
Industrial consolidation may pick-up, leading to more carriers being acquired or going out of business.
Driver shortage concerns are still prevalent.
These and other forces should be considered when making transportation plans in 2020. In this environment, shippers really need to serve as good partners for their Truckload carriers.
This is where empathy comes into play. The shipper who can understand the challenges of owning a profitable trucking operation – and who is willing to collaborate to protect their partner’s interests – is best positioned to get the capacity, rate structure, and contracts that it needs to also operate profitably.
James Mathews is the Director of Truckload Procurement for Transportation Insight. He applies 20 years of experience in transportation to help shippers improve transportation management strategies and achieve cost savings. James offers his perspective to the marketplace through Transportation Insight’s informative transportation and logistics guides and quarterly industry forecasts.