A New Approach to Contract Freight: How Shippers Can Refocus Their Transportation Strategy in 2021

In 2020, we saw the transportation industry’s resilience first-hand, as all parties of the supply chain navigated a challenging freight landscape to get goods to market. Freight demand surged to meet the needs of consumers and frontline workers, and shippers were forced to rely heavily on the spot market to secure capacity in a pinch.

Digital brokerage, on-demand freight solutions, load boards, and other spot market tools became a key focus for shippers filling the gaps of routing guides rendered useless by the pandemic. But as we look to 2021 strategies, the data tells a story that sheds light on a better way to adapt to changing freight needs while also keeping an eye toward more favorable cost and service.

Shippers will need to refocus their procurement strategies on maintaining flexible and adaptable capacity contracts for better cost and service outcomes in 2021.

The Spotlight Has Been on the Spot Market, But Shippers Need to Think About Longevity.

Many shippers have seen how the routing guides they created during their annual RFP process do not stand the test of time. The industry’s response to these challenges, however, has been to invest a disproportionate amount of time, energy, and money on digitalizing the spot market and other short-term procurement solutions.

Yet, the annual capacity procurement process, which manages anywhere from 70-80% of the truckload freight market’s $360 billion in annual spend, really hasn’t changed much in the last few decades.

There is an inherent imbalance in the way the industry is solving capacity problems. While the spot market is helpful and necessary to cover capacity misalignments on a daily basis, the industry needs to take a more agile approach to the contractual side of the equation.

Contracted Capacity Makes up 80% of Shipper Strategies, They Should Get 80% of Their Focus.

Source: Breakthrough

Breakthrough data shows that under typical market conditions, shippers’ capacity mix tends to hover around 80% contract and 20% spot.

Consider the chart above. As the pandemic’s initial influence in the U.S. took hold mid-March and early April, Breakthrough shipper clients experienced a notable uptick in spot market usage. This demonstrates an appropriate use of ad hoc capacity solutions: quickly changing freight needs required fast-acting spot market capacity coverage.

Source: Breakthrough

Over time, however, spot market prevalence endured, increasing to 46% as of January 2021. This heightened spot usage trend indicates that as shipper networks changed throughout the year, they continually sourced capacity in the spot market, rather than recognizing the need for ongoing coverage and finding an appropriate, contracted carrier.

Additionally, as contracted linehaul rates remained steady, the cost of spot market capacity remained volatile and elevated. In an already costly market, shippers who neglected their contract freight strategy paid a premium, and although this phenomenon was heightened through the disruption of 2020, this dynamic is almost always prevalent.

Why Shippers Are Making a Case for More Nimble Contract Capacity Solutions

The occasional capacity misalignment is a cost of doing business, but disruptions that systemically occur over time are costly, no matter how high-tech the spot market has become. When shippers make incremental improvements to their routing guide as issues arise or opportunities come to the forefront, they eliminate the massive, disruptive, full-network RFP that the industry has become accustomed to. More optimized capacity contracts ensure that shippers’ freight needs are met, and carrier networks remain intact over time.

How Shippers Can Diminish Their Reliance on Expensive Spot Market Solutions:

  1. Leverage Smart, Unbiased Technology and Data: The freight ecosystem is complex. To ensure your team makes optimal procurement decisions, you need to find a high level of data integrity. Find partners that provide high-tech, data-enabled solutions for your contract freight strategy.
  2. Set Clear Contractual Expectations on a Per-Lane Basis: Set cost and service parameters that align with your strategic goals, while addressing the unique aspects of specific shipments. This will help your team determine if a short-term solution on an ad hoc basis is appropriate, or if it has become a more systemic problem within your routing guide that needs to be readdressed.
  3. Take a Targeted Approach to Monitoring Carrier Performance: When misalignment patterns emerge, ask yourself, does my entire network need an overhaul? A specific region? Or are select lanes underperforming? Tailor your RFP efforts to address areas of opportunity, rather than unnecessarily disrupting optimally performing lanes.
  4. Break Out of the Annual RFP: An annual cadence is arbitrary and leaves your routing guide stagnant. Monitoring carrier performance and re-contracting intentionally, when your network demands it, lets your freight network evolve over time. Be prepared to make adjustments as opportunities arise and leverage your strategic partners to operationalize changes.  

Regardless of the market ebbs and flows in the year to come, the freight market will always be volatile. In 2021, it is time for shippers to make a case for more robust contract freight strategies, which will ultimately lead to more systemic stability for both shippers and carriers. This will reserve the helpful, albeit expensive, spot market for what it does best—servicing last minute freight needs. 

Ultimately, a stronger contract freight strategy will reduce long-term capacity costs while lending itself to better carrier service outcomes.

Heather Mueller is Breakthrough’s Chief Operating Officer for all freight solutions. She leads the execution and delivery of both our Network Intelligence service offering and the development of our strategic transportation platform, FELIX. Additionally, Mueller oversees and collaborates with our Applied Knowledge team to leverage Breakthrough’s powerful dataset to reveal new industry insights and advance thought leadership in the industry.