Taking a Targeted Approach to Contract Capacity Procurement

It’s been a roller coaster ride for shippers and carriers the past few years. Remember 2018, when transportation spend went through the roof due to capacity constraints? And then last year, the pandemic upended the transportation market once again, and its effects are still shaping today’s procurement practices. Does this signal that the time has come to transform the transportation procurement process? Many shippers believe so, but in what ways? How do you get started? Those are some of the key questions I discussed with Heather Mueller, Chief Operating Officer at Breakthrough, during a recent episode of Talking Logistics.

Lessons Learned from the 2020 Procurement Market

I began our discussion by asking Heather about the lessons learned from the turmoil of 2020. Heather points out the key reality that, “Even the best and most nuanced approaches to planning can’t necessarily predict the future. What that has taught us is that we must both plan for what we expect to happen and have the processes, data, and technology solutions that enable us to be nimble when the unexpected happens. 2020 could not have highlighted more how unexpected the unexpected can be. We have to look at old processes and we must examine what technologies and data sets we have to develop new approaches. So, 2020 has given us the appetite to think differently about things and it has shown us how important it is to be responsive and nimble.”

How Shippers are Adapting

I next asked Heather how companies adapted to the changes of 2020. Heather notes that not all shippers were impacted equally. “In March and April, it was a lot different if you were a CPG or paper company than if you sold non-essentials. In that timeframe, the most nimble tool we had was to look to brokerage to serve surging capacity needs and unexpected volumes through the spot market.

“By the summer, things became a bit more stable as consumer buying patterns were better understood. We’re consuming more in total now. Because we can’t consume services, we’re consuming products. So, we’re shipping more, and consuming more at home. We’re settling into some trends that will continue, but we haven’t necessarily changed our transportation and procurement practices to support that.

“As a result, we’re still seeing high spot market utilization. Where normally you’d see about 20% use of the spot market and 80% contracted freight, right now it’s closer to a 50-50 split. That’s pretty unusual behavior and it comes at a cost premium. So right now we’re working with our shipper customers to help them think about this new reality and how they can contract better, how they can find asset-based carriers they perhaps haven’t worked with before, and how they can be more nimble in their approach to finding partners who can support them through this new environment.”

(Heather recently wrote a guest commentary for Talking Logistics on this topic, so please read the commentary for more details.)

Elevated Use of the Spot Market

I asked Heather why the use of the spot market continues to be so elevated. Heather says, “The main reason is we are just shipping more. Brokerage deals really well with volatility, but we’ve gone beyond that. We need to think about how we contract for today’s elevated volumes and not just use brokerage as a stop gap.

“We’re no longer in a period of chaos. We’re at a stable level of increased shipping. Therefore, besides looking at outdated contracts, it’s important for shippers to look at what’s happening at their lane and facility levels and how they have to contract differently. The ‘big bang’ approach to sending out your whole network to bid once per year is disruptive for shippers and carriers, and it’s static.

“To get our arms around this, you have to look at procurement from a data standpoint, not just within your network, but what’s happening in the ecosystem around you, and then use technology to understand where you might need sourcing attention and where things are going well. You need to understand what is happening in each lane every day, over the course of a month or quarter, to make those decisions. Shippers need partners with this data and technology in order to operationalize this practice.”

Heather points out that shippers have continued to use the spot market at elevated levels because it satisfies an urgent and painful need, and brokers have the technology to make that easy. But now it’s time to step back and look at the root causes of the problems and consider strategic solutions.

How should companies go about determining the best approach to finding the right strategic solutions for them? What actions should they take with that information? Heather provided some great insights and advice to those questions and more, so I encourage you to watch the full episode for all the details. Then post a comment and share your own thoughts and perspectives on this topic.