In the freight industry, we often contextualize fluctuations in market trends in terms of contract rates versus spot rates. When spot rates are beneath contract rates and trending down, or are significantly below contract rates regardless of trend, we consider that environment a deflationary market. The inverse is an inflationary market.
For the first time in over a year, current spot markets rates have dropped below the contract average, a rapid decline from January highs. This transition means a move from an inflationary market to a deflationary one. For shippers, that often means a change in strategy. It can seem like a daunting prospect after having recently adapted to inflationary conditions.
Coming off a high inflationary market, today’s slow-down is resulting in a huge gap between spot and contract rates over the course of the year. But shippers can still take advantage of the new market circumstances — and even recover some of the overspend in budget that was necessary to use when rates were high.
The key to taking advantage of any market shift in the middle of an RFP cycle starts with monitoring freight rates at a lane level. That means looking closely at all-in blended rates, contract rates, backup (LCP) rates, spot and contract benchmarks, and internal budget benchmarks — and comparing the lowest cost options. From there, shippers can identify opportunities in the following categories:
Lever #1: Be Intentional with Your Routing Guide
To capture value in a deflationary market, it is critical to be intentional with how freight is being covered through the routing guide, with backup carriers, or utilizing the spot market. To achieve the optimal results, start with understanding lane level costs for contract and spot, and then ensure the routing guide is set up correctly to take advantage of those rates.
If spot rates are less than contract rates, one approach is to limit the freight sent to contract carriers to what has been committed in the bid. Agility in changing the routing guide setup based on market fluctuations can help to reduce costs. For example, say a carrier has a commitment of five loads per week but nine are generated. If the routing guide is set to a limit of five, then the four remaining shipments will be able to automatically go to freight auctions for cost savings. The inverse applies in a stable or inflationary market, and the primary carriers should always get first right of refusal on loads.
Shippers should also remove backstop broker carriers from the routing guide unless they’re used for a specific service or deflationary price strategies with transparent margins. This allows more volume to flow to freight auction, since in a deflationary market spot rate is typically a more viable cost-savings option.
Lever #2: Address Existing Contract Rates
Assessing existing contract rates during hyper deflation is necessary, but it might mean a difficult conversation with an existing carrier or working with a new carrier altogether. Some shippers might feel bullish on making these changes — others might be more inclined to avoid disrupting existing relationships altogether. No matter a shipper’s risk tolerance, there are still levers shippers can pull to improve existing contract rates as those things that caused a carrier’s costs to increase during inflationary times typically have the opposite effect in deflationary times.
Lever #3: Develop a Low-Volume Strategy
As shipper requirements allow, align the low-volume strategy to the most optimal cost solution. Often, that means most low volume shipments should be covered by the spot market (see step 1). Shippers can also expand the definition of “low volume” (from, say, lanes with 10 loads/year to, say, lanes with less than 50 loads/year) to increase cost savings. Working with a network partner can also open more competitive market rates.
A more conservative approach is twofold: exploring opportunities in new lanes (establishing new routing guides through mini-bids) and focusing any adjustments to existing carrier contracts on poor-performing lanes. Throughout the process, closely monitor how routing guides compare to the market and be prepared to move to a more medium-risk approach if needed.
A medium-risk approach should also include strategies around new lanes and poor-performing lanes. In addition, for broker and non-core asset-based carriers, shippers can:
- Completely replace with more cost-effective carrier
- Reduce commitments to let more shipments flow to freight auction or other targeted network solutions
- Surgically renegotiate rates to bring closer to market
The most aggressive approach centers around finding margin with core, asset-based carriers. That includes more closely monitoring these carrier lanes and, if necessary, acting to completely replace an existing carrier with a more cost-effective one. There are also opportunities to renegotiate rates or reduce commitments to allow volume to flow to the spot market.
Lever #4: Optimize Spot Market Utilization
The spot market is always changing and reacts faster to market conditions than contract rates. For unpredictable freight in a deflationary market, it can be a viable option for shippers to find cost savings. Shippers can leverage freight auctions and automate shipments to go directly to auction, for example, to achieve equal or below existing contract rates.
Shippers can also use data to find opportunities that take advantage of available solutions quickly and effectively. Machine learning models can identify opportunities within a 2–3-day window, reducing transportation costs by $140 per load on average. Working with a transparent brokerage partner can also open access to more favorable network pricing. By having an always-on approach to the spot market, shippers can identify patterns, trends and opportunities for continuous performance improvement.
Moving Forward with Transparency and Flexibility
The current slowdown poses new challenges for shippers, particularly considering fast-rising fuel prices. Q2 2022 has seen record high diesel prices, with an average price of $5.56/gallon. Moreover, a high level of uncertainty in the market remains due to unknowns like demand inconsistency, the reopening of production and shipping in Shanghai, and lease defaults. (Read more about these factors in our market report, here.)
For shippers, a strategy that uses all the resources at their disposal is key. And it means, as market conditions shift, shippers can leverage different tactics to solve for specific conditions as they arise — including striving for rate transparency with partners so they can have visibility to market comparisons and margins. Whether we continue in a deflationary market for a period, or find ourselves in inflationary conditions again, shippers can ensure no shift takes their business by surprise.
Tracy Rosser is Executive Vice President of Operations at Transplace.