By Matt Harding | Vice President, Freight Market Intelligence Consortium | Chainalytics
It is no secret that trucking markets are exhibiting a much different spot rate profile than this time last year. I think it is safe to say we are post-trough on the short-term business cycle and likely heading into a pre-peak phase where capacity issues exacerbate spot rates and procurement events become more challenging to execute and yield fewer opportunities for rate reductions with quality carriers.
Given our experience with over 180+ firms who purchase both spot and contract trucking rates throughout various global markets, we thought it timely to share some best practices during this part of the cycle.
Number 1. Staying disciplined on rates can lead to delayed rate increase impact of tightening markets
Shippers and 3PLs have two choices in the face of tight capacity: either allow changes out of the bid cycle and minimize downstream rate hikes, or stay disciplined and allow increases only in a procurement event. In essence, you pay now or pay later. Freight market intelligence information remains the critical piece of information explaining how severe the overall market capacity issue is, and how long it has been in place. If the certainty of poor capacity conditions is high (beyond seasonal issues), then securing capacity at a higher price will offer advantages if the capacity can be locked in prior to the ensuing market rate hikes. If there is inconsistency in spot rate premiums or more general seasonal issues cause sporadic tightening – it is much better to stick to a disciplined bid schedule.
Number 2. Know where the greatest risk lies in your portfolio of committed carrier relationships
Over-allocating capacity can be a costly mistake. Good relationships are essential to any successful business venture, but can have grave consequences when options are costly or few and far between as rates are going up. Soft markets attract high volume commitments from the carrier community, but over-allocating can backfire in a tight market. The question for all buyers should be – “if this relationship soured, what is the cost and risk of a plan B?” Cases where changing a carrier requires 1-2 months to switch lanes on upwards of +$3 to 5MM of annualized capacity will certainly be rate-hike targets for incumbents in pre-peak markets that could lead to souring of the relationship, in some cases only to find that options are even more costly. Market intelligence is key in locating alternatives in the market and the scale of their operations, as well as, a good reference for reasonable lane pricing to prevent unnecessary changes in your network.
Number 3. Avoid fixation on rates without valuing other aspects like scope, scale, flexibility, and trust
Soft markets offer many opportunities to cut costs with low rates. Fixating on low or below market rates – especially over the last couple years – will introduce risk into your supply chain. Market intelligence allows a reasoned approach to cutting costs. Capacity providers that offer unsustainable rate reductions during soft markets are more likely to react to the contrary when rates tighten. A measured approach to value is the least disruptive in the long run.
Number 4. Always have vetted options
Knowing who operates where and to what degree is Procurement 101. Splitting vital lanes and allowing competition within geographic markets where strong players operate minimizes risk and is a foundation for all strategies.
Number 5. Do not overreact to poor conditions – often they are due to normal seasonality
Changes in contract rates take time to go into effect because so much efficiency is built into TMS technology at the expense of administrative cost and time to update route guides with new rates. When accept ratios drop, reflect on the 3 key questions that affect transportation rates and responsive capacity for near term:
1) Is it me? Are my seasonal spikes combined with poor DC efficiency and long payment terms causing carriers to flee my network? (as an example) What practices actually repel capacity when better options for carriers exist?
2) Is it the market? Is there a genuine shift in the economy driving tightness which affects all shippers?
3) Is it my carriers? Is a carrier or carriers taking opportunities elsewhere and leaving me high and dry due to the markets I operate in?
Looking ahead to 2018
2018 is teeing up to be a very interesting year for trucking considering the confluence of real and imaginary impacts to capacity. In typical years, we need only to watch the economy to gauge and predict rates. Now our attention is directed to tectonic shifts in retail, impact of ELD mandates, global issues, autonomous AI robots, drones… the list goes on. If only this new future were so simple….
In any case, we at the FMIC will continue measuring, separating fact from fiction for our members, and enabling more intelligent decision making – in real time.
Matt Harding is vice president of Chainalytics’ Freight Market Intelligence Consortium (FMIC). Chainalyltics’ FMIC provides strategic freight market intelligence, benchmarking and comparative analysis to its members in a private forum.
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