If your company has decided to tender its freight to secure new contract rates for 2021, you’ve got your work cut out for you. This is especially true when it comes to figuring out the lanes and volumes to include in the bid. And, what should you do about those COVID-related swings in your historical data?
The primary tool for developing a freight budget for most shippers is conducting a transportation sourcing event or bid. This process of selecting and tendering your annual freight requirements typically occurs every 12-24 months. As any transportation analyst will tell you, an essential part of this process is determining the network of lanes and the volumes you expect to move during the contract period. Ongoing economic uncertainty combined with the distortions on both the demand and supply sides of the market in 2020 will make it difficult for many companies to estimate their future requirements.
The usefulness of traditional approaches during COVID-19
Shippers typically rely on the trailing twelve months (TTM) of historical shipment data and then weave in seasonality elements, growth predictions, and network updates to arrive at a network estimate for transport providers. At the moment, this is difficult for many shippers. A conservative volume estimate could lead to shortfalls. A high optimistic estimate could leave the shipper with excess carrier commitments they can’t meet, leading to angry carriers when loads don’t materialize. So, what’s a reasonable estimate?
At the beginning of 2020, COVID-19 lockdowns led to a combination of oversupply and low demand, which then resulted in a brief supply overhang. It then quickly evaporated and became a supply shortage as lockdowns eased. However, the current virus surge could again destabilize supply chains. Different industries will need to take different approaches. Categories like essential consumer goods and food and beverage will see fewer variable estimates than “cyclical” sectors like fashion or electronics.
Adapting your lane volumes
A single approach simply won’t work for all businesses. Or perhaps not even all business units within a company. Here are some suggestions for getting started:
- Don’t do away with TTM. Use Trailing Twelve Months of historical shipment transactions with some adjustments. Keep the month-of-year and day-of-week seasonality derived from shipment data correct for “normal” weeks. You should evaluate your historical assumptions of lower or higher demand during certain months as they may not hold true any longer.
- TTM data is only a starting point. You’ll need to apply day-of-week seasonality and trend patterns for the COVID-19 period. This is especially important for industries like cleaning supplies and toiletries, which have seen demand and sourcing location changes that are not likely to ease soon. A periodic moving average forecasting approach might be useful for representing future load volume based on these behavioral trends.
- Scope the demand data for a shorter timeframe, then annualize it. This can be a useful approach for sectors estimated to see an L-shaped recovery like automotive and major appliances. These sectors faced larger disruptions, so an annualized forecast based on a 3-6 month timeframe may be a better estimate of future requirements.
Checking your origins and destinations
COVID-related disruptions at sourcing locations forced some shippers to fulfill orders from alternative sources within or even outside their network. Similarly, shippers have been required to deliver loads to different destinations on the consignee side due to COVID-related effects customers have experienced (e.g., closed DCs, shifting demand patterns, etc.). Be sure to analyze your updated lane network (both origins and destinations) in addition to the volumes.
The continuing pandemic means you should plan to spend more time and effort building your lane networks and volume requirements for this year’s tender. Pay special attention to volume projections, seasonality, and the re-alignment of network origins and destinations. Using a repeatable, fact-based process for dealing with these conditions will also help better position you for future disruptions.
A successful freight bid in this moment has to interpolate the needs of the recent past and to apply them to an unpredictable future. Reach out to us to see how Chainalytics can help you navigate the current environment and achieve a positive outcome. Our combination of top supply chain talent, proven methodologies, and exclusive market intelligence consistently puts you ahead of the curve.
Rohit Sarma, a Sr. Manager in Chainalytics’ Transportation consulting practice, is based in Bangalore, India. Rohit brings more than a decade of experience to projects involving procurement optimization, route rationalization, freight planning, and logistics assessments.
