Freight transportation is constantly defined by the ups and downs of the market. The pandemic has underscored this reality, and many are wondering if it is time to exit the rollercoaster ride and find a more efficient way to manage freight costs and capacity on an ongoing basis.
As a result of recent market swings which have been shorter, but more dramatic, some genuine innovations are entering the marketplace. Many are worthy challengers and complement tried-and-true annual procurement practices. (Some are just retreaded ideas with a new coat of paint.)
If you are tasked managing transportation for your organization, chances are you’re being bombarded with approaches such as:
- Guaranteed acceptance. The programs that promise this use fixed margins instead of fixed rates. From a shipper’s point of view, this may not work for their entire network, but it may be a good fit for several lanes. Instead of awarding the business to multiple providers or establishing a dedicated fleet, a shipper can ride the market up and down with a single provider.
- Lane network analysis offer. Which lanes should be bid out annually, set up as a dedicated arrangement, pre-negotiated before a bid, or sent to the spot market? Of course, no one will be surprised when those recommendations align nicely with the transport provider’s capacity options.
- Retiring the annual bid process. In lieu of the annual event, many are proponents of more frequent “mini-bids.”
- Ad-hoc negotiations with transport providers. This situation is where either party – shipper or provider – can call the other to the table.
- Scheduled (annual, biennial, or semi-annual) bid processes. They could be conducted for all or part of the network.
- Letting everything ride. In the spot market, that is.
So, which procurement strategy is the right one for you?
They all are – each one is useful in specific circumstances and often in combination with other strategies. Ultimately, it depends on what’s happening in the market at the time, where the market is headed, and your organization’s strategy and risk tolerance.
There is no one-size-fits-all approach that can take care of all your needs. You need to continually evaluate market conditions and be willing to adjust your procurement and allocation strategies. In the same way a financial advisor advocates for and maps out a portfolio diversification strategy tailored to market conditions, Chainalytics can help you decipher the semantic tangles using a streamlined, systematic, and multi-pronged approach.
Transportation portfolio diversification takes on many different forms
Procurement Strategy Diversification
- Annual Bids: Annual procurement events help you provide a reasonable budget number to leadership and, understandably, avoid the perils of riding the spot market. However, if poorly done (e.g., providing wrong/incorrect data to carriers, making awards that are never actually tendered to the winners, etc.), your annual bid routing guide can degrade significantly (and quickly). When that happens, you’ll either pay considerably higher rates as you go deeper into your routing guide or put your fate in the hands of the spot market. Even with a well-constructed routing guide, you can struggle in a cycle where demand exceeds capacity (like the current COVID-19 season). Without a good plan beyond an annual bid, the spot market and going deep into your routing guide can blow up your transportation budget, and then some.
- Mini-Bids: Market volatility is typically limited to a few specific lanes. In any network, there will be lanes that experience higher volatility or a dip in service level. You can use benchmarking services such as DAT IQ to understand the costs you’re paying throughout your network and identify the lanes where you can do better. Pulling these lanes out of the annual process and doing mini-bids during the year allows you to secure capacity at better rates while maintaining desired service levels. You’ll find that – especially for seasonal lanes – this is often a better strategy.
Mode and Contract Diversification
One of the most significant actions you can take to protect your company against volatility is diversifying your carrier portfolio. You should do regular modeling to adjust for changing business conditions, both current and predicted – i.e., volume, seasonality, supplier locations, etc.
- Mode: Ensure you have the optimal mix of Truckload, LTL, and Intermodal.
- Common Carrier vs. Dedicated Fleet: Dedicated fleets are a great way to make sure you have capacity. With the help of a robust modeling exercise, you can identify segments of your network (loops, triangles, etc.) where you can deploy a dedicated fleet. If your company has over $50 million in truckload transportation spend, you should have a place for dedicated fleets. Dedicated fleets also provide an excellent hedge to the wild swings in the market. You can flex your fleet size up and down as market conditions dictate.
- Equipment Type: Equipment types are sometimes interchangeable depending on operational requirements. You can unlock this potential – resulting in a significant reduction in costs and improving service levels – by using, for example, non-operational temperature-controlled trailers to haul dry-van loads.
Supplier Diversification
- Number of Suppliers: Make sure you have the right number of carriers. Too many and it becomes hard to manage, too few and you don’t have enough committed partners when the going gets tough. We’ve seen shippers use soft markets to consolidate their spend with a small number of providers. While this age-old procurement strategy works to reduce cost, it dramatically increases the risk of not being able to secure additional capacity when you need it.
- Asset vs. Broker: Maintaining a mix of asset-based carriers and non-asset-based brokers is critical to achieving your desired service and cost profile. You should include both types in your transportation portfolio. We’re currently seeing that shippers who have been heavily “leveraged” on the broker side have been taking massive cost increases. Their brokers pay large spot premiums to secure capacity and then pass that cost right along to them.
Ultimately, supply and demand are what drive the price. The freight transportation industry is always oscillating between shipper-favoring conditions and carrier-favoring conditions. The only long-term approach that can help you balance risk and cost is one based on portfolio diversification.
Maintaining a diverse transportation portfolio requires flexibility, attention to detail, and specialized expertise. Reach out to us and see how Chainalytics help you determine the right procurement strategy, carrier mix, and supplier base. Our combination of top supply chain talent, proven methodologies, and exclusive market intelligence consistently puts our clients ahead of the curve.
Kevin Zweier is Vice President of the Transportation consulting practice at Chainalytics. In this role, he manages the delivery of projects related to transportation procurement, fleet modeling, and systems and operational assessments.
