August 20, 2013
By Matt Harding | Principal, Transportation Practice
In the late 1990s, transportation procurement processes were a flashy mix of optimization algorithms, large-scale rate data collection spreadsheets (that were shared on floppy disks!), and hundreds of optimized assignment scenarios. The goal was to create a routing guide which would optimize capacity by balancing performance trade-offs with cost. Today, the processes and technology are very mature and we have nearly 20 years of experience with procurement and optimization being integrally linked. But, it’s not without some shortcomings. Many shippers still wonder why so many scenarios are truly necessary when negotiations are the end game, and there is still the question of “the market.”
Many shippers that I have worked with over the past 15 years say they know the market because they just ran a bid. I think this is flawed thinking, and they are falling into the equivalent carrier trap. That is, they assume that each carrier responds to a shipper’s business as they would any other shipper – always providing a competitive rate subject to their asset and broker-based network strengths.
Based on the $18 Billion of shipment-level truckload data that Chainalytics collects each year, I think this is a very dangerous assumption. The data tells us that carriers know your strengths and weaknesses as a shipper, and they price subject to your culture, policies, inefficiencies and special needs – not just the physical characteristics of volume, geography, freight type, and length of haul. These physical characteristics help define an average rate, of course, but there is always some level of variability. Carriers and brokers are maximizing their profits where they can (and rightfully so).
It is clear that we are entering a new transportation paradigm – one which has profound implications for buyers of transportation services. There are two key forces driving this development. The first is the ability to rapidly process large amounts of information with low-cost tools, and the second is the pervasiveness of common data which can be easily and cheaply processed to generate a wealth of actionable insights. This new era will be marked by the emphasis in transportation procurement shifting away from optimization and technology toward negotiations that are supported by market intelligence.
Think about it: What if you knew during a bid that a specific truckload freight corridor had 50% of the volume between $1.20 and $1.80 per mile (which is not unreasonable in certain markets), with a median value of $1.38? What if you knew there were more than 30,000 annual shipments on this lane, and whether demand was stable or not? Would information like this change how you create a routing guide, or address submitted bid rates? We think it will, and in significant ways.
In fact, as a result of this explosion of freight market information, Chainalytics has changed the way it offers transportation procurement services. Market intelligence is now fully integrated to support procurement efforts in a closed-loop. Data is harvested across hundreds of companies within our Freight Market Intelligence Consortium, it is “anonymized,” modeled, and blended, and then used to assess the market and develop individual routing guides. Shippers, who up until now could only judge bid results based on their experiences, can now validate their market knowledge.
Do you agree that the growth of market intelligence will be a game changer for transportation procurement? Let’s keep the conversation going – drop me a note at mharding@chainalytics.com.
