During this period of modest economic growth and ample capacity, freight rates have been in decline. This is confirmed by the various market indices that track freight rates. Lower energy prices that have translated in lower fuel surcharges have also helped keep freight rates in check. The data also indicates that some shippers are switching modes and moving from intermodal back to highway service to obtain faster service at more attractive rates. Looking ahead to the future, 54 percent of the trucking companies responding to a recent Inbound Logistics survey expect static growth in the near term.
Despite the drop in freight rates, 75 percent of shippers surveyed in the same study stated that reducing transportation costs is their top priority while only 38 percent indicating that finding capacity is a challenge. The static economy and low energy prices would appear to be creating a “perfect storm” for shippers seeking to meet their greatest challenge. The danger for shippers is to get greedy as many did during the Great Recession. We remember seeing shippers bid their freight multiple times a year in the hope of continuing to drive lower freight costs. While we are big believers in the value of high quality freight bids, we are also a strong proponent of the old adage, “you get what you pay for.”
We all know that just as there are cycles in the stock market and the housing industry, there are cycles in the freight industry. What goes down will go up again. Shippers that surround themselves with “bottom feeder” carriers at discounted rates will likely have a rude awakening when the market turns. Moreover, with new government regulations coming into play and the volatility of fuel prices, capacity will likely tighten and freight rates may rise sooner than later.
So what should thoughtful shippers do to manage their freight costs as smartly as possible? As stated above, we still believe that conducting a professional freight bid exercise, once a year or every two years is a wise thing to do. For shippers that include a range of quality carriers and logistics service partners in the RFP and conduct multiple round events, this is still a great way to secure savings in freight costs.
We also recommend that as part of the bid, you obtain commitments from carriers on service and capacity. Verify if the service provider has assets, where they are located and whether they will be available to your company. Make sure you sign a multi-year (i.e. three years with a specified rate increase formula and fair fuel surcharge formula) contract with volume, capacity and service commitments. Include incentives and penalty clauses to protect your company from “bait and switch” carriers.
Please keep the following in mind. Looking at a CH Robinson white paper published earlier this year entitled, Do Higher Truckload Rates Bring Better Carrier Performance?, it highlighted that shippers that “choose the lowest cost carrier are most likely to get what they pay for” in terms of On Time Delivery (OTD).
The study also found out that tendering consistent volumes of freight to your bid award carriers is critical in keeping rates down. “The data suggests consistently giving tenders to a carrier at the lane level leads to better rates. Freight consistency—tendering at least one load per week to a carrier in a given lane—is a measure that carriers increasingly seek. In the case of truckload transportation, tender acceptance ratios of carriers rise when shippers offer consistent load volumes on a particular lane. . . ”
“Carriers need to optimize their networks. Consistently receiving loads on a particular lane allows them to develop a sustainable network plan and increase the utilization of the fleet. Previous research in lane aggregation supports this finding, showing that when lanes are aggregated—when low volume lanes are bundled within larger origin/destination pairs—the shipper sees better tender acceptance and more attractive pricing (meaning the demand/tender pattern is smoothed to the carrier).”
An important takeaway from this research and our experience in working with shippers over the past 13 years is the need for quality metrics to track a number of key variables such as On Time Pick-Up, On-Time Delivery and Load Acceptance Ratios per Lane. A freight RFP exercise is not complete without signed contracts, weekly tracking reports and scheduled carrier meetings.
The CH Robinson report concludes with this statement.
“The best carrier for a lane is neither the cheapest nor the most expensive, but the one whose service network complements the shipper's freight. This research suggests that paying market rate yields the best on time delivery. When shippers pay below market, they see a significant drop in OTD; those who paid just over a $20 premium had OTD between 80 percent and 90 percent.”
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