What are Some Lessons that Shippers Can Learn from the Past Two Years?

From a Freight Transportation perspective, the past two years have been among the most tumultuous in decades. Throughout 2018, an economic surge, a shortage of qualified drivers, and the implementation of the ELD mandate in the United States, created a shortage of freight capacity, particularly in the truckload sector. Shippers struggled to find trucks to move their loads.

To address these shortfalls, many shippers were forced to pay significantly higher rates, establish dedicated fleets and/or change their freight operations to become a “Shipper of Choice.” Rather than simply tender their loads, shippers were advised to become more “carrier friendly.” This encompassed a range of activities.

Becoming a “Shipper of Choice”

Shippers learned that they could improve their chances of securing needed truck space by giving carriers advance notice of a pending surge in business volumes. Another way to improve carrier relations was to help fleets keep their trucks on the road, rather than sitting in warehouse yards or at loading docks. To avoid carrier detention fees for long waits, shippers and receivers were encouraged to improve appointment scheduling and freight loading / unloading processes.

Manufacturers and distributors were also advised to invite carriers to participate in joint business reviews on topics such as improving freight flow or boosting profitability. Since driver recruitment and retention is such a huge issue, shippers were requested to improve their treatment of these key carrier employees by allowing them to use the restrooms at their facilities.

Business Conditions Softened in 2019

In 2019, demand for motor freight services softened. As an example, last year daily demand found six truckload shipments searching for one truck; this year there are three. Dry-van truckload spot-market rates in July were down nearly 19 percent versus last year, and declining freight rates have become the norm. This year carriers are carefully trimming their fleets and scaling back truck purchases as new capacity to handle last year's surging volumes is now competing for fewer shipments.

Shippers are taking Two Approaches to the Changing Market Conditions

One group of shippers has abandoned the lessons learned from 2018 and gone back to a tactical or transaction-oriented approach that focuses on the old standbys – price and service. They have reverted to securing capacity on the spot market. Since capacity is more plentiful this year, they are forgetting two facts of life.

First, business is cyclical. The economy ebbs and flows. Capacity is already contracting. Carriers cannot afford to purchase, maintain and insure excess equipment. The driver shortage is not likely to go away any time soon, even with the advent of autonomous vehicles that is still some years away. As capacity exits the market, shippers will be facing shortages again, possibly sooner than they think.

Second, carriers can play the same game as shippers. They can take a tactical approach and award their capacity to shippers in a manner that best serves their companies. They can give priority to their Shippers of Choice, those companies that make long term commitments and pay contracted rates; they can make their limited excess capacity available, at higher spot rates, to those shippers that did not learn the lessons of 2018.

Another group of “enlightened” shippers learned and internalized some powerful lessons during the latter half of 2018. They realized that they needed to expand their processes and key metrics beyond price (freight costs) and service so that they included a range of “Shipper of Choice” capacity related attributes.

One indicator of the quality of those relationships is first-tender acceptance rates, a measure of how often carriers accept (or reject) potential loads from shippers. If a shipper has been difficult to work with, carriers may be inclined to reject their tenders. By changing procedures, by giving carriers more lead time, they can raise tender-acceptance rates.

Another key process (and metric) is dwell time at origin and destination. Dwell time and detention fees can be measured and monitored.

Shippers of choice build strategic partnerships with their carriers. The strength of these partnerships can be measured in two ways. Shippers can track monthly, quarterly, semi-annual and annual meetings. They can measure the number and results of the Action Items that come out of the partnership meetings. Driver satisfaction is also measurable. Shippers have a vested interest in ensuring the drivers of their core carriers are happy and well treated.

Summary

During 2018, many shippers that did not have a Core Carrier Program, and were not Shippers of Choice, experienced capacity shortages and rising freight rates. Those manufacturers and distributors that booked loads on the spot market, frequently paid freight rates that were higher than contracted rates. In 2019, carrier capacity conditions improved, and spot rates came down. The question for shippers is whether they should abandon the principles of becoming a “Shipper of Choice” in view of current realities.

It is our view that the driver shortage will not be solved soon. As carriers adjust the size of their fleets to meet market conditions, capacity shortages will return. To avoid the pain of 2018, shippers are encouraged to establish a Core Carrier Program with a set of high-quality suppliers, and to negotiate contract rates, service requirements and capacity allocations with each of them. By implementing the set of Best Practices and metrics outlined above, this is a sound long-term approach to establishing a robust and competitive freight transportation services procurement program.

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