Shippers across North America are in the process of conducting their annual or mini freight bid exercises. What is in store for shippers and carriers this year?

This is a unique year. The supply/demand curve shifted during the early stages of Covid. Consumers transitioned to working from home, cut back on travel and dining out, spent their disposable dollars on durable goods and some moved away from their city residences. To meet the demand for increased freight transportation services, to move the increase in durable goods purchases, carriers boosted their purchases of fleet equipment. As this process was unfolding, governments sent out cheques to support citizens who lost their jobs during this period and kept interest rates low to stimulate the economy.

As Covid dissipated, consumers cut back on durable goods purchases and shifted some of their discretionary dollars back to travel, dining out, and entertainment. The net result of these market forces was surging inflation. Prices for food, gasoline, travel, dining out, mortgages and many other goods and services escalated. While the economy is not technically in a recession, rising prices created limitations on spending, as discretionary dollars were reduced. The bottom line for the Transportation Industry: There is now too much fleet capacity chasing too few shipments.

The so-called “freight recession” is manifesting itself in the financial results of publicly traded carriers and in the number of carrier failures. The demise of Yellow Freight, a major LTL carrier that has been in business for many decades and Convoy, a much talked about, digital freight broker, are among the thousands of companies that have left the industry this year.

Shippers throughout North America are trying to cope with the tight freight capacity that has been driven by Covid-19, truck and driver shortages, freight embargoes and the surge in eCommerce activity. While many manufacturers and distributors conduct annual and bi-annual freight bids, this methodology is proving to be too static and rigid for shippers experiencing truck capacity shortages on certain corridors. Companies that rely on the spot market for carriers are likely experiencing rate spikes and inconsistent truck availability on an ongoing basis.

There are several solutions to address this problem. First, it is important for shippers to lock in capacity, market pricing and service commitments as part of their annual bidding process. As I have mentioned in prior blogs, these are opportunities to have “heart to heart” discussions with one’s core carriers. Certain carriers may be willing to sign multi-year agreements that provide their customers with “peace of mind” on key traffic lanes.

Second, despite these assurances, some carriers will not provide the expected capacity. They may not be able to retain or hire enough drivers to meet their commitments. In other cases, carriers will identify higher paying freight and divert their capacity to other customers. In other cases, they may wish to allocate some capacity to high-paying spot market loads. In these cases, shippers should have a mini bid methodology which they can quickly deploy to find replacement carriers.

In order to expeditiously go to market, companies should:

Recent stock market and currency value declines in China and Canada point to a challenging year ahead for the economies of these two countries and many others around the world. While the United States has remained fairly stable amidst current world turmoil, its high valued currency may slow exports to its key trading partners. If business levels deteriorate this year, this will place added pressure on shippers who are trying to manage their freight costs? Is this a year to conduct a freight bid?

Certainly faltering economic conditions typically encourage manufacturers and distributors to conduct RFPs to keep freight costs as low as possible. Beyond the general state of the economy, there are a usually a range of conditions that set the stage for a successful freight bid. Here a few to consider.

Freight Bids or Freight RFPs have been around for over two decades. Every year we hear comments about their imminent demise. Unfortunately for many motor carriers, this is wishful thinking. While these exercises are often detested by freight companies, they are popular with shippers across North America. Why? When well done, they provide the shipper with better service providers at a lower cost.

One of the popular themes at many freight conferences is the talk of shipper-carrier partnerships and collaboration. I have heard this theme for a decade. If only shippers would sit down with their carriers, they could pull costs out of their operations and become more efficient.

While this is possible and even probable, the problem with this scenario is that the shipper is left wondering if carrier B could pull even more costs out of the operation than carrier A. This explains why so many shippers have contracted their freight to logistics service providers. They are not convinced that if they forgo the RFP in favor of collaboration, they will derive the maximum benefit. Thus the popularity of freight bids.

Some shippers operate under the misconception that once the bid awards have been made, the RFP process has been completed. This is not the case. There is another critical step that can “make or break” the bid process. It is absolutely essential, particularly in multi-plant companies, to have a process in place, immediately upon implementation, to monitor routing guide compliance.

There is an old adage in business that you cannot manage what you cannot measure. This fully applies to the implementation of freight bids.

Never underestimate the power of human relationships. Tickets to sporting events, golf outings, annual fishing trips or vacations at a carrier’s summer or winter residence can do wonders to dismantle the work of a freight bid. In our work we have seen companies use low ranked carriers, or even carriers not listed in the routing guide, to move their freight. To maintain certain long standing carrier relationships, some shippers can and will find reasons to make a switch back to the incumbents.

We would recommend that you not conduct a freight bid until your company is able to put in place some form of reliable compliance tracking. Even a weekly spreadsheet that displays by lane, the carriers moving the freight that week and the reasons for replacing a carrier in the routing guide, would be a helpful tool.

The objective of a freight bid project is to secure a range of carriers and logistics service providers that are best able to supply a shipper with the service (e.g. transit times, customer service, shipment tracking information), capacity (e.g. drivers, tractors, trailers, straight trucks) and pricing to ensure the company has a competitive advantage in the market. It takes time to do this right.

If your company has conducted a professional bidding exercise, you should be able to rank your service providers on a set of variables at the end of the first round of bidding. If the bidding process has been conducted effectively, there will likely be some significant cost savings, particularly for companies that have not gone to the market for several years.

There is a temptation on the part of some shippers to “take the money and run.” This could be a big mistake.

This year, all signs point to rising freight rates. With driver shortages across North America, driver wages are on the rise. On an almost daily basis, there are reports of trucking companies offering signing bonuses and pay for performance (productivity) packages to attract more drivers (at a higher cost) to their firms. Capacity shortages, government regulations and increases in fleet costs are all driving upward pressure on costs. In addition, economic growth is increasing the demand for transportation services as freight carrier consolidation, particularly in Canada, reduces the range of carrier choices.  New pricing methodologies (e.g. Dimensional Pricing) will also serve to push up freight rates, particularly for low density LTL shipments.

Shippers have been using Freight RFPs or Freight Bids for years in an attempt to keep freight rates under control. The question is whether FRPs still work effectively in a climate of rising freight rates? As a company that has been conducting freight bids for over ten years, the answer is yes, but they take more thought, more planning and more work than is the past. Here are a few tips to ensure your company achieves the best value for its transportation dollars.

1. Leverage your volumes

Your company’s volume of freight, in the traffic lanes where your vendors and customers are located, is the deck of cards your company brings to the table. One of the keys to success is to leverage these volumes as effectively as possible. To do so, it is helpful to consolidate (for purposes of rate negotiations) the freight volumes you have across multiple plants, divisions, sister companies and/or even competitors, if possible. Larger freight volumes give you a bigger bargaining stick.

Freight rate increases are coming this year. The economy is on the upswing. Truck capacity is tightening as driver shortages, government regulations, cost overruns from a very challenging winter and carrier financial prudence all push freight rates in one direction - - - higher What can shippers do to mitigate the impact? A lot. Here is my list.

1. Capture your Freight Costs

Take a look at your freight costs and compare them to prior years. Look for opportunities to fix negative trends (e.g. lack of discipline in moving less than optimum size shipments, too much expedited or air freight etc.) that may have arisen.

2. Benchmark your Freight Costs

Obtain rate quotes from carriers that serve your traffic lanes. Compare their rates to yours. If your company ships high volumes, consider obtaining a benchmark freight rate service on at least your major lanes of traffic. The study will at least tell you if your company is paying market rates or higher and identify carriers that provide the same service at lower rates. There are also companies that provide an ongoing fee-based benchmarking service.

In last week’s blog, I shared some ideas from the recent SCL – CITA annual conference on how to improve shipper- carrier collaboration.  Various suggestions were proposed by a panel consisting of two leading shippers and two major Canadian carriers.  Some other thoughts were expressed during other tracks that day.

The panelists presented some suggestions that came out of a joint meeting between the Ontario Trucking Association and the Canadian Industrial Transportation Association.  Here is more of what they had to say.

Removing Waste from the Shipper and Carrier’s Operation

During the panel discussion it was suggested that it is through trust, communication and dialogue, rather than through an RFP, that opportunities to remove waste from a shipper’s operation can be identified, discussed and solved.  The RFP process is typically too rigid to allow for a meaningful exchange of ideas and for the development of action plans. 

Since the focus in an RFP is typically on rates and service, it doesn’t create a forum for dedicated problem resolution.  Moreover, by not creating project teams, action plans and time lines to remove waste, the inefficiencies typically doesn’t get extracted.  The shipper continues to perform the same functions, in the same way, with its existing and/or new carriers.  Drivers continue to be pick up half full loads since opportunities to consolidate freight or change pick-up dates are missed. As one trucking executive mentioned, the savings generated from these types of initiatives can be much larger than the two percent saved as a result of the freight bid.

The New Year will be an exciting one that will likely be shaped by the financial talks currently taking place in Washington.  Here are some of the key trends to watch for in the coming year.

1. The “Fiscal Cliff” Crisis may determine the level of the Economic Recovery in 2013

As the year comes to a close, America is facing a number of economic headwinds (e.g. high unemployment and underemployment, mismatch between job skills required/positions available) and tailwinds (e.g. possible rebound in the housing sector, potential revival of domestic manufacturing, boom in energy production, improving household balance sheets). Senior government leaders in Washington are trying to solve America’s so-called “fiscal cliff” that is casting a dark shadow over the economy. The resolution of this crisis may go down to the wire and will likely set the tone for the economic recovery, or lack thereof, in 2013.  Should America’s leadership come to a good understanding on tax increases and spending cuts, this will place the United States and probably Canada on a more solid path to an economic recovery, even if 2013 is not expected to be a year of robust growth. This will help shippers and carriers in all sectors of the economy.  A failure to reach an agreement, a weak agreement or an agreement to push the problem down the road, will put a damper on discretionary spending, consumer confidence and possibly shove North America and much of the world into recession.

2. America’s Energy Renaissance/ Fracking comes to the USA

America is going through an energy renaissance.  Induced hydraulic fracturing or hydrofracking, commonly known as fracking, is a technique used to release petroleum, natural gas (including shale gas, tight gas, and coal seam gas), or other substances for extraction.  Fracking is allowing America to produce increasing supplies of energy just as the Middle East, the world’s leading source for petroleum, has become increasingly volatile. 

American Shipper conducted their annual shipper survey earlier this year to determine Best Practices in Freight Transportation Procurement.  The magazine contacted 275 manufacturers and retailers in May of 2012.  The results were published on June 27, 2012. 

They reveal some interesting changes in shipper behavior.  In terms of percentage increase in freight spend, 38% of the respondents indicated that their spend increased by more than 5%.  This compares with 58% in 2011.  Thirty-four percent of the same experienced an increase of less than 5%.  This compares with 17% in the previous year.  Only 11% experienced a decrease in spend.  In 2011, the comparable figure was 16 percent.

The trends for contract freight were similar.  In 2012, 21% of the same sample experienced an increase of over 5% in contracted freight rates.  In 2011, the comparable figure was 40%, a significant decline.  Thirty-seven percent negotiated an increase of less than 5%.  This compares with a figure of 31% in 2011.  Twenty-four percent of the respondents experienced no increase in rates.  In 2011, the figure was 10%.  Clearly there has been a dampening of rate increases in 2012.

The survey respondents were asked to rank the importance of Price, Service and Risk in their freight rate negotiations.  Fifty-eight percent of respondents ranked Price as number one in 2012 as compared to 48% in 2011.  The comparable figures for Service were 42% in 2012 versus 49% in 2011.  No respondents ranked Risk as number one in 2012 as compared to 3% in 2011.

The survey analyzed the cost savings advantages of negotiating freight rates on a centralized basis versus on a decentralized (e.g. multi-plant, multi-divisional) basis.  Thirty percent of decentralized companies experienced an increase of 5% or more as compared to 15% of those companies that negotiate on a centralized basis.  Forty-two percent of the centralized respondents negotiated no increase as compared to 31% of the decentralized group.  Eighteen percent of the centralized group negotiated rate decreases as compared to 20% of the decentralized shippers.