Tailor a mini-bid strategy that plays to your strengths and protects your weaknesses.
New technologies have made it possible for shippers to efficiently bid out their freight and mark rates to the market regularly, optimizing networks for the right balance of cost and service. In the past five years, three important developments have transpired to change the way large organizations move their freight.
First, transportation market cycles have become more volatile and responsive to real-time conditions. Truckload spot prices can move up or down by 40% within a single calendar year. And while contract rates are more stable, prevailing market conditions will affect routing guide compliance and the available capacity of contracted carriers. Multiple overlapping externalities, including natural disasters, trade wars and the COVID-19 pandemic bullwhip effect produced freight market cycles that have seen higher highs and lower lows than in previous decades.
Second, more data and technology is available to help shippers and their supply chain partners benchmark and optimize networks. More real-time and historical rate, volume, capacity and service data have been collected and structured for automated benchmarking, allowing shippers to know when their shipments are at risk due to service and when they are overpaying their carriers in a soft market. For the past several years, 3PLs and freight brokers possessed an information advantage over other market participants, detecting and reacting to market inflections faster than either shippers or carriers by virtue of the number of transactions they saw in the market. Now with the pendulum shifting, shippers have the ability to automatically compare their 3PLs and carriers to the broader market and hold transportation providers accountable.
Third, shippers put their freight out to bid through requests for proposals at a higher frequency than before. Rather than simply relying on annual bids, many shippers bid at least part of their network every quarter. Especially when freight markets soften rapidly, as they did in the first and second quarters of 2022, shippers have taken the initiative to aggressively rebid their contract freight downward.
These three factors have converged to create a new environment, where increased volatility means that routing guides are more vulnerable in tight markets and shippers are often unwittingly overpaying for transportation in loose markets. Shippers who rely on 3PLs to manage their transportation and logistics will have noticed that costs tend to rise faster in a tight market than they decline in a loose one, reflecting 3PLs’ desire to maintain margin.
But responding with deep across-the-board cuts in freight rates can harm relationships with transportation providers and, perhaps even more importantly, introduce new risks into a company’s supply chain. Not all freight is created equal — neither are all markets and lanes. A shipper who asks for a 10% or 15% rate reduction across the board in response to changing market conditions ignores that fact and may end up underpricing freight that moves on stable lanes where rates have moved less. That underpriced freight may be rejected more often and end up in the spot market, costing the shipper more than had the rates never been reduced.
Because hasty mini-bids and sweeping rate reductions can introduce damage to your relationships and new risk to your network, mini-bids or quarterly RFPs should be tactical (used in specific situations), targeted (limited to certain shipment types or network lanes) and tailored (based on the characteristics of your organization’s freight).
Let’s explore what I mean by tactical, targeted and tailored.
Shippers should consider deploying mini-bids or quarterly RFPs when the freight cycle is inflecting and spreads between spot rates and contract rates are widening beyond 15%. If the trucking market is hot and capacity is tightening, shippers risk higher tender rejections and nonperformance on their awarded freight and may experience delays and higher costs on the spot market. If the trucking market is soft and capacity is loosening, shippers risk overpaying significantly for their freight should they not adjust rates down. For this reason, it’s vital that shippers have the ability to recognize and react to freight market inflections as quickly as their transportation providers.
While broad-based transportation metrics like the national average truckload spot rate can vary by up to 40% in a single year, specific lanes, such as Los Angeles to Dallas or Chicago to Atlanta, can move even more. Regions, markets and lanes don’t all move at the same time or in the same direction. Indeed, some lanes are far more stable than others. Some are especially sensitive to externalities while others move according to fairly predictable seasonal rhythms. And within a single shipper’s network, some lanes may be high volume and time critical due to their function in the network — for example, a lane that represents a critical input to a production facility — while others may be less dense and far less time sensitive. So it’s important that shippers have the ability to benchmark their freight spend and service at a lane-by-lane level to target only the lanes in their networks that have diverged significantly from the market at large.
Finally, shippers need to tailor their mini-bids and RFPs to the freight characteristics and network shape of their organizations. I’ll offer an example: A consumer packaged goods company delivered time-sensitive food shipments to government facilities with complicated security protocols in remote locations. When the shipper’s contracted carriers fell off a load, the shipper was punished harshly by the spot market and charged an onerous premium to the market, so the shipper was heavily incentivized to pay slightly above-market contract rates to avoid ever having to send their freight to the spot market. In that case, because going to the spot market involved such a significant downside for the shipper, they optimized their network for tender acceptance above cost, especially on the lanes that were most problematic to cover on a spot basis.
Other shippers that move low-cost commodities where transportation is a higher percentage of cost of goods sold — like bottled water, for example — often tailor their mini-bid strategy to optimize for cost rather than tender acceptance, especially on backhaul lanes where there are plenty of trucks available for dispatch. It’s crucial to understand how the characteristics of your freight — whether it’s dry, temperature controlled, overdimensional or bound for out-of-the-way destinations — affects carriers’ willingness to haul it and how they price it. Then you can tailor a mini-bid strategy that plays to your strengths and protects your weaknesses, allowing you to exceed expectations across the cycle.
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John Paul Hampstead works on media strategy, marketing and freight market research at FreightWaves.
