The past six years have been a roller-coaster ride for domestic transportation. Supply chain management has become part of mainstream discussion thanks not only to the COVID pandemic, but also to the geopolitical environment becoming unstable. Companies can no longer take a passive approach to manage their transportation services and expect things to “return to normal.” If anything the post-recession era was more of an anomaly than the past several years. With all of this in mind, here are some procurement tips for the upcoming year based on some of the lessons learned.
1) Bid for the long run
Look at your carriers like you would a portfolio for retirement. You want your carriers not only to be cost effective, but also reliable. The freight market has become increasingly volatile over the past six years, and expecting historical stability to return will overly expose you to any market fluctuations. Capacity may be much easier to attain this year, but now is when you prepare for when it isn’t.
Contract compliance has ranged from 71.6% to 97.5% since 2018 with three cyclical shifts. Overreactions to market stimuli have become the norm as consumption patterns have become more difficult to predict. In other words, the range of expectations should be widened and shippers should build risk management into their bids — i.e., pay more for peace of mind and reduced carrier management in areas that have a history of instability.
2) Understand the current market
Know what kind of environment you are issuing your bid in: loosening, tightening, neutral, etc. This will allow you to forecast expectations for your budget more effectively and know how aggressive you can expect carriers to be. Knowing the economic conditions is also important, and transportation data can help you understand demand-side conditions outside of your specific focus.
While targeting low-end rates makes sense in the short run, it may not be the optimal long-term strategy. The current market is in transition. We know this by looking at the trendlines for the Outbound Tender Volume Index (OTVI), which continues to show a downward slide and is well below the previous two years. The OTVI is an indicator of truckload demand and is illustrating just how quickly the environment has changed in the past year.
The OTVI is a measure of total requests by shippers to carriers for coverage of loads that have an existing contract rate in place. It measures both accepted and rejected tenders, which has a high correlation with spot rate changes and eventually contract rates. The OTVI averaged approximately 28% lower in November versus the same month in 2021.
While the market is entering a down cycle, with capacity exceeding demand by what appears to be a large margin, volatility should not be ignored. Fast changes mean fast responses. Make sure your bids take the risks of violent market shifts into account.
3) Understand your network
Know how your lanes operate within the context of the national market. Do you have opportunities to leverage your lanes where there is a natural imbalance? Do you have lanes that put your cost controls at greater risk? Knowing a lane like Phoenix to Los Angeles has a natural oversupply of capacity could yield savings or allow you to simply make a quick decision on how many carriers need to be included in your route guide.
The Headhaul Index (HAUL) is indicative of load balance in a market. A positive value means there is more outbound than inbound demand, which tends to lead to higher prices. Carriers will typically give the biggest discounts in lanes that move from a negative to a positive HAUL value (e.g., Phoenix to LA). These are also lanes that inherently carry the least risk of disruption. Focus on diversifying lanes with heavy outbound imbalance.
4) Know where to diversify
Being heavily reliant on a single carrier may be easier to manage, but it can lead to overexposure to a single carrier’s business. Irregular or low-volume lanes can take a lot of time and resources to manage. Use market data to know how to de-risk capacity sourcing and service issues in these lanes. Lanes with heavy outbound volumes over inbound volumes are at the highest risk of disruption in general, but low-volume markets are also difficult to manage.
Looking at a tree map of Outbound Tender Market Share, the Atlanta, and Ontario, California, markets are the highest-volume outbound markets in the U.S., accounting for nearly 8% of the total outbound truckload demand as of late November. The Saginaw, Michigan, market, on the other hand, only accounts for roughly 0.09% of the total outbound truckload demand of the U.S.
This means carriers will not be overly willing to move loads into this market due to lack of reload potential, which also means there are fewer operators available in general. Having diversity in lanes with unfavorable destinations or low-volume origins is something to consider along with lanes with strong outbound demand relative to inbound.
On the contrary, lanes that are well supplied with volume and capacity can be deprioritized in terms of carrier sourcing, with cost expectations lowered.
5) Consider dynamism
Decide whether you need moving parts in your network pricing — e.g., mini-bids or indexed pricing. The past few years have supported flexibility in pricing as a way to manage service risks. Implementing a pricing structure that moves with the market reduces the amount of time in negotiation. Capacity conditions have changed rapidly. In tightening markets, cheaper lanes get bypassed, opening the door to service failures and increased transportation management. In easing markets, shippers can get stuck paying tight market premiums for longer than necessary. Dynamic pricing models can mitigate your exposure to volatility and keep your costs manageable.
Contract rates are only as effective as the market allows. Tender rejection rates for dry van loads (VOTRI) averaged over 20% for a year and a half while contract rates (VCRPM1) steadily rose as shippers attempted to secure consistent transportation. A dynamic pricing model is designed to move contract rates closer in line with market conditions without the need for going through a drawn-out bid process.
The cost savings are mostly soft as capacity tightens in the form of less manual daily management. They are hard savings as rates move lower, as pricing adjusts faster than if managed through a normal bid cycle. To consider this option, you need to identify a trusted benchmark to partner with your carriers on, such as a market index that both parties trust.
There are multiple variations of dynamic pricing models to explore whose goal is to ultimately lower transportation management costs.
