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The way in which shippers obtain transportation may seem arbitrary and lacking in imagination or thought from the carrier’s perspective. Bid and choose the lowest rate. In reality, they have become more sophisticated in their approach. The transportation procurement process of shippers is evolving rapidly, and they would like to see more carriers keep up.
Before the pandemic most shippers held an annual bid event around the same time each year. The first quarter is a popular period, as many industries are slow during this time. The timing of procurement has changed since the pandemic. Shippers now run bids whenever it makes sense. Shippers want to know how and when to engage carriers in the bidding process because the negotiating power between the buyer (shipper), and the seller (carrier), shifts every one to three year.
Two indicators are useful to gain a better understanding of this shift: the New Rate Differential (also known as the Spot Premium Ratio) and the New Rate Difference (also known as the New Rate Differential) were developed and used in our iQ analytics company.
The NRD is calculated as the ratio between the average newly established contract rate and the average rate being replaced. The shipper can track NRD over time to see the overall market movement.
The SPR is a ratio of average spot prices to average contract prices. It signals imbalances between supply and demand. Shippers are constantly gauging the direction of the market to ensure they time their bids correctly. Or, if shippers follow a regular schedule of bidding, they will know what to expect when they make their bid.
What to Purchase
When deciding what type of capacity they need, shippers face three challenges.
Firstly, transportation is a demand derived from other forecasts within an organization. For example, those prepared by sales or marketing. A transportation forecast can only be as good as its underlying products.
Second, transportation buyers forecast volumes at the lane level. The more disaggregated the forecast, the worse the forecast will be. A lane-by lane volume forecast also makes assumptions about the operational decisions that will take place throughout the year.
These two challenges explain why most shippers base their forecasts on their most recent experience.
In addition to the challenges of forecasting, shippers also have to decide whether or not to include a particular lane in their bid. Not all lanes in a shipper’s network are identical. They differ in terms of total expected volume, consistency and strategic importance. Shippers who are sophisticated conduct a segmentation to identify lanes which should be handled differently.
According to an analysis by DAT and the Massachusetts Institute of Technology Center for Transportation & Logistics, lanes that had 12 or fewer loads in the previous year are less than 50% likely to have any volume the following year. Even if volume is achieved, the likelihood that it will not be included in the routing guide increases to over 40%.
How to Purchase
Shippers can create a portfolio of relationships for procurement, including contract, dedicated and spot, once they have segmented the network.
In a dedicated relationship a shipper has control over the day-today use of assets, whether leased or owned. This is the “make” of the classic buy-make decision. It is ideal for lanes that have consistent, balanced volumes and fully utilize drivers and trucks.
The traditional way to do business is through contractual relationships. In this approach, the price is fixed but the volume and capacity offered by the shipper are not. On these lanes, annual contracts are best. They provide enough volume to the carrier so that they can rely on it and have a truck ready when needed. Standard thresholds are one load per week or once every two weeks.
When the carrier and price are determined during the tender, this is called a spot or dynamic relationship. The spot market is ideal for lanes that have low, irregular and/or sparse volume. Recently, shippers have established direct application programming API connections with carriers in order to create more dynamic relationships.
This “relationship-portfolio” engine can give a better understanding of truckload procurement.
During the pandemic shippers learned the hard way the cost of unproductive and inefficient lanes. The days of bidding annually and selecting the lowest rates have passed for most shippers. They are more deliberate about how, when and what they procure their truckload capacities. Imaginative carriers can help.
Chris Caplice is a Ph.D. and chief scientist for DAT Freight & Analytics. He is also a senior research scientist for the Massachusetts Institute of Technology Center for Transportation & Logistics. He is the co-director and founder of the MIT FreightLab initiative.