Aggressive pricing/cost savings strategies have contributed significantly to creating a sustained volatility in the domestic transportation market. While the current market may not seem to be terribly chaotic from a shipping perspective, it is an extremely challenging situation from a transportation provider’s standpoint. The elongated period of softness makes the risk for rapid tightening and service deterioration greater.
Shippers drive prices higher when they bid against one another for available capacity in tight markets. Carriers drive prices lower, bidding for business when capacity is readily available.
While there is no pure solution for guaranteed price demand and capacity in a free market, there are ways to moderate your exposure to the violent swings in market conditions from all perspectives. The key is to take a more long-term and targeted approach to pricing.
We have come through several years of extremes in the transportation industry. Starting in roughly 2017, the US freight market has had two periods of extended capacity tightness and two extended periods of looseness.
Tight environments are characterized by elevated tender rejection rates and rate inflation. National tender rejection rates (OTRI) above 8% tend to lead to rate inflation while rejection rates below 5% tend to be deflationary.
There was little to nothing that transportation providers or shippers could have done to completely avoid the the market swings in recent years, but the majority targeted short-term mitigation strategies in reaction, which fuel the potential for sharp swings in market conditions.
From a shipper’s perspective, transportation is a cost center, and the exercise of sourcing trucking capacity is not much different than that of procuring raw materials for production. The main difference is that if transportation fails, then the entire supply chain falls apart.
The costs of production disruption and missed demand fulfillment are extremely high yet difficult to quantify. Shippers can get lost in only looking at the hard numbers and may play the cost control card too heavily when they should be looking for the best long-term value in their transportation procurement.
The best time to prepare for strong market swings is during the cycle before they happen. The current market is soft, and therefore, it is up to the shipper to prepare for the next shift, which will be tighter.
Shippers have the strongest leverage at this point and can do themselves a favor by making sure they are procuring transportation at a sustainable price. Carriers (and indirectly brokers) who are pushed into offering below-cost prices will not survive for the long run.
The hard part is knowing how resilient your rates are as carrier costs can fluctuate based on their networks. Looking at SONAR’s rate benchmark rates and proprietary capacity data can help you understand where to be focused on controlling costs and where to build resilience. Carrier networks tend to be relatively congruent with national trends.
In the above snippet, the example lane is very unbalanced in terms of capacity flow. Georgia to Florida appears to be a relatively difficult lane to cover, but the rejection rates are deflationary (below 4%) thanks to an abundance of capacity. The Lane Score is telling us that if aggregate capacity tightens, this lane will have a high chance of service failure.
The reverse trip is the exact opposite, and the rates are much lower. The ideal procurement strategy here is to make sure your contract rates are at or above market averages from Georgia to Florida to ensure you are not the first account out, but companies can feel good about pricing that is below average from Florida to Georgia.
Carriers and brokers can use this third-party data to support their cause and offer more targeted pricing to their customers. Transportation managers who are concerned about sustainable service can also show this information to their financial teams to demonstrate that they are managing risk and sustainably targeting cost controls.
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