In the multibillion-dollar U.S. freight transportation market, relationships sometimes get overwhelmed by the sheer volume of cargo being moved and the number of carriers angling to move it.
A new white paper by the freight brokerage and third party logistics services provider C.H. Robinson details how shippers and carriers can better understand each other’s needs in a highly fragmented and volatile market.
The paper, Strategies For Transportation Spend: Understanding the Dynamics of Carrier Pricing, Service, and Commitment, delves into how shippers can make their freight more attractive to carriers to secure stable rates and capacity. The timing of the paper is also relevant — domestic transportation analysts have for years warned of a looming capacity shortage in the trucking sector, driven by more onerous government safety regulations and a dwindling supply of qualified and willing drivers.
“Shippers can start by understanding which factors carriers can control and which they can’t,” the white paper recommended. “Sometimes, the shipper’s own behaviors can determine whether the truck they need will be there for them. They may not be able to control every detail, but the shipper can work toward a win-win scenario in collaboration with a carrier or service provider, paving the way for good, long-term relationships and mutual success.”
The paper advises shippers to seek overlaps with other shippers when it comes to their carriers’ books of businesses to increase density and efficiency on certain lanes, and to monitor the nature of their complementary roles.
“Carrier networks are dynamic,” C.H. Robinson said in its paper. “Synergies exist between the carrier’s customers. When disruptions in those synergies occur, the entire network can be thrown off balance through no fault of the carrier or shipper, with more rejected tenders resulting.
“For example, if Minneapolis is a destination for Company X’s freight and the origin for Company Y’s shipments, the carrier can balance equipment to and from that location. But if Company X stops shipping to Minneapolis, an immediate imbalance occurs. Although neither the carrier nor Company Y caused the situation, some response will be required. The carrier may refuse Company Y’s shipments more frequently, causing Company Y to use more expensive carriers from the routing guide or the spot market. Company Y might also renegotiate rates with the carrier, or they might choose to conduct a new procurement event to keep rates in check.”
The paper highlighted two specific scenarios that create imbalances for carriers:
- One, when a shipper requires a carrier to ship in a low-volume lane, creating excessive deadheads for carriers in “undesirable locations to reposition their equipment.” In this scenario, C.H. Robinson suggests shippers “bundle their low-volume lanes into larger origin and destination pairs or combinations (region-to-region, point-to-region, region-to-point) to expand the size of the corridor, providing carriers with more certainty, and the chance to offer shippers more attractive rates.”
- In the second scenario, a shipper needs to move significant volume from Chicago to Dallas.
C.H. Robinson also emphasized that network imbalances can occur if carriers don’t know about the less attractive features of a shipper’s freight when they place a bid.
“A carrier would likely submit different bids on freight volumes of 12,000 shipments: one price if they knew the loads were evenly distributed throughout the year, and another if there was a three-month peak season for 75 percent of those loads,” the paper said. “Shippers who clearly communicate the good, the bad, and the ugly of their freight — and who understand how these shipments fit into the carrier’s network — are more likely to see the outcomes they expect from carriers than those who do not.”
The paper noted the oft-repeated mantra that relationships require commitment — shippers who don’t seek to constantly renegotiate rates or press for low rates in depressed demand environments, and carriers who don’t jack up rates when capacity is tight.
“Shippers do need to be cautious about how often they renegotiate rates — too often, and they’re just playing the market; too little, and their rates will become stale.”
For shippers, this is especially important given the predicted capacity shortage in the domestic transportation market.
“Carriers are aware that maintaining a more limited capacity pool positions them to make a greater profit on their assets,” the paper said. “The pressure on equipment availability also enables carriers to be far more selective about which shippers they will serve. Shippers who examine their business processes to take advantage of this new reality stand to gain greater rate stability than those who ignore the trend.”
The paper explained that while the domestic transportation market ought to be perpetually in balance due to the sheer number of buyers and sellers, in reality it is often heavily influenced by supply-and-demand factors that increase rate volatility and decrease loyalty in both directions.
“To make freight more attractive, shippers can discuss processes that can negatively impact carrier productivity; focusing on changes in these areas can improve relationships with carriers and help stabilize rates,” C.H. Robinson wrote. “These are areas that carriers mention frequently as they work to improve their operations and margins.”
Aside from the normal recommendations for shippers — looking beyond the lowest rates and aligning carrier and shipper goals — C.H. Robinson suggests that freight buyers should learn as much as possible about a carrier’s current customer base.
“What shippers do they currently do business with, and how long have those shippers been customers?” the paper said. “This information provides a deeper understanding of the carrier’s transportation volumes by lane or region. Low customer turnover or long-term relationships may lead to more favorable rates from the carrier and better commitment levels.”
This article was published in the May 2014 issue of American Shipper.
