The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
COVID-19, polarizing political and social climates, explosions and UFOs are just a few of the unforeseen events making 2020 one for the history books.
The freight markets have been equally “crazy,” for lack of a better word. Unemployment benefits and government stimulus checks, new truck orders trailing replacement demand, increased carrier costs and employee health concerns have strained the capacity base.
Conversely, traditional freight demand has been disrupted as shippers adjust to the new norms (crazy) of 2020. Depending on shippers’ industries and locations, they may have experienced increased demand or decreased demand.
As FreightWaves illustrates, there is a positive relationship between retail demand and COVID cases, whereas there is an inverse relationship between food service demand and COVID-19 cases.
Capacity enters the market and it exits the market. Freight enters the market and exits the market. Rates go up and rates go down. Relatively consistent freight cycles have taken new shapes, making the markets difficult to predict. To put it simply, the freight markets of 2020 have been a real cluster and nearly impossible to predict. Maybe it’s time to think a little bit differently about how shippers and carriers engage.
‘What’s the rate?’
In most shipper and 3PL/carrier arrangements, price is the primary topic of conversation. Whether the servicer is providing spot rates or contract rates, the shipper must do its best to control costs. Likewise, the service providers must forecast their profits or losses based on the pricing agreements.
When markets are relatively predictable, these arrangements get the job done. However, as the spectrum of predictability shifts toward unpredictable, or in 2020 terms crazy, relationships and budgets break down. Many have used the term “paper rates” to describe transportation rate agreements, meaning the rates are good until they are not good. The service provider may even increase rates to the shipper. If rates are below forecasts, a shipper may take their business to bid and catch the low of the market for contract rates.
In either scenario, someone wins, someone loses and opportunity costs are assumed as personnel is focused on “redoing” what’s already been done.
So this begs the question: Can shippers and service providers structure less market-dependent relationships and remove risk and opportunity costs from a portion of their transportation spend?
The answer is yes, and many do so already.
In today’s world, data and market intelligence is fairly easy to come by, allowing for more transparency between shipper and service provider. In addition to more accessible information, the information in and of itself is more detailed and real time than ever before. This transparency allows for a shipper and service provider to engage more strategically and honestly than spot or contract pricing models typically allow.
Strategic pricing models can remove risk for the shipper, the broker and the carrier. All members of the model will experience more consistency in costs and profits, while also experiencing fair market value. Though costs and margins may not always be the “best” from all respective parties, the aggregate model over time often proves advantageous for the client and the service providers.
Most importantly, the service providers have strong motivation to maintain service and capacity allocations through all market conditions, while the shippers don’t have to manage to the exceptions of the market at hand. Specifically in “tight” markets, shippers may have to bring volume to the spot markets or farther down the routing guide and experience increased costs. In “loose” markets, they may have to work with service providers to reduce rates without disrupting service.
This year has forced many leaders to evolve, as they become experts in remote leadership, expand their digital communications and navigate challenging social and political climates. We as transportation leaders might consider evolving our traditional approach to pricing agreements to bring more stability in an unstable environment.
The next year brings more questions than answers when forecasting the economy and freight markets. As FreightWaves outlined in its Q3 Shipper Rate Report, we may experience three different outcomes: a U-shape recovery, a V-shape recovery or a double-dip recession. Though forecasts are a necessity, a portion of the transportation spend could be addressed by incorporating strategic pricing agreements with core service providers to offset the risk of forecasting incorrectly.
The tools and insights exist to support more collaboration between shipper and service provider. Many shippers today incorporate modifiers and bonus structures for the carriers, ceiling and floor pricing to provide some flexibility or even benchmarks (futures, USDA, DAT, annual comps) to support gainshare pricing models.
Though the traditional methods of pricing business will always exist, it may be time to have discussions with your partners on how to offset the negatives of those models through more strategic pricing arrangements with preferred partners. If engagements are transparent, collaboratively built and founded on tangible data, there are a multitude of options that will enable the shipper to control and budget costs while achieving service goals.
Additionally, allow the service provider the flexibility to withstand the unpredictable nature of the market and earn fair value in return for service. Although the 2020s are off to a rocky start, we have the tools and resources necessary to think differently and remove some of the “un” in unpredictable.