How to Manage Freight in Tight Capacity Markets
There is no escape from market fluctuations in the transportation industry. Freight rate forecasting – even during the best of times – has the potential to induce migraines and confusion among shippers and carriers.
A Logistics Bureau post captures the uncertainty of the evolving market when it states, “Whatever trends were in evidence a few months ago are now either reversed or accelerated and in emerging from the COVID-19 crisis, may continue to swing up and down—or not.”
If we’ve learned anything in 2020, no assumption is safe when it comes to economic recovery. While our hopes are hinged on an upswing, it’s difficult to ignore the fragile nature of our economy. Singular events, like a rise in contagion levels, the U.S. presidential election, or a fierce winter storm, have the potential for a more severe negative impact than usual.
Currently, tight capacity – too many loads to haul and not enough trucks and drivers – is driving rates higher for shippers. Industry watchers predict this trend will continue through the first part of 2021. Now is an opportunity for shippers to revisit their freight management strategy.
Amidst so much volatility, it can be challenging to recognize when to make a change. We have outlined three considerations that all shippers should weigh when planning how to adapt as the market evolves.
Avoid Knee-Jerk Reactions
Freight rates can have a profound impact on the financial health of any business tasked with moving goods. Shippers must ensure they are securing the lowest rates for moving freight. But when capacity is tight, shippers are more limited in the carrier options available to them. This can happen for multiple reasons, including:
- Elevated turn-down rates – The rate at which carriers decline loads is higher when capacity is tight. Shippers work hard to keep freight rates low. Carriers, in turn, work hard to secure the highest rate. When carriers accept rates below their operating cost, it can put them at risk for financial strain and even ruin. Being more selective about contracts can give carriers an added measure of financial protection.
- Surge in available freight – When demand for consumer packaged goods and groceries spikes – as it did during the COVID-19 lockdown months – there are frequently not enough drivers to transport those loads. So why don’t we just add more drivers? Adding drivers to trucks takes time – sometimes months.
Fewer options tend to create knee-jerk reactions. In freight management, shippers might look to pull out of their contract rates with carriers in favor of spot rates. Contract rates typically offer year-long security of price and capacity. Spot rates are prices a carrier offers a shipper at a point in time (often hour-to-hour). With too few drivers, shippers are at the mercy of accepting higher (spot) rates based on their pressing need to move goods.
Unfortunately, this does not always net positive results. A higher rate does not always mean better service. Shippers who switch from contract rates to spot rates may find that they end up with carriers they don’t know and can’t fully trust. The carrier offering the spot rate might not fully appreciate or understand the requirements of hauling a specific load. Alternatively, a carrier who offers a lower rate might not be as responsive as a carrier with whom a shipper was previously contracted. There are multiple ways relationships can thrive and fail. Recognizing the inherent risk in any change is crucial.
Diversification and Collaboration is Key
You’ve heard the proverb, “don’t put all your eggs in one basket.” When it comes to finances, investing in anything can be risky. Financial advisors will frequently encourage clients to diversify their portfolios or spread risk across multiple investments.
The same goes for freight management: a diversified carrier base gives you access to large and small freight providers. The more options a shipper has, the more competitive carriers must be when providing service, price, and value.
Beyond diversification is the importance of collaboration. In a May 2020 article analyzing the US truckload market, Mike Sinkovitz, senior vice president for collaborative transportation management at Coyote Logistics, notes: “‘Shippers and carriers alike are recognizing that collaboration this year will be key to a successful recovery and avoiding a capacity and pricing crunch next year…On the shipper side, we’re seeing a surge in collaboration that wouldn’t have happened’ without the pandemic.”
To effectively diversify and collaborate, shippers and carriers will need to engage over a tough topic: money. Shippers can better understand carriers by asking simple questions that set the stage for meaningful conversations.
Shippers will frequently lean on brokers for their experience with hauling a variety of goods and commodities, as well as their knowledge of lane requirements. Freight brokers have access to tens of thousands of carriers, enabling them to explore new options in new lanes or negotiate pricing based on fluctuating supply and demand.
Alternatively, carriers often prefer to work with shippers directly. This way, carriers can avoid losing a percentage of their earnings to a broker. However, many shippers are required to use brokers, as directed by their management. Working with one carrier to move a few loads might be feasible, but as a business grows shippers require additional technology and human resources to move larger quantities of goods.
Technology Is a Game-Changer
Understanding and analyzing data is essential to helping shippers stay competitive as they price and manage freight. Many shippers are inclined to rely on historical data to predict what is likely to happen next. However, market volatility and the constant influx of data can render some historical data ineffective or, worse, obsolete.
Using Transportation Management Systems (TMS) with integrations to forecasting platforms like FreightWaves SONAR or capacity management platforms like Parade can help shippers increase employee efficiency, reduce operating costs, and effectively scope pricing.
A robust TMS can give shippers more insight into lanes, regions, spot rates, contract rates, mode types, and improve tender acceptance.
Ultimately, if a shipper estimates their freight pricing too low, they can expect intense push-back from management over the difference in target pricing. Leveraging technology will help decrease forecasting discrepancies.
Want to Learn More?
Any time you stand to feel the pains of financial constraint, expecting a high level of forecasting accuracy isn’t reasonable – but strategizing is essential. We’ve covered just a few of the considerations for managing and pricing freight in a volatile market.
Whether you are struggling with tight capacity, fluctuating rates, or more work than your team can handle, we have knowledgeable logistics professionals ready to help. We recognize that gathering the right information is crucial to your decision-making process, so we encourage you to access our resources and connect with an agent today!