As the Market Turns: Preparing for the Next Upswing in Carrier Rates.Connect
Rates represent a constant dilemma between shippers and carriers. Shippers face continual pressures to reduce costs, but truckload transportation providers expect to be paid fairly for their services as their costs, maintenance, and equipment quality continue to increase.
We wanted to know, when a shipper pays higher transportation rates per mile, do they receive better on time performance and load tender acceptance patterns from their service providers? We asked Nane Amiryan and Sharmistha Bhattacharjee, graduate students at MIT’s Center for Transportation & Logistics (MIT CTL), to find out. Among other findings, their research shows:
- Overpaying does not result in better on time pickup percentage. No one wants to overpay for service, and there is no real incentive to do so. No relationship was found between on time pickup and freight rate, and only a weak correlation was found between on time delivery and freight rate.
- When shippers paid below market average, there was a clear decrease in on time delivery performance. Shippers who paid $50 below market rate saw significantly lower on time delivery. Shippers who paid $20 below market rate saw more modest but meaningful delivery time underperformance. Significant savings resulted in a significant loss in service.
So what does this research on paying higher rates show about today’s low rates? Searching for market rate is a worthy goal in this market, but so is collaboration with carriers and finding stability in your route guide. It is not clear when the market tension will return to the point that truckload pricing will shift to normal pricing levels and patterns of increase. Some factors point toward costing pressures and supply-demand balance shifts that can effect transportation budgets:
- Lower fuel prices helped many shippers save on their year over year budgets, but it seems likely that pricing will eventually rise. It remains to be seen when, to what extent, and how much shippers will need to adjust their transportation budgets as a result.
- The market is in relative equilibrium. Today that means that active capacity is still being utilized at a reasonably high level, but advanced bookings appear not too far out. It seems prudent to watch the waves that will impose tension and advanced bookings. When these tension elements are material enough, market capacity feels more scarce and pricing starts to climb.
- Some analysts predict an increase in carrier bankruptcies by year end as some providers are forced out by today’s low rates and implementation of ELD’s. Even given the same amount of freight that we have today, equipment will get tighter if too many go out of business.
- Consider the patterns of replacement equipment in this market. Some analysts are suggesting we may be in a capacity retraction as truck sales continue to be light and questioning if enough new equipment is being injected into the market to offset retiring tractors.
History shows the market won’t stay this way forever; what goes down will go up. In meantime, learn all you can about the connections between truckload rates and service. Start by reviewing the research in our white paper, Do Higher Rates Bring Better Carrier Performance?