In Search of the Rarest of Birds: The Market Freight Rate
Logistics departments spend a significant portion of their time negotiating rates for moving their cargo in particular lanes, yet one of the most elusive values in the supply chain domain is the market freight rate.
Dr. Chris Caplice, executive director of the MIT Center for Transportation & Logistics, argued recently that the market rate does not exist . According to Caplice, a general lack of pricing data and confidentiality agreements with carriers make it impossible to get an accurate fix on the going rate for transporting freight in a lane.
We sympathize with that view, but have a slightly different take on this ill-defined value.
Ask any shipper what they pay to move their freight in a lane and they’ll have no problem quoting a price—assuming, of course, that they’re willing to divulge the information.
However, that price is almost certainly one in a range of rates that shippers are paying in the lane. The median, or average, rate could be called the market rate, but this is a gross simplification of the many factors that influence the pricing of freight transportation. A more realistic approach is to think in terms of the range of rates and the set of factors that influence where you should be in that range.
A good analogy is researching the price of a used car. Buyers can consult various sources to estimate the price of a particular model, but the actual price will vary according to the location of the car, mileage, current demand, overall condition, and the available options.
Similarly, establishing a freight rate involves multiple trade-offs. Here are the main factors that influence the pricing of freight transportation.
Network status. Carrier networks are in a state of continuous change, and a load that is desirable today might not be a month hence. Also, every carrier does not necessarily have a long-term business plan and the market rates they quote today might have a short shelf life.
Peak season shifts. Fluctuations in pricing and capacity availability tend to be more extreme during periods of high demand.
Current volumes. Have you ever put a house remodeling project out to tender and received wildly varying estimates? Maybe the contractor with the low price desperately needs the business, while the most expensive bidder is booked up and not concerned about winning the business. A similar rationale can apply when bidding out freight, leading to variations in service prices.
Lead time. Tender lead time can influence a carrier’s decision on whether or not to accept a load. TMC-sponsored research carried out by Erik Caldwell and Bryan Fisher at the MIT Center for Transportation & Logistics for their M. Eng in Logistics shows that the more time allowed between the tender and pick up days, the more likely the first carriers in the routing guide will accept a load (for more on this see Chris Brady’s Connect blog post, Savings Tricks You Might Have Missed).
Dwell time. A history of truck delays at loading and unloading docks that feature in the move can affect the contract price. A negative track record in this area can deter carriers from bidding competitively.
Shipper profile. In a capacity procurement exercise the carrier is not the only party that comes under scrutiny—so does the shipper. Carriers often evaluate the worth of freight contracts on the basis of shipper-related criteria, such as the company’s credit rating, payment terms, the availability of drop trailer lots, and their treatment of drivers.
True carrier capacity. Just because one or two carriers offer the best pricing—which often happens during procurement events—does not mean that they will be the best providers over the long term. The carriers might not have the capacity to meet the shipper’s needs if volumes increase, for example. And, as mentioned above, carrier networks are subject to change.
Accuracy of the information. It can be necessary to tweak the information provided during a procurement event because the accuracy of the facts and figures is suspect. For example, often carriers will be over-optimistic when estimating how much capacity they have available on particular lanes. This is one reason why a service provider might not be a reliable source of realistic rates.
Stability of the lane. In high-volume lanes, market rates tend to be less variable than in low-volume lanes where there are relatively fewer carriers competing for the loads.
Rather than trying to snag the true market rate for your freight, a more productive approach is to carry out regular procurement events designed to secure rates that are the best choice for your logistics needs.
 MIT’s Caplice and the Three Myths of Transportation, Dan Gilmore, Editor-in-Chief, Supply Chain Digest, October 31, 2014.