Last week, Chris Brady and Kevin McCarthy reviewed some of the approaches taken by shippers to timing Truckload (“TL”) procurement events. In this post, we take a look at factors that influence these buying strategies.
As McCarthy has argued in several TMC posts, second guessing the TL market by trying to buy when freight rates have hit bottom is chasing fool’s gold. It’s impossible to predict market movements with certainty, so the chances are that your timing will be off.
Still, picking the optimum entry point is an attractive proposition for transportation managers under pressure to cut costs. Maybe a more opportune moment is when carriers really need the business. Like buying a car when dealers are anxious to get rid of inventory, perhaps TL carriers are open to giving sizeable concessions when loads are at a premium.
The problem with this line of reasoning is that buying TL capacity is not the same as shopping for a car. Driving off the lot in your new vehicle marks the end of the deal (hopefully). Signing on the dotted line with a contract carrier could be the beginning of a long relationship or one of many deals that you have negotiated with the provider.
Also, once the car dealer has offloaded a unit they can tick the “sold” box on their inventory list and move on. A TL carrier has a freight network to worry about, and the contract they have just signed with a shipper may be difficult to justify when business picks up a few months down the road.
“The shipper may win better pricing on paper when there is a surplus of capacity, but when the market tightens the carrier might drop the business for more profitable loads, and the buyer is faced with a lot of route guide substitution,” says McCarthy.
Besides, price is not the only consideration. The concept of “service” is multifaceted, and in a TL context can include requirements as diverse as the need for electronic billing and/or drop trailers.
At the end of the day, carriers tend to give the best deals when the base rates and network configurations help them to meet their business goals, believes McCarthy. Stability also helps; carriers’ planning, costs can go through the roof when they are constantly reshuffling lanes and disrupting delivery schedules.
On the shipper side of the desk it’s not a bad idea to initiate a new round of bids during a lull in your sales activity. “There is much more risk when you do a procurement event during busy periods,” points out Brady. In addition to the extra work load and uncertainty involved, it is likely that a new contract will need a number of tweaks, distractions you can do without when traffic volumes are peaking.
One way to develop a more thoughtful approach to TL procurement is to parse your buying portfolio into bite-size pieces. A major shipper says that in the past they undertook huge network bids where some $300 million worth of business across modes was transacted. In 2013, the company is planning a series of smaller bids focused on specific service types such as intermodal.
Given these variables, what is the ideal time to launch a procurement exercise? “If you are going to bid it needs to be on a regular cycle, yearly is probably the best,” advises the major shipper. This appears to be a rule of thumb. “Annually is longer term but not too long term, and it gives carriers a reasonable planning horizon,” concurs McCarthy.
A recent landmark study on the shelf life of freight rates published by C. H. Robinson reinforces this view. Shippers in the study that rebid their freight annually achieved lower rates compared to players that seldom or never stage procurement events.
So, unless you have a compelling reason to do otherwise, set your TL procurement alarm to go off once a year. And try not to press the snooze button when the alarm sounds, or you might be facing some hefty freight costs when you wake up to the need for a fresh round of bids!