To the uninitiated, truckload transportation procurement appears to be a relatively straightforward process. Simply run a reverse auction for the forecast capacity with a large field of prequalified transportation providers and, using some sort of optimization model, choose the carrier that best fits each origin-destination pair.
The “best fit” is typically the carrier with the lowest cost, subject to meeting certain service levels and business requirements. The winning bids are then placed into the routing guide of the transportation management system (TMS). When a load needs to be moved, the TMS will tender it to the primary or best-fit carrier.
This is how most shippers have procured truckload services ever since optimization-based procurement came to the industry in the late 1990s. However, recent crisis-level capacity shortages revealed flaws in this approach.
In 2017-18 and 2020-22, many shippers saw their primary carrier tender-acceptance rates plunge from around 90 percent to below 75 percent. Transportation budgets exploded. Procurement events changed from an annual exercise to a quarterly, monthly or — for some shippers — even a weekly occurrence. Mini-bids became commonplace.
The ‘Relationship Portfolio’
Using a reverse auction as part of an RFP to establish contract rates isn’t all bad. But it can leave shippers vulnerable when market dynamics change quickly.
Therefore, more shippers are combining a dedicated contract and spot relationships to cover loads across their freight network. They’re using a “relationship portfolio” engine to power a more efficient, productive and comprehensive approach to truckload procurement.
In a dedicated relationship, a shipper controls the day-to-day utilization of assets. The shipper could have a private fleet; the drivers are employees, and the company owns the tractors and trailers. Another option is a long-term leasing arrangement for equipment and/or personnel. In either case, this relationship is essentially the “make” in the classic make-buy decision. It’s ideal on lanes with consistent, balanced volumes that keep trucks and drivers fully utilized.
A contractual relationship is like those described above. A shipper awards a lane to a carrier for a specific period (usually a year). The price is binding, but the volume tendered by the shipper and the capacity provided by the carrier are not. In fact, in trucking, these variations from the contracted levels are treated as performance metrics rather than contract breaches.
Annual (or longer) contracts work best on those lanes with enough volume where the carrier can more or less guarantee that it will have a truck available when needed; one load per week or every other week is a common threshold. Indeed, research at DAT Freight & Analytics and MIT FreightLab has shown that the primary carrier rejection rate is inversely proportional to load volume and consistency.
In a spot or dynamic relationship, the carrier and the price are determined at the time of tender. This is easily the most misunderstood relationship. Historically, shippers used the spot market to find trucks after the routing guide and all other alternatives failed.
However, the spot market is a good fit for lanes with very low, inconsistent, and/or sparse volumes. In fact, even if these low-volume lanes have assigned primary carriers on contract rates, they typically fail and end up in the spot market anyway.
The 80/20 Rule in Trucking
Interestingly, the Pareto Principle is alive and well in truckload freight networks —approximately 80 percent of a shipper’s lanes handle only 20 percent of the volume. Employing a dynamic relationship for these “trivial many” lanes will make the contracting process more effective for the “vital few” lanes with sufficient and consistent volume. Current technology enables fast and transparent dynamic relationships between shippers and transportation providers (both asset and non-asset carriers).
The RFP may be alive and well, but relying on a one-size-fits-all approach to truckload procurement can lead to missed opportunities, more work and worse overall results. Future articles will discuss more nuanced, hybrid forms of procurement that fit between traditional contracts and pure load-by-load spot.
In the meantime, keep that engine running.