March 5, 2018
transportation report | Motor Freight

Skinning the tight-capacity cat

Skinning the tight-capacity cat

It's getting rough on the roads for truck shippers. But is a rate hosing foreordained?

By Mark B. Solomon

The numbers and anecdotes tell the story. Truckload and logistics giant Werner Enterprises Inc. ran on some days in January at 145 percent of capacity. Celadon Group Inc., another large truckload carrier, had days when it was turning away 800 to 1,200 loads. Non-contract, or "spot," rates for refrigerated truck capacity were quoted as high as $10.38 a mile in January.

Shippers canceled bids midstream because they were put off by the rates they expected to receive. A sales rep for a large less-than-truckload (LTL) carrier walked into a shipper's office, proposed a large rate hike, and said the contract would not be renewed if the new rates were not accepted. The leverage of asset players in today's ultra-tight-capacity environment may have been best summed up by a trucking executive who said, "Our negotiating strategy is indifference."

As senior vice president, supply chain and transportation for Transplace, a large third-party logistics service provider (3PL), Ben Cubitt has seen plenty in his time negotiating motor carrier contracts. When asked recently how the company was coping with what some are calling the mother of all capacity-tightening cycles, you could almost hear Cubitt's shoulders shrug over the phone.

Working about 15 open bids each week as of the beginning of February, the start of the busy spring truckload contract cycle, Cubitt reported his team has typically negotiated rate increases in the low- to mid-single-digit range and price reductions in the 3 to 8 percent range. Asked how he does it, Cubitt joked that it's "that crazy lane magic."

Hardly. Transplace analyzed each lane to determine price anomalies among the various carriers. Often, there is one carrier that underbids the rest because the specific lane may be a better fit for its network, according to Cubitt. None of the competing carriers know how each is bidding, Cubitt said. Even though carriers utilize more sophisticated technology than ever before to support their bids, "carrier pricing is not that scientific," he said.

Cubitt recommends that Transplace's customers put all their lanes out for bid each year and focus on eight or so core carriers. This gives shippers more leverage and efficiency than if they had to manage 25 or so separate negotiations with multiple providers, he said. At the same time, however, Transplace will not hesitate to replace an incumbent carrier—even though its shippers place a high value on incumbents—if a reputable alternative comes in with a meaningfully lower bid, he said.

THERE'S INEFFICIENCY SOMEWHERE

Cubitt's comments underscore the notion that, in what by all accounts is a brutally tight market for truck capacity, there are still many inefficiencies that can be discovered and exploited. Good intermediaries can leverage capacity availability in ways that even large shippers can't on their own, brokers say. The key, according to Jeff Tucker, who runs Tucker Company Worldwide Inc., a family-owned broker and 3PL based in Haddonfield, N.J., is for shippers to stop thinking of brokers as a fallback mechanism and instead to "stand shoulder-to-shoulder with us" as partners. Shippers that have the volume and, perhaps more important, the culture to work strategically with intermediaries can "scale up their capacity" in ways they may never have thought possible, Tucker said.

Tucker said his company's business is split 50-50 between contracts and transactions conducted on the spot market. Tucker's contract portion is around twice the level held by a typical broker. Jeff Tucker said his company deals primarily with larger fleets that are more inclined than smaller fleets or owner-operators to work with brokers in contractual relationships.

Tucker is hell-bent on steering his firm toward more contract work. "It is my sole mission in life in 2018" to get more shipper business under contract, he said in a phone interview.

Yet weaning carriers off the spot market will likely be a difficult chore, especially with spot rates up about 30 percent year over year, on average, as of early February. For months, Truckstop.com, one of the industry's two main spot market loadboards, has been processing an average of 500,000 to 600,000 loads during each 24-hour cycle, according to Brent Hutto, the company's chief relationship officer. That pace is expected to continue through most of 2018, Hutto said early last month.

By contrast, in 2014, when capacity tightened considerably due to adverse weather across a large part of the country, Truckstop handled an average of 400,000 loads during each 24-hour period, Hutto said.

Cubitt said he believes most brokers will continue to focus on the spot market as long as tight capacity and elevated rates mean fat margins for them. However, brokers' emphasis on today's spot market lucre may be ignoring the bigger picture. According to Cubitt, in mid-2016, shippers desperate for capacity assurance began shifting portions of their volume toward asset-based carriers and away from brokers and the transactional market. The migration toward assured capacity became more pronounced after retailers started imposing stringent delivery requirements that came with penalties if they weren't met, he said.

The poster child for the latter is retailing behemoth Walmart, which last August began requiring its U.S. truckload and LTL carriers to deliver all orders in full on the "must-arrive-by date" 75 percent of the time (for truckload haulers) and 33 percent of the time (for LTL) or else face penalties. Effective April 1, Walmart plans to ratchet the requirements up to 85 percent for truckload carriers and 50 percent for LTL.

A FURTHER OPTION

Another tool that shippers have at their disposal is the so-called mini-bid, where shippers bid out small portions of their volume. This approach has been effective at minimizing exposure to big price hikes, while reducing the cost and resource burdens of annually bidding out an entire network, experts said. Even Cubitt, who advocates that shippers go out with full bids each year, admits that shippers are suffering from "bid fatigue" because of the time and resources consumed in what is an extensive annual process.

The annual full-bid dance can also be painful for carriers, as it may force them to regularly turn over the bulk of their lanes. Big truckers have to "redraw the whole map every year," said C. Thomas Barnes, a long-time transport executive who is now president of project 44, a Chicago-based logistics IT (information technology) provider.

Barnes, who bid out large volumes when he ran the multimodal unit of the former Con-way Inc., said he would insist on contracts beyond one year and do relatively frequent "surgical bids," another name for mini-bids, within the contract's time window.

CHANGE THE GAME

No matter the size of the bid, shippers would be wise in this environment not to delay putting them out, according to Michael T. Regan, founder of consultancy Tranzact Technologies Inc. Many shippers have delayed their bids to see if the market quiets down, Regan said. However, such a move is potentially disastrous because truck pricing and capacity have entered an "unprecedented" upcycle that could last at least a year and perhaps longer, said Regan, who has been around the industry for decades. Not surprisingly, he is advising clients to get their bids out sooner rather than later.

Regan and Barnes also bemoan the growing influence of procurement managers in bid preparation. Procurement folk, they said, view transport as a pure commodity where the lowest cost rules. In addition, procurement managers lack the awareness of logisticians of how to extract sustainable value out of their transport spend, they said.

Barnes said that many shippers, particularly big companies with large volumes, have a pattern, especially in periods of abundant capacity, of demanding double-digit rate cuts only to discover their service levels worsen as a result. Putting such a squeeze on carriers is unlikely to succeed in today's climate and will come back to bite shippers even if they could get the upper hand on prices, Barnes said.

"Short-term thinking gives you medium- to long-term pain, and people don't realize that," he said.

In theory, everyone says they want rate and capacity stability. In practice, though, shippers have budget targets, while carriers have rising costs and a once-every-dozen-years-or-so profit opportunity. Something has to give, according to Cubitt. "Even those who work toward a stable environment can't figure out how to get it," he said.

Tucker said the key for shippers and brokers is to recognize the lanes carriers want to play in and feed them enough good freight to make the game profitable. Shippers must realize that carriers and brokers will be reluctant to lock in prices unless the lane awards make good financial and operational sense, he said.

"There are tons of opportunities for brokers and carriers to solve lane problems for shippers," Tucker said. But, he added, "twisting arms isn't the way to lock in capacity."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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