Since the recession hit, truckload carriers have tried to push their shippers into one-year contracts rather than locking them in for two, three, or more years at a time.
For the carriers, the reasoning was simple. With their costs rapidly escalating, they wanted the flexibility to change rates and contract terms on short notice and not be saddled with static multiyear pricing that lagged behind their dynamic expense structures.
But short-term contracts might not just benefit the carriers. In what may be the most extensive study ever conducted into contract bidding behavior in the truckload sector, researchers at Iowa State University found that shippers who rebid their freight on an annual basis could save significant money—in the millions of dollars a year in some cases.
The three-year study, commissioned by third-party logistics services and brokerage giant C.H. Robinson Worldwide Inc., found that shippers who rebid their business regularly achieved rate reductions of $25.17 per load compared with shippers who rarely or never utilized this method.
What's more, because the researchers found that the savings generated at the initial stage of the rebid diminished within a year, a strategy of annual rebids allowed those savings to be freshened every year.
All told, shippers were able to save, on average, $40.44 per load through what the study called "annual bid procurement events." Given that the average contract rate for an individual load in the study was $907, yearly rebids helped shippers cut their contract pricing by about 4.4 percent, which the researchers called a "sizable gain."
A large shipper tendering 100,000 loads a year could save about $2.5 million through annual rebids, according to estimates by the survey's authors. Although it costs more to rebid contracts annually instead of on a multiyear basis, the rate savings—even for smaller shippers—usually outweigh the expenses, according to the authors.
The study analyzed data from 700,000 truckload shipments that were accepted by carriers from 2008 through 2010. The shipments were tendered by TMC, a division of C.H. Robinson, using TMC's transportation management system, or TMS. The rates applied to shipments moving more than 250 miles and hauled on dry vans, the most common form of truckload livery in the United States.
THE TRUTH ABOUT CONTRACTS
The study's findings seem to counter the conventional wisdom that shippers need to obtain multiyear contracts to achieve rate stability and capacity assurance in a climate of shrinking rig and trailer counts. Tractor capacity has dropped by as much as 18 percent from 2006, the year the trucking industry entered into what became a multiyear recession.
At the heart of the study's findings is a fact that most who ship and haul for a living already know: that no truckload contract, regardless of duration, can force a shipper to honor a volume commitment, or a carrier to honor a capacity commitment. Because trucking is considered "derived demand"—meaning supply doesn't react unless demands are put on it—a carrier can easily change capacity, and the rate it charges, if it doesn't secure enough high-yield freight on a lane and finds better opportunities elsewhere. In many cases, it will stop accepting freight on a lane altogether.
Faced with little or no capacity when it's needed, a shipper has no choice but to scour its rate guide—which lists the carriers that provide service on a lane—to seek out alternate sources of supply. However, these backup carriers will often charge more for their services than the original supplier had supposedly promised. This scenario—known in the trade as "rate guide bleed"—is the main reason a shipper will see its rates increase beyond what it modeled for during the initial procurement event, the study concluded.
According to the study, the average truckload rate went "stale" after only 328 days, meaning that after that point, the original rate was no longer valid at the capacity levels the shipper had originally anticipated. "We were surprised [rates] became stale that quickly," said Bobby Martens, assistant professor of supply chain management at Iowa State's College of Business and a former account manager at the logistics arm of Schneider National Inc., one of the nation's leading truckload carriers.
The study's authors emphasized that neither side enters into a procurement event with the idea that the deal will dissolve before its time. "Both parties have the best intent, but both parties have levers that pull on their business," said Steve Raetz, director of supply chain integration at Eden Prairie, Minn.-based Robinson. "Demand may change, and capacity needs may change. As a result, equipment gets positioned in unplanned ways."
Annual rebidding can avoid much of this fallout by allowing shippers to stay on top of carrier realignment strategies and be able to pivot quickly if rate and capacity patterns are altered, the authors contend. Annual procurement builds carrier goodwill by fostering some level of predictability of load flow, they add. Carriers appreciate consistency of traffic and the beneficial impact it has on their resource utilization. In return, they will be more willing to allocate appropriate capacity at an agreed-upon price, according to the authors. It will also enhance service levels for that shipper because carriers will be better motivated to outperform, the authors said.
"What a procurement exercise does, above all else, is allow for price discovery," said Raetz. "The more visibility a shipper has into its business and the more information that's available to the carrier, the more rewarding it will be to the shipper."
AVOIDING "STALE" BIDS
One shipper, Houston-based retailing chain Stage Stores Inc., has gone even further in its procurement practices. "Our rating is dynamic based on competitive bidding, rather than an annual volume bid. This removes the dilemma of 'stale' bids," said Gough Grubbs, Stage's senior vice president, distribution/logistics. "As more competitive bids come in for certain lanes, incumbent carriers are given the opportunity to revise their rates in our system if they choose to. If not, they drop down in the pecking order for future loads."
The study's authors stress that they don't advocate a strategy that would trigger a massive annual turnover of a shippers' carrier universe. They note that carriers want shipper relationships that foster multiyear stability. At the same time, however, shippers need to understand that freight transportation—and the nation's truckload networks that move most of that freight—is a fast-changing business and what might be in place this September may not be there the following fall.
Those most surprised by this process are procurement professionals who oversee the buying of trucking services, said Kevin McCarthy, director of consulting services for Robinson. "Those with a procurement background have a hard time understanding that you can't leverage truckload transportation," he said. "It's not like buying boxes. There is no bidder's remorse. The shippers won't tender the freight, or the carriers just don't pick it up. For procurement folks, that's a novel concept."
By contrast, McCarthy said, transportation professionals that live this world simply shrug their shoulders. "For people who've been around the block and have access to a TMS, they are not surprised at all," he said.