The evolution of transportation procurement

Traditional methods for procuring freight transportation no longer work in today’s increasingly complex marketplace. This is especially true for “set it and forget it” approaches to routing guides. 

The last few years alone have made it clear to transportation and procurement professionals that a reasonable proportion of the routing guides fail and require a thought-out approach to handle the exceptions or the failures.

At this year’s CSCMP EDGE in Atlanta, Dr. Inam Iyoob (Principal, Global Freight Market Intelligence, at DAT Freight & Analytics) co-presented with Ron Guzzi from The Home Dept. They spoke about how the mechanics and strategies of transportation procurement are changing for the better, allowing both carriers and shippers the opportunity to reset based on market conditions. 

This blog discusses how mega-shippers, like The Home Depot, are shifting strategies.

Speak with one of our transportation Analytics Expert to learn how to evolve your procurement strategies.  

Changing transportation costs

Today, freight transportation and procurement have the eyes and ears of senior leadership and earnings analysts. Covid-induced supply chain challenges have further highlighted the importance of transportation strategies and related constraints to all levels of the organization.

Contract rates have been on the rise since September 2021, increasing 24 percent year-over-year for dry van shipments and 18 percent year-over-year for reefer shipments. Spot rates also skyrocketed to an all-time high in the second half of 2020. Contract rates generally follow the spot market trends with a four- to six-month lag. We are currently seeing new contract rates priced at 12-16 percent higher than the rates being replaced. 

These new contract rates, while still 14-20 percent lower than current spot rates, will likely  continue trending upward until the capacity market loosens up, meaning that shippers need to rethink their approach to transportation procurement in a market that is crunched for capacity.

Shippers go to the spot market when a routing guide fails. Routing guide failures typically vary between five to 25 percent depending on the market conditions. In today’s tighter markets, shippers are averaging approximately 20 percent to 22 percent of loads going to the spot market, and reefer failures are at the same level as they were in 2018 (14-16 percent).

The deeper into a routing guide you go, the more you can expect to pay. The cost of routing guide failures (or the spot market premium) is averaging 30 percent or more for van and reefer loads — a significant markup that can quickly upend a company’s budgeting strategies. 

In response, shippers are turning to more frequent mini bids to reduce the number of loads going to the spot market.

The Home Depot: Leveraging data and focusing on carrier relationships

Transportation and supply chain procurement have become priority ticket items that get discussed in high-level meetings and earning calls. At the same time, shippers also need to be able to predict these costs ahead of time so that they can factor that expense into the cost of goods.

Consider The Home Depot, for instance. The big-box home improvement retailer has leaned into using sophisticated modeling and data science to help manage its freight procurement. This allows the company to collect and analyze information about contract rates, the likelihood that a given load will go to the spot market, spot premium ratios and more — letting data drive the company’s decisions and removing uncertainty. 

Another aspect that’s taking prominence is how companies engage in carrier management. Carrier are a key component to establishing reliable relationships within the industry and helps attain coveted Shipper-of-Choice and Carrier-of-Choice status. 

The Home Depot’s approach to business foregrounds relationships with carriers, from truck drivers to corporate entities. With measures like offering clean restrooms and taking steps to ensure that things move quickly at the loading dock, The Home Depot demonstrates their commitment to retaining carriers.

Generally, around 60-80 percent of a shipper’s loads are moved by incumbents, with the remaining expected to churn. Incumbent carriers are preferred, as they’re more likely to know your business, your expectations and how you operate. Switching carriers increases opportunities for customers to have a less-than-ideal experience. Even when going with another carrier might be cheaper, shippers will often award loads to incumbent carriers because the rate now includes that know-how, experience and other factors that new carriers won’t be able to provide. 

So, how do shippers choose carriers? In the past, contracts used to be evergreen, but now procurement events typically happen in annual or biennial cycles. This helps shippers modify their procurement strategies if they’re going over budget, while also helping carriers reset partnerships and potentially improve their rates and pricing. 

However, rates can still change — carriers can submit quarterly bids for updated rates between procurement events. Shippers don’t want to be in the spot market, so the opportunity for contract rates for as many loads as possible is often appealing. In fact, some shippers are transitioning to a monthly mini-bid system in order to bring spot market loads back into a contract.

If and when a load falls from the routing guide, shippers turn to brokers for the spot pricing. Traditional approach for spot pricing via brokers is not efficient and also doesn’t give the shipper the ability to price shop across multiple brokers. Shippers are starting to explore the Index based (algorithmic) dynamic pricing options presented by mostly brokers and some carriers to improve process efficiency via automation and price shop on the fly. We haven’t yet seen clear evidence that the dynamic pricing method is providing a better rate for shippers. Since the capacity is committed via the dynamic pricing providers, shippers are willing to pay a higher price (within reason) to automate the process and gain efficiency in today’s tight market conditions.      

The changing nature of freight

The COVID-19 pandemic proved incredibly disruptive to the global supply chain. Markets are still reeling, leading manufacturers and distributors to seek out new solutions. This, paired with extremely tight capacity and increased demand for overseas, rail and intermodal freight, has contributed to unprecedented prices. The situation is right for finding new, innovative tactics. 

The shift toward rethinking routing guides, more frequent contract bidding, and the mini bid approach are just a few ways that market mechanics are changing for the better, allowing both carriers and shippers the opportunity to reset their strategies based on current conditions.

 

If you’re ready to evolve your transportation procurement to the next level, speak with your Transportation Analytics Expert today.  

DAT