Shippers typically run annual RFPs to collect robust contract rates that they can use throughout the year within their routing guides. Many shippers assume that their routing guide is their de facto budget. Unfortunately, because routing guides fail, the rates they actually pay will fluctuate, causing shippers to spend over their RFP-derived budget.
This is an example of unplanned rate variability – and while it is usually unplanned, it really should not be unexpected or ignored. Instead, shippers need to consider and incorporate both volume and rate uncertainty into the truckload transportation budgeting process.
At CSCMP EDGE 2021, Dr. Chris Caplice, DAT’s Chief Scientist and MIT Senior Research Scientist, led a featured session about effective budgeting in uncertain times and discussed how shippers should prepare their budgets in the face of surging spot rates, shifting volumes, and failing routing guides.
Truckload procurement is usually run as a two-stage process that starts with an annual RFP that generates rates that are executed within a routing guide in their TMS.
Routing guides create a baseline
The output of an annual RFP is a routing guide, which is essentially an electronic catalog that specifies which carriers should haul loads on particular lanes and at what cost. When used strategically, routing guides can streamline operations, reduce costs and provide consistency.
Sophisticated routing guides apply a waterfall approach that first offers the load to primary carriers, then to alternates, and finally, as a last resort, to the spot market. And here is where planning for uncertainty can be the difference in making, or breaking, the budget.
The deeper shippers go into the routing guide, the more they should expect to pay. Costs can easily jump 25-35% per load when outsourced to the spot market.
While the goal is to have the primary carriers accept as many loads as possible, savvy shippers should anticipate the expected need for and cost of backup and spot carriers as part of their budget planning.
Understand rate types for accurate budget planning
Segmentation of the freight network is critical and is based on the concept that, since not all lanes in a network are the same, they should not be procured or managed in the same way. At the most basic levels, there are three big buckets of how shippers can manage their freight lanes: dedicated, contract and dynamic.
Lanes that are consistent, reliable and balanced should be covered by dedicated or private fleets. These are typically favored by carriers (so long as the network fits) and can potentially create opportunities for cross-company collaboration.
These lanes should be identified and assigned prior to the RFP process. Including dedicated lanes within an RFP is essentially comparing apples to oranges and can lead to inexecutable results.
Contracts are suited to lanes that have a fair amount of volume but are not necessarily consistent or balanced enough to operate within a dedicated operation. These are the lanes to run through an annual RFP and establish a formal contract.
Truckload contracts are unique in that they are binding in price, but not in capacity or volume. As shipper’s are well too familiar, the negotiated price doesn’t change, but the carrier may not always have capacity at the time of the shipper’s need, which can lead to tender rejections and higher alternatives or spot carrier rates.
Finally, dynamic relationships are best suited to variable, irregular and unbalanced lanes. We define dynamic rates as planned, while spot rates are unintended and usually caused by the waterfall method failing. Dynamic rates are best suited for niche circumstances, like surges, sparse lanes, or lanes that shippers only use sporadically, or for sending small loads that are not worth negotiating contract rates. Shippers typically work with brokers or non-asset-based providers to find capacity because they are much more flexible than asset-based carriers.
Dynamic rates are to contract rates as weather is to climate. The former is a marker of day-to-day conditions, the latter are those conditions charted over time. Contract rates tend to be much more stable for this reason, while dynamic rates are more volatile, with larger peaks and valleys. Dynamic rates also tend to be an indicator of how contract rates will trend in the coming months. Shippers should plan for the climate but be prepared for any random changes in the weather!
Establish a better budget
The key to establishing a better, or more realistic, budget is to think beyond the routing guide. While the output from the annual RFP is a good place to start, it needs to be augmented with an estimate of the magnitude and cost of carrier non-compliance as well as for dynamic rates.
Sophisticated shippers take a bottoms-up approach to creating a budget — using anticipated volume and demand through sales forecasting, then translating that data into network flows. Paying attention to details like the anticipated changes in the number of loads on a given lane per week, is an example of this approach.
From there, shippers need to:
- Adjust for changes. This could mean improving load utilization, preparing for changes in production for unexpected demand shifts, and more.
- Estimate baseline and future rates. Use the RFP routing guide as a baseline and adjust for inflation.
- Determine unplanned rates. Use data to determine how often the primary carrier will turn down a load and how much that will cost. There are models that predict the probability that a carrier will accept a load based on factors like variability of volume, annual volume, frequency of the loads, provider type (asset vs. non-asset based), spot premium ratio and more.
- Determine dynamic rates. By calculating the expected spot premium ratio (what is being paid over contract rates), anticipated expenses can be incorporated into the budget.
Routing guides are naturally going to degrade over time as market conditions change. The goal is to identify ahead of time which lanes will degrade first because that will impact the budget. While budgets are adjusted on longer cycles (annually), routing guides should be adjusted with much greater frequency. Routing guides are living documents that can be adjusted weekly or monthly as needed in order to improve costs and operational efficiency.
Having rate analytics for key network lanes to compare to the broader market over time provides a keen understanding of transportation climate, while insights on current market rates provides a clear view into transportation weather. To build a budget that positions logistics teams to manage uncertainty successfully, DAT iQ gives companies the transportation intelligence needed to get deeply familiar with both weather and the climate.
To learn how to use analytics to craft your transportation budget, reach out to DAT to speak with your Transportation Analytics Expert.