Transportation costs are not like other business expenses. They’re affected by many different factors, and not always in the same ways as other commodities your company is accustomed to purchasing.
Part of the reason is the unique nature of truckload transportation contracts.
While these contracts are binding in price, they aren’t in volume provided by the shipper or capacity supplied by the carrier. Shippers are not financially punished if they fail to reach a promised volume level, just as carriers are not expected to accept all loads.
There are metrics that track primary carrier acceptance rates to reflect the health of a carrier relationship, but not meeting contracted volumes doesn’t come with a direct financial penalty. Instead, it risks damage to the relationship, potentially resulting in the loss of future volumes for that carrier.
Even if these contracts are not enforceable, they have long served as reliable agreements, allowing each side to better plan for the year ahead and serving as the foundation for mutually beneficial business relationships.
However, when overall capacity is tight, shippers face an elevated risk of some carriers refusing to honor certain rates that were previously agreed on. When this happens, the first line of defense for shippers is routing guide alternatives, and then ultimately the spot market.
Alternatively, carriers could seek upward rate renegotiations or decide to re-route their trucks to more profitable loads. This can be a risky strategy for carriers, which could harm these successful, long-lasting relationships in response to advantageous, short-term market conditions. Nevertheless, it may be too tempting for some to resist, leaving shippers scrambling for last-minute spot market alternatives.
This process could also give shippers leverage to request improved on-time service in return for paying the higher rates but is still likely to lead to unforeseen budget variances.
How ‘mini-bids’ can help
To mitigate this volatility, shippers can employ a “mini-bid” strategy, with shorter contract periods throughout the year that allow both the shipper and carrier to reassess pricing and volume agreements.
When executed successfully, mini-bids can help reduce cost, while showing your commitment to being a steward of your organization’s finances.
To learn more, get our free eBook, “Maximize Your Mini-Bid.”