This commentary was written by Bill Driegert, Senior Director of Uber Freight.
Due to tight capacity in 2018, shippers increasingly engaged the spot market to find scarce capacity at budget-straining prices. So far in 2019, capacity has been plentiful, with spot rates trending 20-30 percent below contract rates. We’ve started to see a turnaround into peak in the last four weeks, but the swing in pricing over the last year has been unusually pronounced and difficult to manage as a shipper or a carrier.
Quickly sourcing capacity and moving spot freight is challenging and often inefficient for enterprise shippers, taxing limited resources within budget-limited transportation departments. The lack of transparency in the market, as well as the manual work of sourcing and pricing freight often results in lack of operational flexibility, cost creep and service failures. Fortunately, new market entrants and technology are quickly unlocking the potential for real-time freight.
Shippers now can instantly access guaranteed rates at any time and have the power to book loads without ever making a phone call or sending an e-mail. By embracing real-time freight operations, they can move loads with the confidence that their prices reflect the current state of the market and available capacity, ensuring that service stays consistent and reliable.
As real-time freight operations become more popular, across both spot and contract freight, traditional RFP and manual bid processes will be redefined.
The ups and downs of contract freight
Real-time freight booking and pricing opens up many new possibilities for logistics – savings in soft markets, better service in tight markets and lower labor costs in procurement – yet widespread adoption will take time to achieve. Most shippers rely on an annual bidding process to both provide signals on the future cost of freight for budgeting purposes and to provide reliability in their network by locking in capacity for the following year. However, it’s hard for shippers to know if they are truly getting a good deal when they receive RFPs for the year ahead, as the carriers are providing their best guesses on future rates when they bid. They also aren’t guaranteeing capacity, as carriers frequently walk away from contracted freight when the market tightens, as was common last year.
RFPs are based on a collection of forecasts and estimates of lanes, volumes and rates for the following year. Shippers predict the lanes they will have next year and carriers estimate pricing, but the actual decisions that determine which lanes are shipped and the volumes on each are often made by planning and scheduling tools disconnected in time and function from the bidding process. As a result, variability, volatility and uncertainty are engineered into the process. If pricing information and commitments can be generated instantaneously, load planners and the teams making network planning decisions – which help determine distribution, capacity, inventory and replenishment – would make better decisions, contracts would be more certain, and service would become more reliable.
If I were a shipper trying to make a sourcing decision for the next two weeks, knowing the real-time pricing for those 14 days would guide my decision. It may result in sourcing from a new location during produce season or moving a shipment from Monday to Tuesday. If I had to rely on static outdated contract rates in my network planning tools, I wouldn’t be able to make a dynamic tradeoff to correctly time the produce surge. I may also find that the bid rates are stale, my carrier rejects the load and I end up exposed to surge pricing, despite my contract rates.
As real-time freight technology becomes more prevalent, shippers will steadily gain flexibility, insight into the market, more reliable service and material savings for their business. Providers like Uber Freight have already begun offering future-committed rates, and the recently introduced Trucking Freight Futures contracts, with the first trade sold on the FreightWaves platform at the end of March. Shippers understand that there is always some risk in rates, and more options and rate transparency allow shippers to make better tradeoffs in managing their budget and service expectations. For shippers, it’s important to understand how all these pieces fit within their transportation planning and procurement processes.
Shipper’s choice: predictability, reliability and cost
Today’s various contract forms and pricing tools each prioritize a different objective – rate certainty (freight futures), reliability (real-time spot and short term contract rates) and cost (long-term contracts). Each shipper must find its balance among these objectives.
It’s too early to predict how the use of futures contracts will evolve, but one potential benefit may be that they can help limit budget risk by reducing exposure to rate volatility. This works both ways, however; if the market softens it won’t guarantee that you’ll pay the lowest cost. The traditional RFP process helps lock in the option of a lower cost. That said, RFPs don’t provide guarantees and may not be reliable as the market tightens. Within traditional contracts, neither carriers nor shippers are contractually bound to be good actors. Spot freight, on the other hand, can provide reliability during capacity crunches, as long as the shipper is willing to pay market rates and bear some rate risk. In soft markets, the spot market can be both reliable and lower cost.
New contractual forms and true on-demand logistics solutions are starting to come to market. Modern pricing solutions enable shippers to take advantage of the market’s ups-and-downs without compromising on their budget or quality of service. Contracts that can be generated in real-time, driven by advanced market insights and machine learning, can guarantee a shipper predictable rates at the time that the shipper needs to make a decision. Whether that involves distribution strategy adjustment, working with a new vendor, or any number of network changes, on-demand logistics makes the answer clearer and easier to obtain. Generating rates through APIs reduces the manual workload involved with massive bid exercises, and since real-time pricing more accurately reflects the market, it reduces uncertainty for carriers as well, improving overall transparency and reliability.
This idea is quickly gaining traction among smaller shippers; many have recently begun taking advantage of instant booking and real-time pricing. Already, it’s possible to view predictive rates on lanes up to two weeks out and enterprises can now integrate these solutions into their transportation management system. As technology in the freight industry continues to advance, real-time pricing and real-time contracts will be more widespread, leading to the rise of true on-demand logistics. Having immediate insights into rates and capacity allows shippers to make better decisions, and removes uncertainty for both. Within our own data, we see shippers cancel 5 percent or more of all loads tendered, wasting time for shippers and carriers. This is often driven by over-planning capacity based on imperfect information. Real-time freight allows shippers to make decisions with better information, and has the potential to change the economics and procurement strategies of freight for good.