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How do you handle bidding out your truckload contract business? Is your STRATEGY to look to lock in rates over a multi-year contract term to glean the savings in the outer years as general rate increases are killing your competitors? Or do you look to do shorter-term contracts due to lack of confidence in your projected shipping volumes, or doubt about estimated sales projections? Or are you driven by uncertainty about the carrier’s ability to deliver capacity or service level, given all the trade-magazine hype about aggressive pricing strategies and capacity manipulation by the savvy carrier community?
For years I have advocated at least doing an annual review of carrier contracts to evaluate the need for a relook, given changes in our business requirements and/or changes in the carrier marketplace driven by the economy. What I have long suspected was just confirmed in a recent trade magazine article about a large 3PL that sponsored a three-year study of the truckload contract rebid process to assess where the best opportunity for shipper savings existed. Contrary to popular belief, annual contract rebids produced the best savings opportunities while providing the best working environment for the shipper-carrier needs fulfillment.
Key points identified in the study related to the annual rebid of truckload contracts included:
⦁ Shippers were able to save, on average, $40.44 per load through “annual bid procurement events” (i.e., annual contract competitive bids)
⦁ Average contract rate for a load in the study was $907
⦁ Rates in the study applied to shipments > 250 miles dry van moves (dry van moves being the most common truckload moves)
⦁ Average contract price reduction achieved was about 4.4 percent
⦁ Although it cost more to rebid contracts annually (rather than multi-year contract terms), the rate savings usually outweighed the expense of doing so.
One of the key drivers for pursuing such a STRATEGY hinged on the fact that newly negotiated truckload rates on multi-year contracts tended to go “stale” in 328 days (i.e., the rate was no longer valid at the capacity level the shipper had originally anticipated).
KEY POINT TO PONDER: The study found that “…no truckload contract, regardless of duration, can force a shipper to honor a volume commitment, or a carrier to honor a capacity commitment.” If you don’t understand the reality of that statement, then you need some serious help. Carriers can change their available capacity as easily as they can change their rates. They can stop accepting freight or just abandon the lane.
Why? Several possibilities:
⦁ The promised volumes don’t materialize
⦁ They are unable to secure enough high-yield freight in the shipping lane
⦁ They find better opportunities elsewhere (customers or geographic demand)
As a result, rebidding helped avoid much of the fallout by allowing the shipper to stay on top of the carrier asset realignment strategy as capacity and lane shift were made to maintain or enhance carrier revenue, and take appropriate action to replace or secure needed capacity and service level support when needed.
Annual contracting also provides desirable outcomes for both the shipper and the carrier. It builds goodwill with the carrier by providing them with a level of shipment frequency and volume requirement (i.e., predictability). This greatly aids with asset positioning and expected utilization as well as financial planning and expense projections. In return, the carriers can be counted on to provide promised capacity at the agreed-upon price, providing predictability in service and expense for the shipper.
So does your truckload contracting STRATEGY need an adjustment?
Think about the TACTIC of utilizing an experienced outside resource well-versed in truckload competitive bidding to help you make the shift from “multi-year contract” thinking to “annual bid” contract savings.