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Supply Chain Challenges, Freight Transportation

As Freight Capacity Tightens, Is Reliance on the Spot Market Too Risky?

Larry Catanzaro | April 13, 2017

A funny thing happened with freight volumes during the first quarter, a notoriously slow time for for-hire trucking companies.

It wasn’t so slow.

Freight CapacityIn fact, it was downright busy. And that should be a sign to shippers that this is the beginning of a tightening freight market where, by Q4, ensuring adequate freight capacity may become a real problem.

Unless, of course, shippers act now to lock in that capacity with favored carriers.

Freight Capacity: What’s Going On?

Demand for trucks grows as the economy grows. So what signs indicate that things are turning around?

  • Consumer confidence is up and people are buying more
  • The stock market is at an all-time high
  • Companies are more confident in the current administration and the prospects for growth
  • Interest rates are rising

According to Jonathan Starks, COO at industry analyst firm, FTR Transportation Intelligence, “If sustained, this (economic climate) would raise the outlook for freight demand this year and into next year …..and cause capacity to tighten.”

The American Trucking Association is seeing the same signs.

“Looking ahead, signs remain mostly positive for truck tonnage, including lower inventory levels, better manufacturing activity, solid housing starts, good consumer spending …all of which are drivers of freight volumes” said ATA Chief Economist Bob Costello.

Freight load board company, DAT, reported that, compared to February 2016, this past February saw a 100% increase in freight on the spot market.  In a blog entitled “Is the freight recession really over?” DAT predicts that the growing number of van loads will soon pressure freight capacity and drive rates up. 

Shippers Need to Lock in Capacity

OK, so what’s all this good news about the economy mean for transportation and logistics managers charged with securing freight capacity at a reasonable rate?

For one, they may want to move away from the spot market -- where rates are rising and capacity is less predictable -- and partner with asset-based freight carriers to ensure capacity and lock in rates.

In a 2015 op-ed in Transport Topics, I talked about the comeback of dedicated contract carriage and some of the advantages of asset-based carriers in a tight freight market:

  • Guaranteed capacity
  • Reliable performance – sometimes hard to sustain with unknown carriers
  • Regular drivers with backup support – leading to better relationships at the delivery point
  • Predictable rates

Despite these advantages, rates rule the day for many shippers, who assume that the spot market will always yield a better rate. But committed relationships with a select group of carriers actually have some distinct financial advantages that many shippers don’t think about.

Network efficiency.  Steady freight gives the carrier time to mine for customers in the area to create a more efficient network with minimal deadhead miles. While the spot market often yields an attractive deadhead rate, the same result could be achieved with dedicated carriers, who then share these cost efficiencies with customers.

Better rates.  On a 3-year deal, the rates are locked in for the contract period. In a fluctuating freight market, that could result in real savings, depending on how the market moves.

Happier customers. Your customers appreciate carrier reps who know their product and their procedures. What’s the value of a happy customer? 

Freight Managers Need to Be Nimble

Freight managers need to be nimble and adapt strategies based on market conditions. Right now, it’s a pretty sure bet that the freight market is shifting toward the side of the sellers. As capacity tightens, shippers should take a hard look at shifting some of their spot market capacity to dedicated carrier partners that can ensure they have the capacity they need to support business growth.