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Consumer Goods Logistics Blog


The Freight Rate Trap: How Chasing Spot Market Pricing Can Backfire

Published by Larry Catanzaro

Freight rates fluctuate. Always have. Always will.

Large-volume shippers in search of the cheapest rate monitor spot market freight rates closely. When prices dip, freight procurement people rev up the RFP machine and shop out lanes to capitalize on the savings.

But, actually, these “savings” may end up costing shippers more in the long run. And what’s happening now is a perfect example.

spot-market-freightWhen the pandemic hit at the tail end of Q1 2020, stores shuttered, freight disappeared, and rates plummeted. Many shippers walked away from solid carrier relationships to do the freight equivalent of the limbo dance – how low can you go?

At the time, carriers were desperate for freight and, yeah, they went pretty low. Shippers were able to reduce their freight bills for a short time, but now the strategy is backfiring. Capacity has tightened and freight rates are up as much as 25%. The same carriers who submitted low bids in the Spring to fill their trucks have now pulled that capacity to chase more profitable runs.

The spot market giveth, and the spot market taketh away.

And how about those rate-shopping shippers? Their newfound carrier friends have abandoned them and they’re now paying a stiff premium to move huge volumes of freight during peak season.

 

Speed dating and the freight market

There is a false perception among some shippers – particularly large-volume shippers in the retail and consumer goods space – that it’s unwise to forge long-term relationships with carriers. That, somehow, these agreements prevent them from leveraging favorable spot market freight rates and capitalizing on rate-based competition. Because of that, they shop out their lanes regularly in an effort to save money.

We call this the “speed dating” phenomenon. The authors of these shipper RFPs talk about partnering, but these bid requests are more of an invitation to speed date, with the full knowledge that the exercise will be repeated each year. They’re playing the field, with no intention of making a commitment. But these speed daters are missing some clear financial advantages to locking in capacity and rates with core carriers. Here are a few:

  • Meet customer delivery commitments. There are only so many trucks. When capacity is tight, carriers reserve what is available for their core customers.
  • Lower rates. Right now, for instance, shippers with long-term contracts are likely paying less than market rates to move freight. Then there is the issue of lane density. Longer-term contracts give carriers time to find other customers to fill deadhead miles. This improves carrier profitability on the lane and can lead to improved rates.
  • Create happier customers. Shippers appreciate carrier customer service reps who are familiar with their products and procedures. They like it when regular drivers get to know the routes and build relationships at delivery locations. When carriers constantly change, that continuity and comfort level is lost.

 

Take a long-term approach to freight capacity sourcing

The spot market for freight is not unlike the stock market. Investors that move in and out of holdings constantly do not do better than investors with a longer-term strategy.

Short-term freight capacity strategies that play off spot market freight rates are risky, and shippers are now seeing the downside of this risk. Perhaps this is the lesson that large-volume shippers needed to reassess whether regular freight RFPs – often driven by the purchasing function – are actually achieving their cost-saving objective.

As for KANE, our transportation and freight solutions business is thriving as we stand by our core shippers – honoring our contracted rates and giving them preferential access to capacity during this peak shipping season.

Want to talk more about the advantages of building strong relationships over speed dating when it comes to freight capacity planning? Contact KANE today.

 

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Filed under: Freight Transportation

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