How are Truckload Contracts Managed? Are Annual Bids a Thing of the Past? Have Indexed Contracts Taken Hold?
Truckload transportation (characterized by lane-based, one-way, rates where the shipper is paying for the entire capacity of the truck) sourcing has been a topic of great debate for decades, especially following the introduction of optimization techniques and transportation procurement software in the 1990s. Shippers have continually sought the best strategies to secure freight capacity at reasonable costs while maintaining good customer service. The question of how to manage contract rates with carriers remains central to these strategies.
Transactional vs. Relational Approaches
Shippers generally adopt a strategy that leans more transactional or more relationship based. The strategy within the same company may differ by mode and world geography.
Transactional Approach: In this approach, shippers want to work with providers with the lowest costs and are quicker to switch providers than relationship-minded shippers. These shippers understand that when market rates rise, carriers may reject their loads at the contracted rates, forcing the shipper to turn to the spot market or conduct another bid to secure capacity at new rates. This approach can add more volatility to transportation budgets but can deliver lower overall costs. These types of shippers are more likely to conduct more bid events (especially in down markets) than relationship shippers.
Relational Approach: Other shippers aim to build lasting relationships with carriers, willing to sacrifice some cost savings to keep their freight with long-term core carriers. The hope is that when rates rise, these carriers will be less likely to reject loads or demand rate increases, given the shipper's loyalty and reasonable rate negotiations during the last cycle. Many of these shippers will still conduct bid events (although a significant portion do not manage formal bids), but typically do more focused bid events with plenty of pre-negotiations to lock in capacity before an event.
Insights from the Latest Benchmark Survey
To understand current strategies for contracting Truckload rates, the Descartes 8th Annual Global Transportation Management Benchmark Survey added a question on the topic to gain some insight. The survey involved over 630 shippers and logistics service providers (LSPs) across North America and Europe. For this question we’ll focus on the 427 shipper responses.
Survey Findings
The survey reveals that shippers utilize multiple and diverse strategies (even within the same organization) for contracting Truckload rates, indicating a blend of traditional and innovative approaches:
- Annual / Strategic Bids (37%): The most popular method, showing that annual bids remain a cornerstone of rate contracting strategies.
- Use Private / Dedicated Fleets (34%): Many shippers rely on their fleets to ensure consistent capacity and control over transportation costs. North America showed 10% higher selection of fleets compared to Europe (39% vs. 29%)
- Access Real-Time Pricing through API Rate Providers (32%): This method's popularity underscores the increasing reliance on technology for immediate rate visibility and flexibility. North America showed 5% higher selection of real-time pricing compared to Europe (34% vs. 29%)
- Tactical Bidding (28%): Shorter-term bids to adapt quickly to market changes.
- Outsource to a 3PL / 4PL (24%): Leveraging third-party logistics providers to manage freight and rate negotiations. North America showed 8% higher selection of outsourcing transportation compared to Europe (28% vs. 20%)
- Utilize Load Boards to Access the Spot Market (21%): Using spot market rates for additional capacity when needed.
- Index-Based Carrier Contracts (20%): Although less common, index-based contracts tie rates to market indices for more dynamic pricing adjustments.
Key Takeaways
Annual / Strategic Bids
Despite the evolving market, annual bids are not obsolete. Shippers continue to rely on this method as a foundational strategy for securing rates and capacity for their high-volume, more stable freight lanes. Shippers have increasingly reduced the volume (especially relationship shippers) that goes into annual bids since the lanes with more sporadic volumes are more likely not to have the awarded bid rate honored. There is a stability provided by annual bids for ‘good freight’ that helps shippers better plan their budgets and operations more effectively.
Private / Dedicated Fleets
Using private or dedicated fleets offers shippers greater control and reliability. This method reduces dependence on external carriers, ensuring a steady capacity, which is especially crucial during peak seasons or market disruptions. Ensuring your fleet is the right size is an on-going process as networks and volumes are always changing.
Real-Time Pricing
The integration of real-time pricing through API rate providers reflects the growing importance of technology in transportation management. This approach allows shippers to respond swiftly to market fluctuations, optimizing costs and capacity dynamically. This approach is helpful in quickly getting loads covered at the ‘market’ rate but makes it harder to budget your costs for that freight.
Tactical Bidding
Tactical bidding (typically for portions of a network, or a single facility) allows shippers to engage in more frequent and shorter-term bidding cycles. This flexibility helps shippers adapt to changing market conditions, securing the best rates without as much volatility as real-time pricing.
Outsourcing to 3PL/4PL
Outsourcing freight management to third-party logistics providers (3PLs/4PLs) can be beneficial for shippers lacking the resources or expertise to manage these tasks internally. These providers can offer specialized knowledge and access to broader carrier networks. But in many cases any shipper with some significant spend in Truckload can access similar pricing as 3PLs.
Load Boards and Spot Market
Load boards provide shippers with access to the spot market, enabling them to quickly find trucks when regular carriers fall short, even same day. This method is essential for managing unexpected surges in demand or capacity constraints.
We don’t have data from previous years, but it would be interesting to see if load boards were utilized this much before the Pandemic. During the capacity crunch in the early days of COVID shippers were scrambling to find trucks and some were looking at contracting methods not previously considered.
Index-Based Carrier Contracts
Index-based contracts, while not as widely used, offer a dynamic pricing model tied to market indices. This approach provides transparency and aligns rates more closely with market trends, potentially offering cost advantages in volatile markets. Choosing the right index and ensuring that it aligns with your equipment and freight types is essential to reflect the market conditions specific to your business.
Conclusion
The contracting of Truckload rates is a complex, multifaceted process influenced by market conditions, technological advancements, and strategic priorities. Shippers use a mix of traditional and innovative methods to secure the best rates and ensure reliable capacity. Annual bids remain foundational, but the increasing reliance on real-time pricing and tactical bidding highlights a shift towards using more flexible, responsive strategies in conjunction with annual bids for parts of the shipper’s network. Ultimately, the best approach depends on a shipper's specific needs, market conditions, and relationships with carriers. By understanding and leveraging the various contracting methods, shippers can navigate the complexities of Truckload transportation more effectively, ensuring cost-efficiency and high service levels.
INDUSTRY WHITEPAPER
2024 Global Transportation Management Benchmark Report
Descartes conducts annual benchmark research among global transportation professionals. The 2024 study reveals key industry trends, leading transportation management strategies, and future IT investment outlooks..
