As Trucking Rates Fall, It’s Time to Renegotiate with Carriers
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After a couple years of sky-high trucking rates and tight capacity, the U.S. trucking market is finally softening. Today, retailers have too much inventory and consumer demand has dropped due to inflation and renewed spending on services. The result is weakening demand for truck capacity and falling trucking rates. Truckload spot market rates are below contract prices and 15% lower than a year ago.
We believe that trucking expenses will be flat or decline further through the first quarter of 2023. But our forecast is anything but certain. With full employment, high inflation, war and a new Congress, there are many potential pitfalls. For sure, the softening market won’t last forever.
How can manufacturers take advantage of today’s lower transportation costs while building in the flexibility needed to deal with an uncertain future?
1. Develop a Carrier Strategy for the Long Haul
Even if price is the top consideration at your company, it is rarely the only goal. Identify your company’s goals and priorities, then focus on value rather than price, partnerships rather than transactions. Carriers providing dependable service, flexibility and access to capacity will reduce your supply chain risk.
Keep the number of providers you work with limited so that your business is large enough to be meaningful to the carriers you’ve selected.
Build in redundancy– a primary/secondary carrier model on key lanes ensures two carriers are motivated and price competitive while increasing your company’s flexibility.
Incorporate both carriers and brokers into your plan, assigning lanes by provider. For key lanes with steady volume, an asset-based carrier is a good choice. For the 80% of lanes that have 20% of the volume (and less of a need for steady access to capacity and equipment), a broker may be a better choice, offering more flexibility. When market conditions change, tweak the ratio given to brokers up or down. In the current market, spot rates are less expensive than contract rates, so you’ll give a greater share of freight to your brokers.
2. Pay Attention to All the Cargo
Full truckload outbound tends to grab everyone’s attention. To capture all the opportunity, make sure you’re considering all the freight.
Less-than-truckload (LTL) rates rose 5-6% this year. Review your LTL spend. As shipments become smaller and more frequent, the amount of LTL your company ships may surprise you. Explore whether regional carriers can cover some of your lanes at a lower cost than a national provider. In contrast to the truckload market, to save on LTL shipping you may need to add carriers to your portfolio.
On inbound transportation, make sure you’re in control of your shipments, not your suppliers. You have a vested interest in getting your company the best transportation service at the best price – a supplier doesn’t. Put in place lane-specific rates for frequent shipments of inbound materials. The additional spend may also move your company’s overall transportation into a higher discount category.
Manufacturer’s small parcel costs are no longer small. FedEx has already announced a January general rate increase (GRI) of 6.9%, and UPS followed by matching that increase. Lock in rate reductions now, prior to the GRI, to reduce the amount the GRI is applied against. A small-parcel consultancy can identify specific savings opportunities for you and help you renegotiate your rates on a gain-share model that rewards suppliers for adding value.
3. Match Procurement Strategies to the Times
Now that transportation rates have come down from the stratosphere, it may be tempting to try to lock in savings by launching a freight request for quote (RFQ). Instead, employ strategies that respect and foster longer-term partnerships.
Carriers have limited resources, have been exceptionally busy and are prioritizing bids with the best chance of success. Your bid may receive poor pricing or no response at all if there isn’t a current business or sales relationship. If your company needs to validate pricing with an RFQ, focus on the carriers whom know you best.
Offer your core carriers more volume or additional lanes in exchange for lower pricing. A core carrier strategy rewards performance while reducing shipping and vendor management costs. Close collaboration may uncover solutions that benefit both companies.
Consider quarterly rate resets rather than annual pricing. Quarterly rates will quickly capture today’s lower costs while protecting both parties from unanticipated market changes in the future.
To right-size transportation costs today while being prepared for an uncertain future requires a balanced approach to transportation procurement. In a changing environment, tactics bring in immediate savings while carrier and procurement strategies generate smart solutions for the future.
Lauren Pittelli is the founder and principal of Baker Logistics Consulting Services, a consulting firm focused on addressing the international trade and transportation needs of industry. Her consulting services focus on 3PL selection and management, international air and sea transportation and customs and trade compliance. Prior to starting Baker, Lauren spent 30 years at leading international freight-forwarding companies managing their transportation, customs and contract logistics business in the Midwest. She is a graduate of Harvard College and a licensed U.S. Customs House broker.
