How to be a successful shipper in a tough full truckload market

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Domestic full truckload (FTL) market capacity trends

Although the recent surge in rates has started to plateau slightly, the industry outlook for the foreseeable future is for continued imbalance in supply and demand in the market.

There are myriad reasons for the challenges in the shipping marketplace. On the demand side, the US economy continues to grow, and recent corporate tax restructuring efforts are likely to incentivize companies to invest. The market dynamics on the supply side are all too familiar. The ELD (electronic logging device) mandate puts constraints on the hours that drivers are able to work, further exacerbating the driver shortage issue plaguing the industry.

Additionally, truck manufacturers are facing supply constraints upstream with increasing demand from customers to grow their fleets. The growth of ecommerce coupled with customer expectations for rapid delivery of orders has made the impact of these ongoing supply-side issues more prominent. Many shippers are being forced to utilize load boards, which puts them at the mercy of currently high spot rates, while simultaneously not getting the carrier on-time performance they need to be successful.

So, shippers are now competing with each other to secure available capacity—and thinking strategically about how to gain that capacity, including the methodical segmentation of both lanes and carriers.

We surveyed executives from 17 large shippers with extensive FTL experience to get their insights about current rate issues. All respondents said both their contracted and spot rates either increased or stayed the same in 2018, with 65% indicating rates had increased between 5% and 15%. The vast majority expect rates to go up, citing capacity and driver shortages as the primary reasons.

Given this challenging environment, shippers are redefining their criteria for success. Historically, shippers have focused on capturing savings through reduced rates, but that now seems improbable in the current market. The main goal is to keep rates flat and secure much needed capacity.

Segmentation scheme principles for shippers

To become more efficient in awarding lanes and become more attractive to carriers, shippers are implementing segmentation schemes that try to create win-win propositions for themselves and their carriers. An effective approach to this process follows these four core principles:

1. Segment lanes by complexity and service level

A shipper needs to focus on protecting capacity among its preferred carriers for high complexity/high service lanes and is unlikely to reap any appreciable savings (‘protected spend’). The name of the game in this situation is to be as attractive a shipper as possible and focus more on guaranteeing volume to secure capacity than on rates. If a shipper is unable to obtain capacity on these high complexity lanes, it may need to consider setting up dedicated fleet operations. But before deciding whether a lane or geography would be a good candidate for insourcing, a shipper should create the business case for doing so and take a hard look at its internal capabilities.

On the other hand, for low complexity shipping needs, a shipper might be able to achieve a higher level of savings by cultivating relationships with smaller or regional carriers (called ‘bottleneck spend’). On these lanes, a shipper should focus on finding carrier “sweet spots” to ensure it can secure competitive rates and an acceptable service level.

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2. Identify carrier sweet spots

Once lanes are segmented according to key variables such as complexity, service requirements and strategic importance, a similar exercise should be completed on carriers to understand their value criteria. A sweet spot is an area in a carrier’s network that maximizes its asset utilization and provides the best operating cost.

A shipper should look at a carrier’s business model and capabilities and identify the geographies/areas where it wants to have volume. The shipper can then match a carrier’s sweet spot to each identified lane segment and create value for both parties.

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3. Develop a core carrier program

Once a shipper systematically matches its lane complexity with carrier capabilities and sweet spots, it can develop a 'core carrier' program in which the shipper commits volume to at least three carriers in order of volume awarded. A program like this has several benefits. First, and most importantly, it enhances the ability of a shipper to ensure capacity. If a shipper has three carriers on a given lane, each with guaranteed volumes, it increases the availability of capacity on that lane. It also helps maintain an acceptable service level, as carriers will not want to risk losing guaranteed volume, knowing there are other carriers available to carry the volume.

A secondary, but consequential, benefit of limiting the numbers of carriers is that it enables a shipper to reduce its operating costs. Minimizing the number of carriers overall makes the management of those carriers (e.g., carrier communications, freight payment, metrics/business reviews) by logistics teams much easier. Furthermore, having a prescribed set of three to four carriers that shipment executers can call on for every lane will limit the amount of time those employees spend playing the spot market or calling other carriers to look for capacity.

The success of the core carrier program largely relies on the execution of contracts with select carriers to create certainty in shipping rates. While contract duration can vary, a typical contract last from two to three years. Even so, shippers should plan to revisit their spending every year to ensure that contracted rates are in line with the industry.

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4. Become more carrier-friendly

Here are several actions a shipper can take to become more appealing and accessible to carriers:

  1. Improve forecasts and pickup schedules so carriers can get in and out according to schedule.
  2. Increase the speed of load and unload times to help a carrier save time. This is especially important, as the new ELD (electronic logging device) mandate limits the number of hours a driver can work, even if the wheels are not moving.
  3. Increase the tendering lead time provided to carriers from 24-36 hours to at least 36-48 hours to allow carriers to perform more detailed planning. This can be further expanded by allowing carriers to have a broader pickup or delivery window (e.g., four hours rather than one hour) for shipments that are not considered urgent.
  4. Invest in automation to improve interactions with carriers. For example, automated dispatching helps to streamline communications with carriers, and automated billing and freight payment (e.g., a three-way match) ensures carriers are paid in a timely manner.
  5. Standardize fuel and accessorial programs to provide carriers with more stability in the structure of shipments as well as delivery and billing.
  6. Reduce the payment terms for some carriers down to 15 days or less, if possible. Getting paid faster is very important to carriers, as they operate on thin margins with high pressure on cash flow.

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Ensuring shipper success in the carrier-dominant market

Shippers need to adopt a disciplined approach to segmenting lanes, collaborating with a select number of carriers and using automation to keep costs in check. A shipper should have a good understanding of its own needs as well as the different motivations of national, regional and local carriers, so it can determine the best fit. By being well-informed and well-prepared, shippers will be able to navigate this very difficult rate environment.

Contact us

Glen Goldbach

Principal, PwC US

Brett Cayot

Principal, PwC US

Sandy Gosling

Principal, PwC US

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