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Tuesday, May 21, 2024
Logistics

What’s contributing to freight market volatility chaos?

It’s no secret the freight industry is highly cyclical.

“Every year or two there is a recession and then there’s a spike, specifically in the freight industry,” said Margie Hamlin, head of operations and accounts at Leaf Logistics.

The transactional, load-by-load way that freight is contracted remains an issue, according to Hamlin. The odds of shippers being able to look ahead and have capacity and cost certainty is slim to none.

“And this leads to interesting behaviors that exacerbate the problem,” Hamlin said. 

Shippers rely on data to update their annual budgets and processes. Yet, most shippers only have access to their own historical freight data — information that is incomplete and imperfect because it’s based on incomplete and imperfect data from the last year. This leads to a continual cycle of poor decision making when it comes time for RFPs.

Request for proposal (RFP) rates are not enforceable in most cases. Even with negotiated volumes and rates, there’s no commitment to hold true to either — anyone can reject a tender. This makes the situation even less predictable, where shippers don’t actually know how much they’re going to spend at that time or even which carrier is actually going to be there. For carriers, they don’t know how much business they will see, making it difficult to predict how many drivers to hire or assets to purchase for the year ahead.

Despite all of these issues, the freight industry continues to operate on a load-by-load basis. Companies have tried to solve contract enforcement issues with mini-bids or quarterly RFPs, but these solutions have yet to fundamentally change how freight is contracted.

“If you are a shipper and you, instead of doing annual RFPs, are now doing quarterly bids, your carriers have even less reason to commit and more reason to chase a rate elsewhere, because you’re just going to rebid that work in three months again anyway,” Hamlin said.

Hamlin believes this inefficiency actually increases uncertainty in the market and continues to feed the volatility problem, calling them “good faith efforts that aren’t changing anything.”

“The existing tools and some of the transactional ways of contracting freight really just continue to feed the problem of the volatile market cycles,” Hamlin said. “I worked with shippers for many years. They’re doing a great job with the tools they have, but we want to help them realize that there are different ways to identify patterns in transportation that allow them to contract with certainty, plan and execute for longer and thus ease the burden of transportation from top to bottom.”

The freight market continues to cycle through times of tight and loose capacity, and several other factors have made it increasingly hard to plan ahead. Hamlin points out a few factors that contribute to freight volatility chaos:

Seasonality

“Not all freight flows the same way week over week,” she said. “Every business is different. What is your peak season? When do you ship more, and when do you ship less? When are your trucks moving from the West Coast to the East Coast or from the South to the North?”

While shippers understand the seasonal demand unique to their businesses, they have less control over supply and macroeconomic factors — what happens if less produce grows or the economy enters a recession? Hamlin sees these complexities as all the more reason for advanced preparation. When shippers schedule their baseline freight months in advance, they can focus on the small percentage of their freight portfolio that’s most volatile.

Market fragmentation

The siloed nature of the freight industry leads to confusion and speculation, two factors that worsen rate variability, according to Hamlin. 

“Shippers and their carriers or brokers are only conversing about one lane or one region at a time,” she said. “This transactional market today just really enhances this fragmentation in silos and adds to the volatility, making it difficult to coordinate freight and plan ahead.”

Short term solutions

In an attempt to lessen uncertainty, shippers are trying to plan in smaller increments with mini-bids and more frequent RFPs to lock in certainty based on shorter time horizons. While these efforts are commendable, using those tools isn’t actually solving the root problem of market uncertainty, according to Hamlin. Rather, they’re continuing to worsen the problem by compressing the contract length and rebidding the same lane over and over again.

“When carriers or brokers are asked to rebid the same lanes every three months, they aren’t able to plan for the long term,” Hamlin said. “It adds uncertainty for those transportation providers and makes it difficult for them to commit and plan beyond those three months. While more frequent bids are imperfect, shippers are using some of the only tools they have. There’s just not a tool out there today that helps them think longer term and build those lasting relationships with their transportation providers.”

Moving forward

Hamlin contends that if everyone looked to different tools for long-term planning or thought about freight differently, it would allow shippers to combat the inconsistent freight market and help reduce tender rejection and rate volatility over time. 

Since many experts see the market turning again this year, Hamlin urges shippers to reevaluate their approaches to long-term capacity planning and contracting. 

“Everyone needs to look back at what happened in 2018 and 2020,” she said. “What did you use then? What worked and what didn’t? Are you approaching it differently than you did when the last market turned? Really think about if there are other ways to lock in longer-term solutions and secure capacity as well as find ways to have some more reliability in the cost structure.”

Although comfortable, these types of negotiations still make it difficult to plan ahead and give the shipper little insight.

“We want to set a different approach,” Hamlin said. “You have to analyze the transportation data and let that help guide your decisions in a different way.”

Leaf Logistics offers many useful tools to combat these overarching volatility issues. The company provides a data analytics tool called Leaf Adapt, software that continuously analyzes shippers’ transportation data throughout the year to coordinate and schedule freight into multi-shipper circuits across the transportation grid.

Leaf Adapt identifies freight patterns and builds a portfolio approach to contracting freight over different time horizons. Leaf secures long-term contracts for shippers and logistics service providers using its Flex committed contracting to lock in the same providers at a guaranteed rate. Leaf is able to adjust contract length and terms as needed throughout the year based on data analysis to account for changing business needs or shifting market conditions. Long-term contracting gives shippers more certainty into their true capacity and costs, while carriers and brokers gain certainty around the volume and rates they will see, allowing both sides to navigate market swings. 

“Ninety-percent of freight should be planned months in advance, leaving last minute planning for true spot emergencies” Hamlin said. “Now that we can identify patterns in transportation data over time, we’re able to help our customers lock in long-term business certainty so they can navigate market swings more easily.”

To learn more about Leaf Logistics, visit its website.

The post What’s contributing to freight market volatility chaos? appeared first on FreightWaves.

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