The Stunning Reality of Freight Costs … and What You Can Do About it
By on Jan 22, 2016
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Every shipper and manufacturer thinks they know how to work the contract/spot market lane system to maximize their transportation spend – but trust me, they don’t. Hear me out and I’ll explain the problem and how to cure it.
What many people in shipping, manufacturing and even logistics don’t realize is there is huge opportunity lost during the time it takes to compare their contract rate to the spot market at the moment the shipment is ready. The “why” is simple. Until recently, the technology to do this wasn’t available. The old, manual way was the only way.
That has changed. But it takes awhile for old-school industries like shipping and transportation to learn to trust something new. I liken it to the financial services industry’s slow but sure move toward having computers rather than brokers manage buy and sell orders in the stock and commodities markets. People always did it, and usually did a pretty good job, but machines do it faster, more accurately and cheaper. And every year, more transactions are brokered automatically.
But for now in transportation, we’re still mostly old school, which works via Transportation Management Systems that enable shippers to utilize the spot market through a handful of freight brokers when contracted lanes cannot be fulfilled. The problem is, these systems don’t enable shippers to evaluate capacity and rates in the spot market prior to sending a lane to a contract carrier, which means shippers often miss out on getting the best rates and routes.
It’s understandable why we haven’t moved away from the traditional waterfall TMS methodology. Prior to new technology approaches in transportation, the spot market experience has rarely been a positive one. It has been considered a last resort where companies feel they’re at the mercy of the freight brokers. Who has time to figure out if pricing at this point is reasonable? You just need the shipment to move! An additional hang-up in the spot scenario is that brokers don’t – can’t - work in “real time.” They provide a price and then find a truck, accepting tenders through the TMS to secure freight. The brokers aren’t heavily invested in the success of the shipper or the carrier because they figure that if they can’t find a truck, they can always give it back (or at least this appears to be their philosophy … don’t get me started on that mentality).
Further complicating matters, the constant process of weighing the spot market against existing contracts inherently causes extra work for larger carriers. When a contracted lane is bringing more in the spot market, carriers struggle to adhere to their contracted pricing, compromising their guaranteed capacity minimums. And, of course, this is when shippers need their contractors the most! It all can make your head hurt but unfortunately, this is the reality of how freight is moved.
If things could happen in real time, with TMS/brokers delivering a live rate, shippers would be able to make a “best price” decision on the fly. And now, fortunately, it is possible for shippers to be able to access contract carriers to secure lanes in tight capacity while also enjoying the best pricing when the spot market is lower than contract rates. This is because the TMS of the future is available today. It delivers the best pricing on the fly with live equipment evaluating all markets, contracts, capacity and pricing in micro-seconds.
So there it is. It’s no longer necessary to settle for yesterday and its higher-than-necessary prices. Look around. Investigate. Ask. And then try the future on for size. You’ll find it very comfortable.