Revisit "Favored Shipper" During Downturn in Rates

I have advocated over and over that the idea of getting better rates because you are a "favored" or "preferred" shipper is a red herring.  The idea that a trucking company will take less in profit because you are preferred just does not make sense.

In the environment of rate reductions and over capacity I am sure shippers are starting to hear the same old mantra from the trucking companies:  "Stick with us and pay higher than market rates.  Once the "worm turns" we will stick with you".  This is the logic. Yet by all accounts, even the transportation executives believe transportation is a commodity play.  Less capacity and more demand = prices go up.  More capacity and less demand = prices go down.  That simple.

I had been somewhat a lonesome person in this argument until C.H. Robinson, along with Iowa State University, attempted to quantify this with a white paper entitled:  Do "Favored Shippers" Really Receive Better Pricing and Service.  Let me cut to the chase and let you know the answer is NO.  Here is a quote:

"Carriers cite many attributes that may result in "shipper of choice" status.  Research shows that keeping the driver moving and generating income is more important to these carriers than keeping a shipper as a customer".

The bottom line is that dwell time of the driver is the overriding factor to determine if you will get best price or not.  And really, it is not even the driver rather it is the trucking company asset (Truck and trailer) they truly care about.

So, remember, no matter what you do in terms of "market rates" what really matters is dwell time. The research clearly suggests that regardless of what you do in terms of rates now, in the future, it is all about dwell time and if you do not have best dwell time, what you did when rates turned down will be meaning less.

My advice is the same now (and even strengthened) as it always has been.  Take what is yours in terms of rates because the trucking company will take what is theirs when the environment changes. Then, of course, do the right thing and keep the trucks moving.

Another Year of Dashed Hopes for Trucking

Well, another year starts off with the "this is the year for trucking" story and it is starting to look like it is another year where it is going to fizzle.  I am traveling a lot this week so it will be tough to get into the details here.

Having said that there are clearly two big data points.  As the Wall Street Journal pointed out in an article titled "Trucking Stocks Tumble on Downgrade, Pricing Outlook", the bid season has not gone well for truckers.  This generally means there is excess capacity and that is driving lower prices.  An interesting quote (which blows apart the "shipper of choice" boloney over the last few years) is the following from a Stifel report lead authored by John Larkin:

"Many shippers have effectively elected to toss to the wayside any talk of partnerships, relationships, cooperation, collaboration, etc.,” the report read. “Shippers are under enormous pressure to cut transportation costs and seem not to be satisfied with the massive fuel surcharge reductions racked up over the past year and a half.”

If you don't believe that then use the trucking companies' actions to tell you what they think.  FTR reports Class 8 Orders at Lowest Level since 2012.  Having worked in the trucking sector I know as soon as the trucking executives see a prolonged slowdown the first thing they do is cancel truck orders.

Back to the future....

Class VIII Orders source:  FTR

Bid More Frequently, Not Less

I am not sure how I totally missed this great article in DC Velocity entitled "Go Short" however I am glad I ran into it now.  I think it is spot on and a great contrarian view from today's prevailing wisdom which is you need to be a "partner" in times of tight capacity.  Partner generally is a euphemism for a trucking sales person asking you to give them above market rates to secure some nebulous and not guaranteed insurance policy for capacity in the future.

As this article rightfully points out, this guarantee is anything but that and generally will not stand even after you paid that insurance policy cost.  The article states:

"At the heart of the study's findings is a fact that most who ship and haul for a living already know: that no truckload contract, regardless of duration, can force a shipper to honor a volume commitment, or a carrier to honor a capacity commitment. Because trucking is considered "derived demand"—meaning supply doesn't react unless demands are put on it—a carrier can easily change capacity, and the rate it charges, if it doesn't secure enough high-yield freight on a lane and finds better opportunities elsewhere. In many cases, it will stop accepting freight on a lane altogether."

As prices in the market change and as your rates become "stale" the carrier can just stop accepting tenders. They will say to you their "network has changed" and they can no longer support this lane.  It happens all the time and it happens with the best and most ethical carriers.  I am not accusing them of malpractice but rather I am just accepting what is and this article articulates it well.

This article advocates going shorter on your bid cycle, perhaps one year, and ensuring rates and lanes do not "get stale".  Interestingly enough, despite all the discussion from the carrier base about "long term partnerships" this appears to be in their best interest as well.

It is important to outline another extreme which is highlighted in the article.  Grough Grubbs, SVP of Distribution and Logistics for Stage Stores says:

"Our rating is dynamic based on competitive bidding, rather than an annual volume bid. This removes the dilemma of 'stale' bids," said Gough Grubbs, Stage's senior vice president, distribution/logistics. "As more competitive bids come in for certain lanes, incumbent carriers are given the opportunity to revise their rates in our system if they choose to. If not, they drop down in the pecking order for future loads."

This certainly looks and feels like every day is a new day and the bid cycle essentially never stops.  While this ensures market prices every day you would need to identify the trade off of this strategy with the benefits of some sort of stability.  That trade off equation would be different for each company and you would have to look at it in the context of your own competitive environment.  

One of the concerns I have written about many times is the fear the coordinated industry effort to "scare" shippers by talking about capacity shortfalls and rising prices (a week does not go by where a CEO of a trucking company feels a need to "remind" us that lowering capacity will result in higher prices) would result in the industry actually reinforcing to shippers that this is a commodity business.  Again, I do not believe it is a commodity however if all you talk about is the commodity behavior of the pricing scheme then you are essentially educating your customers to treat you as a commodity.

This article, and certainly Mr. Grubbs has taken it to the fullest measure.