Logistics procurement has evolved with new cutting-edge technology driving advancements in capacity management, predictive rate indexing, and award management. These tools have revolutionized the way shippers and brokers negotiate contracts with carriers. But while they make fielding, negotiating and optimizing rates more efficient, they often only help early adopters enhance an incomplete RFP process. This is because shippers still rely heavily on paper freight rates to make procurement decisions, and new technology makes rate-centric decision making fast and easy. With freight procurement, supercharging incomplete processes based only on paper rates can quickly erode already tight margins.
In order to make the most of all the advancement in logistics technology, shippers need to reassess the data points they use to establish contracts with carriers. They need to understand the real cost implications of service on their transportation contracts and partnerships. With the help of the right technology, today, it is possible to move away from the conventional ways of setting rates. Finding the correct freight rate doesn’t have to be a race to the bottom. Instead, shippers should strive to understand the true costs of service and establish a new high water mark: the effective freight rate. How to do it exactly? We’ll discuss that here in detail.
The Attraction of Paper Rates
The appeal of paper rates often lies in their simplicity and accessibility. For many shippers, they represent a readily available option, easy to understand, and a seeming antidote to the complexities of the shipping industry. Many opt for them, not necessarily because they believe they’re the best option, but because that’s what the indexes provide and, for some, navigating beyond them requires a level of industry maturity or technological investment they might not yet possess.
However, this simplicity can be deceptive. While they might seem straightforward, paper rates fail to account for unexpected expenses that occur en route to a customer—a core concern for shippers. A contract built solely on paper rates might look cost-effective, but when poor carrier performance and service levels come into play, hidden costs emerge. These rates frequently overlook carrier performance metrics, focusing solely on cost, and thus may expose shippers to unforeseen expenses and inefficiencies.
In essence, the argument isn’t about choosing spot rates over contract rates. Instead, it’s about advocating for more insightful contract rates over those constructed merely on paper rates.
Let’s Dive into a Practical Scenario. Imagine you’re in charge of shipments and have to select a carrier for a route from Houston to Detroit.
- Carrier X offers a bid of $2,000 all in
- Carrier Y proposes $1,850 all in
- The average market rate is currently at $1,900.
At first glance, Carrier Y seems like the most economical choice. But the story doesn’t end here. If you knew their service history, you’d know that:
- Carrier X, which has serviced this route before, delivers with a 97% On-Time Delivery record and maintains a consistent 98% tender acceptance rate.
- Carrier Y, despite its enticing rate, has a slightly concerning 88% On-Time Delivery and an 85% tender acceptance rate.
Now, let’s factor in the actual effectiveness of their operations. When you account for accessorials, spot market and penalty exposure:
- Carrier X, with its exemplary performance, has an effective rate of $2,100, which is just a small increment from the initial bid.
- Carrier Y’s effective rate after considering their performance discrepancies shoots up to $2,200.
The end result? Those initially appealing paper rates from carriers might not always translate to cost-savings. Operational hiccups, represented by hidden costs such as delayed shipments or declined tenders, can cause businesses to suffer higher “effective” costs in the long run.
Through this lens, the initial bids transform. They’re no longer just about the upfront numbers but also about real-world implications and the performance behind those numbers. It underscores the need to assess carriers not just on their rates but on their total costs of service.
Tackling the Challenges of the Conventional Shipping
Beyond the sheer financial implications, paper rates present other cost and service-related challenges such as:
- Lack of Market Responsiveness: Traditional RFPs based on paper rates overlook the broader implications of real-world service costs. Their true flaw is ignoring the tangible costs of service disruptions and inefficiencies. This gap was highlighted when trans-Pacific spot rates surpassed contract rates from June 2022 for over a year, underscoring the need to consider more than just paper rates in negotiations.
- Performance Blindness: They offer no insights into a carrier’s service quality or reliability. The carriers can simply lower the prices to increase their chances of getting the contract. This reduces the focus on the service and reliability as it is usually not measured.
- Administrative Overhead: Contracts based on paper rates are rigid, leading to inefficiencies and unexpected deviations. This can push businesses towards the spot market more often, straining administrative resources and increasing costs. In contrast, contracts built on both price and service, ultimately leads to a more stable, sustainable routing guide.
- Narrow Cost View: They overlook indirect costs, giving businesses an incomplete view of their expenses. When viewed with a holistic view of service, speed, and reliability, what might appear cheaper on paper can prove much costlier.
Embracing a Data-Centric Approach to Contract Rates
Addressing the challenges of modern logistics necessitates more than just technology—it requires a change in perspective. The key lies not in the simplicity of paper rates OR the allure of the spot market, but in unleashing the power of comprehensive data on the true costs of service when you negotiate your next RFP. Consider these pillars for strengthening your processes and eliminating hidden transportation costs:
- Create a unified source of performance truth: Build a single source of truth with your carriers. Establishing this mutual data foundation is important. Not only does it bring clarity to operational metrics, but it also ensures both parties understand the true, effective costs of each shipment on every lane.
- Access predictive performance insights: Instead of solely focusing on paper or lagging market freight rates, delve deeper. Understand carriers’ real-time performances, the hidden costs, and the total value proposition. It’s about gaining a holistic view of your logistics expenditure, beyond mere transactional figures.
- Negotiate with a mutual understanding of total costs: With a shared data understanding, negotiations transcend mere numbers on paper. Both shippers and carriers come to the table with insights from the previous year, enabling informed discussions about the actual costs and efficiencies of their partnership.
New technology facilitates this shift, providing a space where shippers and carriers converge over a shared data narrative. Tools like the Dynamic Scorecard and Performance Analytics provide pathways to transparent, informed, and mutually beneficial relationships in the freight industry.
Navigating the New Era of Freight with ISO
In modern logistics, getting a clear understanding of the real costs of freight is difficult but essential. At ISO, we’ve been on this journey with multiple businesses, helping them zoom out and look at the bigger picture. We believe in long-term partnerships, transparent conversations, and mutual growth.
See how ISO helps supercharge transportation procurement https://www.iso.io/benefits/for-procurement-teams/