How Market Conditions Affect Carrier Decisions
Many carriers remain loyal to their shippers during market shifts, especially if the shipper shows a willingness to adjust and renegotiate rates that more closely reflect market realities.
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Transportation has been referred to as a “perfect market,” meaning no single party controls the entire market enough to affect rates. Instead, the market fluctuates based on supply and demand.
If supply (equipment) is abundant and there is less freight available, rates go down; if capacity is tight and shipment volumes are greater, prices go up.
How do these ebbs and flows in the market impact carrier-shipper relationships?
Carriers respond to market demand in different ways, though it is common to base decisions on the strengths of their relationships with shippers.
Some turn to the highest bidder for their equipment, whether the bidder is an existing customer or not.
These carriers often ride the waves of regional freight demand driven by produce and other seasonal items.
The pricing pendulum swings further, and faster, during these market shifts than for other types of carriers.
When equipment becomes scarce, other carriers may shift their equipment to transactional customers who will pay higher spot market rates. Some carriers will show a preference to customers with higher contracted rates than shippers with larger volume and lower contracted rates.
Many carriers remain loyal to their shippers during market shifts, especially if the shipper shows a willingness to adjust and renegotiate rates that more closely reflect market realities. This enables the carrier to remain profitable, and the shipper does not have to go to the spot market and potentially pay higher rates.
Of course, shippers do need to be cautious about how often they renegotiate rates - too often, and they’re just playing the market; too little, and their rates will become stale. But a give and take approach, when appropriate, can foster a foundation of trust and loyalty that enables both parties to maintain their businesses in up and down markets.
This is not to say that rates should be renegotiated every time the market swings. But if both shippers and carriers try to seize the advantage when the market swings in their favor, neither party has much stake in remaining true to their commitment in the long run. In reality, neither carrier nor shipper can truly swing the market in their favor.
Shippers can bring added stability to their freight spend by remaining loyal to those carriers that consistently move their freight and provide good service levels. Carriers are more likely to reciprocate and remain loyal to the shipper in return, bringing stability to their own networks.
6 Shipper Strategies for Achieving Greater Advantage in Capacity and Rates
1. Look beyond the lowest rates when making freight awards. Identify the carriers that closely match freight needs in a particular lane first, and then look for low rates within this subset of carriers. The chosen partner might also have the lowest rates, but that should not be the only criteria for awarding business.
2. Make sure shipper and carrier goals are aligned. Negotiations are most successful when both parties get what they want. This alignment will likely have a direct impact on the carrier’s commitment after freight is awarded.
3. Learn as much as possible about the carrier’s current customer base. What shippers do they currently do business with, and how long have those shippers been customers? This information provides a deeper understanding of the carrier’s transportation volumes by lane or region. Low customer turnover or long-term relationships may lead to more favorable rates from the carrier and better commitment levels.
4. Make freight more attractive to carriers. Consistent freight volumes are attractive to carriers because they make it easier to justify equipment and capital investments.
5. Change processes that make freight unattractive to carriers and result in higher rates. Freight rates will be higher if:
- The driver is responsible for an accurate piece count.
- Pallet exchange is required, and there are multiple drops with firm appointments that cause excessive trip duration.
- Freight is insufficiently secured, resulting in damage to trailers or compromise to the trailer’s integrity (e.g., floor or wall damage).
- Appointments do not allow for the most efficient transit time and use of a driver’s hours of service (HOS). Sometimes, the driver will be held up a day because a receiver has a small dock and too small a window for unloading.
6. Leverage the scale, technology and expertise of a transportation service provider or 3PL. Sometimes, a shipper does not have the scale to mitigate ebbs and flows in the market or to manage seasonal fluctuations. Some do not possess the technology and processes to provide good information and data regarding their shipping habits. Both situations can be solved by leveraging a transportation service provider to improve payment terms, conduct strategic procurement exercises, and bring balance to their service network.
Download the Paper: Strategies for Transportation Spend