Editor’s Note: The following is an excerpt of a research report published last week, “Powered by the Network A Platform Approach to Matching Freight Demand with Capacity More Efficiently.” The research, based on a survey of over 360 transportation professionals conducted by Adelante SCM and commissioned by Transporeon, discusses why the dominant approach to transportation procurement — that is, the way freight demand is matched with trucking capacity — needs to change in response to current market realities. Please visit the report page for more information about the research and to download the full report.
When you think differently about transportation management, what new ground can you find?
One big opportunity for improvement, as our previous survey of shippers and carriers revealed, is the ability to match freight demand with capacity more efficiently.
Although the majority of freight still moves via contract carriers at negotiated rates, what happens when your primary carrier rejects your load tender and you exhaust your routing guide?
What usually happens is that automated processes break down, leading shippers and carriers to engage in often manual and inefficient ways to match loads with capacity. The net result is typically higher costs, delayed shipments, and sub-optimized utilization of trucks and drivers.
In addition, it adds to the waste and inefficiencies that continue to plague the industry – for example, in the form of empty miles/journeys (15-30% empty) and increased CO2 emissions.
Looking at the problem more broadly, therefore, especially in light of current market conditions, another question arises: Has the time come to transform the traditional transportation procurement process, not only to better match freight demand with capacity, but also to reduce empty miles, CO2 emissions, manual processing, and other forms of waste?
We’re Not In 1980 Anymore
The year was 1980. Jimmy Carter was President of the United States and Margaret Thatcher was Prime Minister of the UK; Tim Berners-Lee began his work on ENQUIRE, the system that would eventually evolve into the World Wide Web; and Commodore released the VIC-20 home computer, the first computer to sell more than a million units.
It was also the year that the Motor Carrier Act (MCA) of 1980 was passed in the United States, which deregulated the trucking industry. As Thomas Gale Moore, an emeritus senior fellow at the Hoover Institution, writes in the Library of Economics and Liberty:
The MCA made it significantly easier for a trucker to secure a certificate of public convenience and necessity. The MCA also required the commission to eliminate most restrictions on commodities that could be carried, on the routes that motor carriers could use, and on the geographical region they could serve. The law authorized truckers to price freely within a “zone of reasonableness,” meaning that truckers could increase or decrease rates from current levels by 15 percent without challenge and encouraged them to make independent rate filings with even larger price changes.
Simply put, the passage of MCA transformed the way shippers, carriers, and third-party logistics providers work together in the United States. It effectively allowed the parties to negotiate and establish contracts with each other, thus redefining and establishing a new norm in transportation procurement.
(Similar regulatory changes have occurred in Europe too. For example, in Germany, there was the long-haul traffic tariff (GFT) that served as the legally binding calculation basis for transport services by trucking companies from 1989 to 1993. “Due to changes in the law in August and November 1993, the regulation of transport costs was completely ended [beginning on] January 1, 1994.”)
However, as Chris Caplice, PhD, executive director of the MIT Center for Transportation and Logistics, discussed in a August 2018 presentation, since deregulation in the 1980s, “there has been little change to this now dominant design [in transportation procurement] where shippers run reverse auctions to secure annual contracts from carriers that feed into a routing guide that is used for the remainder of the year. Currently [in August 2018], about 90 percent of all truckload moves operate under annually contracted rates. This dominant design is now being challenged by the rise of new technologies, availability of detailed data, and the adoption of advanced methodologies.”
As you might expect, the trucking market in Europe, and the way shippers and carriers work together there, is different from the United States. When it comes to procurement, for example, there are some notable differences. As Jeroen Eijsink, President of C.H. Robinson Europe highlights in a blog post:
During truckload procurement events, EU shippers negotiate with carriers for a committed rate in a lane for a year. They expect carriers to hold to that rate for the entire year, regardless of freight surges or lulls in the market. Shippers strive to meet their commitment of tenders to the awarded service providers, and the service providers commit to the pricing, even if they need to procure more costly capacity from secondary providers. These strategies tend to result in generally stable rates for EU shippers.
On the other hand, U.S. shippers typically use the same liability and risk contracts from year to year, supplemented by an addendum. U.S. carriers who receive lane awards are expected to cover those shipments, but both shippers and carriers typically have a 30- or 60-day “out” for any reason. This is because [shipper and carrier commitments are non-binding].
Despite the differences, Caplice’s point above applies to the European market as well: the dominant approach to transportation procurement — that is, the way freight demand is matched with trucking capacity — needs to change in response to current market realities.
For more on the factors that are driving the need to innovate transportation procurement, as well as the results from the web survey conducted with shippers, carriers, and logistics service providers from around the world on this topic, please download the research report.
