Contract Rates in 2018: Adjusting to the New Reality
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Estimated reading time: 4 minutes
RFP season is upon us—the time of year when shippers host bids and transportation contracts get negotiated. Last year, we predicted that contract rates would increase. Now that we’re deep into the first quarter of 2018, that new reality is sinking in and shippers are doing what they can to get the most out of their transportation spend while avoiding costly disruptions.
According to Benjamin J. Hartford, analyst for investment firm Robert W. Baird & Co. Inc., truckload contract rates “could break records” this year and will likely remain strong into 2020 (DC Velocity). Experts are predicting overall increases of 4-8% year-over year, though some more volatile lanes may see double-digit increases.
Looking at the Spot Market to Predict Contract Rates
Spot market rates often lead contract rates by six to nine months. We saw spot rates escalate dramatically in the second half of 2017 with increased port volumes, economic improvements, ELD pressures, and natural disasters contributing to the shift. In January, rates remained unusually high—even surpassing December’s peak-season rates. During the week of January 7, dry van rates rose to $2.28 per mile, which is 7% higher than in December and 35% higher than last year (DAT Solutions).
In February, the market has softened to some extent, which is typical for this time of year, but the spring surge is right around the corner. We will begin to see increased demand for capacity as building materials start moving, produce season heats up, and Easter-related freight begins flowing. Strict enforcement of the ELD Mandate starting in April, along with a surge in U.S. imports in May and June, could further constrain capacity. These and other factors will put serious pressure on carriers to ensure that the rates they are contracted to will act as a buffer against the many unknowns that come with market volatility.
How Shippers Are Reacting
As carriers raise contract rates, shippers must also adapt to increasing pressures from their customers to deliver on-time and within tight windows. To mitigate high transportation costs, some shippers are sending RPFs out to a larger list of carriers than in past years in hopes that more bids will drive down price. Others are digging deeper into routing guides to find capacity (JOC.com).
But the most effective way to reduce total transportation spend without sacrificing performance during this volatile time is to focus on service and communication with carriers. In the past, the main objective of an RFP was to reduce transportation spend; but this year, we’re seeing shippers look at how they award their carriers more strategically. They are much more focused on a how a carrier or broker’s core competencies may fit into their network. For example, shippers are offering route optimization packages or “loops” to maximize truck efficiency and provide continuous movements. Or, rather than having a carrier fill out the entire lane list on an RFP, they are now encouraging them to focus only on areas where they can execute with a high level of service.
Many are willing to pay extra for reliable service to ensure their products get onto shelves. Not doing so can result in missed deliveries, chargebacks, or even failed relationships—which may be costlier in the long run. Even large retailers and distributors (who are notoriously cost-driven) have become more service-oriented this year, placing a higher emphasis on execution and reliability.
Routing guides have also changed. Last year, a shipper may have had one primary carrier per lane with up to 15 carriers in their waterfall. Now, they are assigning multiple primary carriers per lane. Primary carriers must commit to 95-100% load acceptance, so this added safety measure helps to ensure coverage.
Another way shippers can reduce transportation costs and avoid disruptions is by positioning themselves as carrier or driver-friendly. Shippers that prioritize expedient loading and quick payment will have a better experience during contract negotiations. In fact, shippers and receivers with long loading times are likely to see contract rate increases of 10% or higher (Logistics Management).
Economic change is inevitable in any marketplace and LoadDelivered has experience in providing a blend of capacity services, ranging from dedicated to backup to surge. Contact us to get the most out of your shipping dollars in 2018 and beyond.