Lots of things deteriorate with time, the freshness of food, athletic performance, and human memory, for example. And according to research sponsored by C. H. Robinson and carried out by the Department of Supply Chain and Information Systems, Iowa State University, another item can be added to the list: truck load (TL) freight rates.
The research, described in a recently published white paper[i], looked at rate information on contract TL loads hauled 250 miles or more and tendered during the years 2008 to 2010. The data cover about 700,000 records in all. Every move was processed by the same transportation management system to ensure an apples-to-apples comparison in the analysis.
The researchers found that following a procurement event, freight rates decay compared to the market until the effect levels off at around 328 days. But why do contract rates lack staying power after a rebid?
One reason is bidders’ remorse; the tendency for lower-cost carriers to start rejecting loads after winning the business, because they find better margins elsewhere. As this happens, the shipper is forced to go deeper into the route guide for capacity, and usually pays a premium for using deep-tier service providers.
This effect is known as route guide “bleed or substitution” and there are a number of underlying causes. Both the carrier and shipper’s business are dynamic and lane volumes are constantly changing. The shipper gains and loses customers, volumes, and/or SKU’s. Similarly, the carrier adds and loses clients and lane volumes. These constant “tugs” on the service provider’s network influence their ability to support the conditions specified in the initial freight contract, even if they fully intended to comply when the agreement was signed.
As rate age approaches 328 days the curve begins to flatten (see the graph). This is partly because trading partners often make ad hoc adjustments to rates in response to market shifts and changes in the configuration of their freight networks. Some below-market rates tend to be more resilient, but these are often associated with local niche carriers. In general, impromptu tweaks eventually moderate the upward movement of rates. The researchers also found that this behavior of tweaking rates occurred for all shippers in the data set. In other words, the work associated with contract adjustments is unavoidable because rate negotiations are ongoing even where no procurement exercises take place.
Why the decline in rates after 328 day? There are a number of possible reasons, and this is an area that merits further investigation. Shippers might continue to secure more competitive rates, for example. Another possibility is that as rates age they fall below the market which has moved upwards, and some carriers decide not to negotiate an adjustment to compensate for this disparity. There are various reasons why a carrier might extend lane pricing that is below market. Perhaps the service provider wants to preserve a favored relationship they perceive as fair or offers cost advantages; maybe the business balances a lane that is overfunded in the opposite direction.
What do you think? Why does the truck load freight rate curve start turning south approximately 328 days after a procurement event? Your opinions are welcome.
[i] The Stale Rates Research: Benefits of Frequent Transportation Bids white paper can be downloaded here.