Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

What is the Shelf Life of a Freight Rate?

stale rates

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.

rate creep

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.

Comments

Kevin Isenberg

VERY well written article and certainly apropos. My belief is that numerous RFP awards are based solely on price. This is what I would call a transactional bid. More emphasis is put on the immediate savings versus a long-term partnership. After the awards are implemented, to your article's credit, there is definitely a "bleeding" of carrier capacity. Since the RFP is based on price, carriers begin to look at their internal costs and compare them to the revenue generated by their new business. In some cases, a shipper will push his carriers for the lowest possible price, not being concerned with how this will impact the carrier, and inevitably the shipper himself. To avoid the 328 day cost increases, shippers need to get a fair cost and to create partnerships. Working with carrier partners will reduce the capacity bleeding or substitution. My theory for the decline after 328 days is that routing guides have been adjusted (in some cases redone) to reflect fair market value. If 328 days is the average, that means some shippers are creating partnerships, and therefore are keeping their RFP solutions in place. However, it would also indicate that other shippers, who are above the 328 day mark, are continually trying to shop based on price. This leads to service disruptions and inefficiencies at DC's, with constant carrier and trailer pool changes.

8.9.12

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Kevin McCarthy

The one thing I’d point out is that I would expect that you would have similar curves with either approach. No matter how well you treat carriers their networks will change and when they do they simply will not have trucks for you at a market price in some lanes and that is part of what cause routing guide bleed. It’s not just price shopping.

8.16.12

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