US shippers guarantee volume to secure truck capacity

US shippers guarantee volume to secure truck capacity

Tight capacity and rocketing rates are barreling down on US surface shippers. Photo credit: Shutterstock.com.

Shippers facing double-digit rate increases in an unprecedented tight trucking market are increasingly willing to consider shorter-term contracts and volume guarantees to secure needed capacity and hopefully some measure of control over runaway transportation costs.

With the autumn peak shipping season fast approaching, capacity tight on the rails as well as roads, and the US freight economy looking strong well into 2019, there’s pressure to deal now. Truckload spot rates are easing in mid-July, but they remain at near-record highs.

“Shippers are willing to pay more to assure the fact that when they call, a truck is going to be there,” said Charles W. “Chuck” Clowdis, managing director of research and consulting firm Trans-Logistics Group. “They’re willing to assure volumes in order to ensure capacity.”

“Shippers are starting to do innovative stuff, trying to figure out what level of volume guarantee makes sense,” said Ben Cubitt, senior vice president of supply chain and transportation at logistics provider Transplace. “That’s in the early stages of development,” he said.

Retail penalties drive interest in guaranteed capacity

Traditionally, shippers have been as loathe to guarantee shipments as carriers have been to guarantee trucks. Guarantees usually come with penalties when they’re broken, and no one wants to be caught short and penalized when orders fall below forecasts or drivers aren’t available.

“Carriers say, ‘I’m not going to tie up my capacity for a year or two years. We just don’t know what’s going to happen,’” Clowdis said. The same is true for shippers, whose predictions for sales and demand over multiple freight lanes can change significantly within a year.

The trucking market is so hot now that some of that resistance is melting. Capacity, whether dedicated or guaranteed, is critical to shippers preparing for what looks to be a challenging autumn peak season. Increasingly inflexible customer delivery demands only add to the need.

“We met with a consumer products goods shipper who said they had 25 customers that impose fines” for missed deliveries, Cubitt said. Walmart isn’t alone with its on-time, in-full delivery requirements. “In that kind of world, you really do want guaranteed capacity.”

Offering some level of guaranteed volume in return for a capacity guarantee is an option for those who don’t want to pursue costlier dedicated trucking. Most dedicated contracts run multiple years and come with a premium price, which is why dedicated is growing fast.

With truckload carriers reporting they are overbooked each day, some shippers will be hard pressed to get any agreement, said John Haber, founder and CEO of consulting firm Spend Management Experts. “Trucking companies have all the leverage right now,” he said.

“The only people who are getting contracts these days are people who are willing to pay a premium to lock in capacity,” said Haber. “They’ll have to risk getting locked into expensive pricing if they want to have that capacity or go the route of setting up dedicated fleets.”

Clowdis sees a small but growing number of shippers working with their suppliers on assurances that might not “guarantee” specific volumes or absolute capacity levels, but set a baseline that comes close enough to help secure the capacity and revenue they need.

“This is where the smart guys on both sides are going,” he said. “The shippers are saying they’ll give an assured volume per day, week, or month. ‘Here’s the highest rate we’ve ever paid for that,’ they’ll say, and ‘we’ll add 10 percent to that and give it to you for a year.’”

Some shippers are looking at even shorter-term assured volume deals. “They’re willing to give the trucker that additional 10 percent [in price] and promise the volume to the carrier for 90 days, as long as rates never go up more than 1.5 percent,” Clowdis said.

What does the shipper get in return? A truck. “Gold right now is having an empty truck and a driver to put in it,” Clowdis said. “A lot of people think there are not enough trucks out there,” Haber said. “There are a lot of trucks that are parked because people can’t find drivers.”

Shippers, Clowdis said, “now are willing to put some skin in the game. They’re willing to say we’ll assure you of these volumes and if we don’t have them, we’ll compensate you. If you don’t have the truck, you’ll compensate us. They were reluctant to do that in the past.”

“There are people who are starting to say I’d like to have volume guarantees and penalties,” Cubitt said. “A large shipper in a recent bid said, ‘I’ve got lanes where I’ve got a lot of volume. What if I pull those lanes out. I can probably guarantee 60 percent of the volume.

“If there’s a base amount of volume that’s there 95 percent of the time, they’ll offer a guarantee for 60 percent of that volume,” he said. “It’s a good, solid engineering approach. But when they ask a carrier what kind of a discount they’ll get for that, the answer is not much at all.”

With rising equipment, fuel, and labor costs, trucking companies don’t have deep discounts to offer even to customers who strive to be “shippers of choice,” Cubitt noted. “Even in good times, truckload carriers have to be competitive to win a lane, and there’s not a lot of extra money.”

Buying trucking isn't like buying widgets

In addition, procuring transportation services is very different from goods purchasing, Cubitt said. “Transportation contracts aren’t like widgets. They’re conditional agreements. If you sign a contract to buy 1,000 widgets, it works pretty well, you buy 1,000 widgets.”

Transportation works differently. “Let’s say a shipper says I’m going to give you, the carrier, 500 loads a year. In the first week, the shipper gives you two loads. The second week, you get 20. That’s been the challenge,” he said, with regard to volume and capacity agreements.

Shippers and carriers need to keep the conditional nature of the market in mind when trading guarantees and assessing penalties for falling short. They need to define some degree of wiggle room, Clowdis said. “They’ll forgive you if you forgive them. Write that into the contract.”

Clowdis, a former IHS Markit executive, has been involved in trucking contract negotiations since before deregulation in 1980. Assured volume and capacity contracts are “something we’ve been doing very selectively,” he said. “It takes patience. The key is openness and collaboration.”

Shippers increasingly are open to contracts of different lengths, shorter and longer, depending on the terms. Although most shippers are sticking with annual bids, they’re extending terms offered to “core carriers,” Cubitt said, and trying to experiment with pricing terms.

“Two or three years ago, some shippers began bidding every two years,” he said. “Everybody who did that has backed away from it. What they’ve learned is that if the market goes south and rates collapse, you’re on the outside looking in, which is hard to explain to your boss.”

When rates rise rapidly, “the contracts aren’t as sticky,” he said. Truckers exit contracts and gravitate to higher-paying customers. “You end up losing capacity and have to renegotiate, so you miss out on the downside and you don’t have much stickiness on the upside.”

In its bid management program, Transplace is seeing more interest in “modified” one-year and two-year bids. “With the modified one-year deal, shippers bid annually but go to their core carriers and extend terms for another year in return for a lower rate increase,” Cubitt said.

“They’ll pitch to them that they won’t take their lanes out to bid if they agree on, say, a 3 percent rate increase. You keep the lanes where you have good service, and take out the problem lanes, new lanes to bid. We’ve seen a lot of that, and it’s good for the shipper and carrier.”

There’s also interest in two-year contracts that offer a fixed rate increase in the first year in return for more flexible pricing in the second year. “There’s a lot of experimentation with pricing in that second year,” Cubitt said. “No one has really come up with an index they like.”

A similar idea gaining some ground is shortening contracts, offering a generous rate increase up front in return for a cap on increases in the next contractual period. Clowdis said he has some shipper clients who have opted for six-month contracts that offer this type of trade-off.

“I have one situation where they went to quarterly contracts, but most are saying let’s do twice a year,” he said. “They’ll say twice a year with the caveat that we can go back into the agreement if fuel prices go down or the spot market prices goes down, which I don’t think they will.”

Such agreements might not save shippers much in the short term, but they can pay off in the long run, he said. “It’s a trading point. If you’ll sit down every three months and look at your rates, at least you’re open to talking. The term of the contract is a negotiating point.”

“Anecdotally we’ve heard from at least two sources that pricing is in such flux that it doesn’t make sense to sit down and negotiate a one-year agreement, so they’re going to shorter agreements right now,” said Mark Montague, industry pricing analyst at DAT Solutions.

As freight demand and rates on DAT’s spot market load boards surged in June, “I’m pretty sure carrier rejection rates went up, or they didn’t want to take a lot of business at their contractual rate levels. Certainly they’re being more selective” about their freight, Montague said.

Sharing the load, sharing the lane

Cubitt sees some shippers getting even more creative with bids as capacity tightens. “People are starting to look at lane awards and origin level commitments,” he said. Those commitments give trucking companies access to freight on multiple lanes from a single point of origin.

In some bids, “carriers own a lane outright, but then on others you could use a bunch of carriers,” he said. If a carrier finds its contractual volume dips low on its dedicated lane, the shipper could guarantee shipments on a different lane from the same origin city.

“Say you’re the primary carrier on the lane from Atlanta to Chicago, at $1.60 a mile,” Cubitt said. “Then Atlanta to Philadelphia comes up, and it’s priced at $1.80 a mile. If I don’t have enough Chicago loads one week, I’ll send your trucks to Philly” to meet the volume commitment.  

“It may not be an optimal solution, but net-net everyone is better off,” said Cubitt. It’s better than going to the routing guide or god forbid the spot market. Losing capacity carries such a penalty that shippers are doing anything they can to get better alignment. Better off is not bad.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.