Transportation portfolio diversity is the antidote to volatility

Editor’s Note: As COVID-19 continues to evolve, you’ll still find this post from December 2020 extremely relevant. If nothing else, these times have taught us the need to always be ready for market volatility. The methods described below will help you keep the wheels turning as the supply chains of the vulnerable come to a halt. A competitive advantage? Sure. But it’s nothing more than being prepared.

The difficulties of the market constantly define freight transportation. The pandemic underscored this reality. It left many wondering if it’s time to exit the rollercoaster ride and find a more efficient way to manage freight costs and capacity going forward.

Because of recent shorter, but more dramatic market swings, some genuine innovations are entering the marketplace. Many are worthy challengers and complement tried-and-true annual procurement practices. (Some are simply retreaded ideas with a new coat of paint.)

If you’re tasked with managing transportation for your organization, chances are you’re being bombarded with approaches such as:

• Guaranteed acceptance. The programs that promise this result use fixed margins instead of fixed rates. From a shipper’s point of view, it may not work for your entire network, but it may be a good fit for several lanes. Instead of awarding the business to multiple providers or establishing a dedicated fleet, you can ride the market up and down with a single provider.
• Lane network analysis offer. Which lanes should you bid out annually, set up as a dedicated arrangement, pre-negotiate before a bid or send to the spot market? It’ll surprise no one when such recommendations align nicely with a transport provider’s capacity options.
• Retiring the annual bid process. Instead of an annual event, many shippers are proponents of more frequent “mini-bids.”
• Ad-hoc negotiations with transport providers. This situation is where either party — shipper or provider — can call the other to the table.
• Scheduled (annual, biennial or semi-annual) bid processes. You can conduct them for all or part of the network.
• Letting everything ride. In the spot market, that is.

So, which procurement strategy is the right one for you?

They all are. Each one is useful in specific circumstances, and often in combination with other strategies. Ultimately, it depends on what’s happening in the market at the time, where the market’s headed, and your organization’s strategy and risk tolerance.

There’s no one-size-fits-all approach that can meet all your needs. You must continually evaluate market conditions. It’s also important to adjust your procurement and allocation strategies, because transportation portfolio diversification takes on many different forms.

Procurement strategy diversification

• Annual bids. Annual procurement events help you provide a reasonable budget number to leadership and, understandably, avoid the perils of riding the spot market. However, if poorly done (for example, providing incorrect data to carriers or making awards that aren’t tendered to the winners), your annual bid routing guide can degrade significantly (and quickly). When that happens, you’ll either pay considerably higher rates as you go deeper into your routing guide or put your fate in the hands of the spot market. Even with a routing guide that’s well put together, you can struggle in a cycle where demand exceeds capacity. Without a good plan beyond an annual bid, the spot market and going deep into your routing guide can blow up your transportation budget — and then some.
• Mini-bids. Market volatility is typically limited to a few specific lanes. In any network, there'll be lanes that experience higher volatility or a dip in service levels. You can use benchmarking services to understand the costs you’re paying across your network and identify the lanes where you can do better. Pulling these lanes out of the annual process and doing mini-bids during the year helps you secure capacity at better rates while maintaining desired service levels. You’ll find that this is often a better strategy – especially for seasonal lanes.

Mode and contract diversification

One of the most significant actions you can take to protect your company against volatility is diversifying your carrier portfolio. You should do regular modeling to adjust for changing business conditions, both current and predicted — that is, volume, seasonality, supplier locations and so on.

• Mode. Be sure you have the optimal mix of truckload, less than-truckload and intermodal.
• Common carrier versus dedicated fleet. Dedicated fleets are a great way to make sure you have capacity. With the help of a robust modeling exercise, you can identify segments of your network (loops, triangles and so on) where you can deploy a dedicated fleet. If your company has over $50 million in truckload transportation spend, you should have a place for dedicated fleets. Dedicated fleets also provide an excellent hedge to the wild swings in the market. You can flex your fleet size up and down as market conditions dictate.
• Equipment type. Equipment types are sometimes interchangeable, depending on operational requirements. You can unlock this potential by using, for example, non-operational temperature-controlled trailers to haul dry-van loads. It will result in a significant reduction in costs and improved service levels.

Supplier diversification

• Number of suppliers. Make sure you have the right number of carriers. Too many, and it becomes hard to manage; too few, and you don’t have enough committed partners when the going gets tough. We’ve seen shippers use soft markets to consolidate their spend with a small number of providers. While this age-old procurement strategy works to reduce cost, it dramatically increases the risk of not being able to secure additional capacity when you need it.
• Asset versus broker. Maintaining a mix of asset-based carriers and non-asset-based brokers is critical to achieving your desired service and cost profile. You should include both types in your transportation portfolio. (During the pandemic, shippers heavily “leveraged” on the broker side took massive cost increases. Their brokers paid large spot premiums to secure capacity and then passed that cost right along to them.)

Ultimately, supply and demand impact price. The freight transportation industry always oscillates between shipper-favoring conditions and carrier-favoring conditions. The only long-term approach that can help you balance risk and cost is based on portfolio diversification.

— By Kevin Zweier