The pendulum of market power seems to have swung firmly in the carriers’ favor. The market disruptions triggered by COVID-19, followed by all-time high spot rates, clearly illustrate how carriers have become increasingly disciplined in their capacity management. As a result of the tightly controlled capacity and high spot rates, most shippers had difficulties booking their cargo on their service contracts. Many were required either to pay significant increases or to suffer extensive delays.
As we look toward 2021, no one knows how the freight market will play out. However, we do see shippers preparing to follow different paths when negotiating their 2021 service contracts.
For instance, some shippers seem to be taking the same approach as they have in the past, by pressing for lower freight rates where possible and merely insisting that their carriers honor the service level agreements as outlined in the contract boilerplates.
However, innovative shippers are taking a new approach. They have realized their legacy boilerplates are not effective alone. They are collaborating with their carriers to agree on new performance terms that align expectations and incentives. For instance, in return for fixed rates and allocations from their carriers, the shippers are committing to specific volumes on key lanes. This improves on-time, in full (OTIF) numbers and avoids unbudgeted freight spend for the shippers, while enabling the carriers to better optimize their networks and equipment flows.
Over the past year, those shippers who established clear performance terms with their carriers, using NYSHEX to monitor performance and manage exceptions, achieved over 99 percent contract compliance. As we begin 2021, I’m excited to continue our work with the innovative shippers and carriers who are collaborating to solve the contracting challenges of the past in ways in that will benefit both carriers and shippers.