This commentary appeared in the print edition of the Jan. 6, 2020, Journal of Commerce Annual Review and Outlook.
Capacity pricing essentially enables shippers and carriers to drop the façade of managing rates by hand grenade once a year and have a deeper conversation. Contract pricing provides a base of business and a means for carriers to minimize risk of big losses, but it also limits the opportunity for big reward.
I see it like a diversified financial portfolio: some nice conservative business from good-paying and loyal clients to cover operating expenses, and then playing in the more aggressive spot market to maximize profitability. The magic is in the mix and the execution. If the shippers approach each of their carriers with an open dialog to balance the best mix for the carriers, the result is efficient and effective operations for all parties.
I know LTL better than truckload, so I’ll speak specifically to how these same technologies are affecting the “little brother” market. The savvy shippers are employing technology that enable contract pricing as a backstop that remains competitive, but also allows for the LTL carriers to offer live lane specials instantly through their TMS. Hard dollar savings have been north of 7 percent in 2019 and are expected to climb in 2020. This model works for LTL because they have a hub-and-spoke system with dedicated lanes, but constantly changing networks of capacity requirements and demand. Also, the automation of much of the volume LTL rating and execution from the LTL carriers is opening more options for the smart shippers to explore across modes when the spot market is an option.
The market isn’t binary between contract and spot quotes, but a portfolio of options enabled by technology incorporating a variety of modes to truly maximize the best options for shippers. Carriers need to be open about the right and the wrong freight for their networks.