V-shaped recovery shifts capacity strategies of shippers, carriers, brokers

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Updated Dec 1, 2020

Editor’s note: This is the first of a two-part series on how events in 2020 have created near and long-term shifts in the capacity strategies for shippers, carriers and 3PLs. Part 2 of this series will run on Wednesday, Dec. 2.

Pricing power in the freight market moves like a pendulum, and in 2020 the buyers (shippers and 3PLs) and sellers (carriers) of transportation capacity have seen the direction change multiple times.

As capacity has tightened in the latter half of 2020, carriers are finding new opportunities to increase asset utilization.As capacity has tightened in the latter half of 2020, carriers are finding new opportunities to increase asset utilization.

Buyers gained an unexpected pricing advantage in the first and second quarters when capacity flooded the market from hard-hit sectors like automotive, manufacturing and foodservice during the COVID-19 lockdowns.

Capacity tightened in the third quarter as a V-shaped recovery began for truckload, less-than-truckload and final-mile shipments. The recovery spiked in August and was primarily driven by consumers increasing their spend on physical goods in place of entertainment, travel and services.

FourKites, a freight visibility provider, reported that shipment volumes from January to October have increased by an average of 22%. Much of that growth came in the third quarter, with a peak in August for retail and manufacturing shipments.

The shift in consumer spending accelerated online purchases by five years, according to IBM’s U.S. Retail Index, and created a surge in residential deliveries. UPS Ground’s residential volume, for example, increased by nearly 64% from April to June. Parcel carriers responded by limiting customer shipping volumes and adding residential delivery surcharges.

Truckload and LTL carriers also saw freight surge in the spot market, which has presented new challenges for shippers and 3PLs to secure capacity commitments. As capacity has tightened, carriers are finding new opportunities to drive efficiencies and asset utilization.

Another emergent trend in 2020 is that shippers, 3PLs and carriers are bypassing request for proposals (RFPs) and working directly with trusted partners to create dynamic transportation solutions.

Death of the RFP?

When the COVID-19 pandemic reached North America in early March, any chance of 2020 resembling 2018 in terms of capacity shortages seemed farfetched. Entering the 2nd quarter, many shippers and 3PLs had a strong negotiating position with carriers but that moment didn’t last.

John Miller, managing partner of refrigerated carrier Plains Dedicated.John Miller, managing partner of refrigerated carrier Plains Dedicated.

Going into 2020, one of the largest importers in the United States, SanMar Corp., decided to stay with the strategy it had started in 2018 to build strategic relationships with carriers and stay out of the spot market as much as possible, said John Janson, the company’s senior director of supply chain.

The Issaquah, Wash.-based company ships custom apparel items to printers and embroiders nationwide through eight distribution centers. Keeping its freight lane and volume commitments with core carriers, Janson believed, would yield dividends for the next cycle of tight capacity.

That cycle came sooner than anticipated in the 3rd quarter. The core carrier strategy has been “clearly tested,” he said, but having strong relationships has proven critical with tight capacity likely “to stay for a while.”

John Miller, managing partner of Plains Dedicated, an Orlando, Fla.-based motor carrier and 3PL, sees 2020 as an inflection point for shipper RFPs due to the pendulum changing directions so quickly.

Plains Dedicated operates a temperature-controlled fleet of 25 tractors powered by independent contractors. Whenever large shippers conduct RFPs, Miller said it takes capacity out of the market from small carriers who depend on having consistent business relationships to grow.

The RFP process “flips the whole transportation market on its side,” he said. In 2020, shippers have come to realize that RFPs would not work in their favor. “The ups and downs are helping nobody.”

Plains Dedicated has received more business this year from shippers who lost capacity commitments from carriers they had selected in RFPs with the lowest rates, Miller said.

To develop sustainable capacity, Miller believes that shippers and 3PLs will need to focus on developing long-term relationships with small carriers. Most small fleets are willing to adjust rates as market conditions change rather than risk losing the business through an RFP, he said.

Baylor Trucking has benefitted from a surge in freight demand for retail and medical supplies. It recently increased team driver pay to $0.75 per mile.Baylor Trucking has benefitted from a surge in freight demand for retail and medical supplies. It recently increased team driver pay to $0.75 per mile.

During 75 years in business, Milan, Ind.-based Baylor Trucking, a truckload carrier with expedited dry van and refrigerated operations, has been through many freight cycles. In 2020, its shipper customers have not conducted RFPs outside of the normal cycles in the 4th and 1st quarters, said President Cari Baylor.

When the freight market cooled in 2019, Baylor Trucking lost some business it had picked up in 2018 from shipper RFPs. This year, Baylor has expanded its freight volumes and lanes with core customers who are asking for transportation solutions, she said.

Baylor Trucking has been able to improve utilization in the tight capacity environment with shippers being more willing to change pickup and delivery times to match drivers schedules set by their hours of service, she said.

The carrier has raised rates for loads with evening or nighttime pickup times, she said, to compensate for lost utilization. Loads with late pickup appointments flip drivers’ schedules by requiring them to drive at night and sleep during the day, she said.

“Because shippers have had trouble securing capacity, they appear to be more willing to make adjustments in their supply chain,” Baylor said. Prior to 2020, the general attitude in the shipping community was “look, this is when it picks up. Take it or leave it,” she added.

Nearly all the freight in Baylor Trucking’s network is from contract commitments. As it expanded to new contract lanes, Baylor has grown by transporting more of its customers’ spot market freight to reposition its equipment.

“Work out solutions with partners you can trust,” advises Baylor during a tight capacity environment. The cycle will change, and just because carriers have a pricing advantage now, “there is no reason when you’re in a V-shaped recovery to do V-shaped rates,” she said.

Creating capacity

As freight rebounded in the 3rd quarter, many carriers began leaving a greater portion of their capacity uncommitted to take advantage of spot market opportunities. This trend is evident by the sustained increase in “load tender rejections.”

In September, the load-to-truck ratio in the DAT network reached 5.5 for vans, meaning 5.5 loads were available for every truck. This was the highest watermark since June 2018, and the trendline is expected to rise further in the peak retail season. Ratios for refrigerated and flatbed loads have also reached the highest mark since June 2018.

3PLs are seeing new business opportunities from shippers looking for capacity beyond their core carriers, but those who are relying mostly on spot market transactions to source capacity “are paying a heavy price right now,” said SanMar’s John Janson. “I think carriers have gotten so much smarter in how they do business, and that is not going away.”

Traditionally, carriers that work with Arrive Logistics will plan out their freight networks a year in advance. With more capacity going to the spot market, the Austin, Texas-based 3PL has been “having lots of conversations with both our carrier partners and our shippers to get creative on sourcing capacity,” said Justin Frees, executive vice president of carrier development.

As an example, Arrive Logistics recently helped a shipper customer reposition its private fleet to resolve a network disruption and keep its drivers moving. The solution also made it possible to offer additional capacity to another shipper customer.

To maintain capacity with rising spot market rates, “we’ve had very transparent rate conversations with carriers on dedicated lanes and on contractual lanes with shippers,” Frees said. “Honest dialogues on rates and working with shippers for drop trailer opportunities with driver-friendly facilities for our carrier partners has been a winning strategy for us.”

During 2020, Arrive Logistics has expanded its business in growing freight sectors such as furniture, electronics, retail, e-commerce, home improvement and home building. In these new markets its focus remains on contractual opportunities with enterprise shippers and carriers, he explained.

Capstone Freight Management is offering free, next-day load payments to help retain capacity.Capstone Freight Management is offering free, next-day load payments to help retain capacity.

Load volumes for Arrive Logistics in 2020 have increased 25%, year over year, and the company is forecasting a 30% increase in 2021 to reach 650,000 loads, he said.

One strategy being used by Atlanta-based Capstone Logistics to retain capacity in the volatile market conditions of 2020 is to offer a Quick Pay Plus program to core carriers. The program has next-day ACH payments with zero fees.

“It has proven to have a positive impact,” said John Ackerman, executive vice president of carrier procurement. “But we don’t do that for everybody.”

Capstone has tens of thousands of carriers in its network. Those who do one-off loads can use a Quick Pay program with next day payments for a three percent fee. Only carriers who haul on a consistent basis for Capstone, which specializes in refrigerated shipments, have the zero-fee option.

Shorter-term contracts

With carriers allocating more capacity to the spot market, shippers and 3PLs have been finding success with shorter-term contracts and more predictable schedules to get capacity commitments.

“One of the biggest trends we’ve noticed is an increase in mini-bid activity,” said Capstone’s Ackerman, who noted that 3PLs are doing the same exercise with carriers. This can make it more difficult to maintain carrier relationships when lanes change more often, but 3PLs can also increase the variety of lanes they can offer.

“We try and allocate new lanes to the same carriers,” he said. “It creates more conversation, which ultimately is a good thing.”

Anshu Prasad, CEO of Leaf LogisticsAnshu Prasad, CEO of Leaf Logistics

Getting capacity commitments from annual RFPs has always been a problem, said Anshu Prasad, CEO and co-founder of Leaf Logistics. Prior to Leaf, Anshu spent 10 years at supply chain consulting firm A.T. Kearney where he led the Global Analytics practice and conducted bids for large shippers. He has 20 total years experience working on the problem of RFPs, having also worked at Tigris Consulting and Verticalnet.

“Fewer people believe that an annual RFP is a viable solution coming out of 2020,” he said. “I think it is a shift in a direction that is permanent.”

The New York City-based company developed a freight contracting platform used by shippers, 3PLs and carriers to secure future transportation capacity, rates and service. Lanes awarded to carriers through an RFP process are difficult to plan around, he said. With Leaf’s platform, shippers and 3PLs can analyze their demand-driven supply chains to identify freight lanes with predictable schedules that can be offered to carriers for different time periods.

Freight contracts can be extended for days, weeks or months at a time, he explained. In some instances, lanes can be combined to create a repetitive round trip to negotiate more favorable rates.

By the end of the year, Leaf Logistics forecasts it will be managing more than $150 million in transportation spend for shippers, he said.

Editor’s note: the Transportation Intermediaries Association provided feedback and access to members on its shipper’s committee for this report.