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DG&A's Transportation Consulting Blog

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As the long, slow recovery from the Great Recession continues, shippers and carriers have become used to modest economic growth. Demand for freight services has been steady but not robust. The muted demand for freight services has not put undo pressure on truck capacity; rate increases have been limited in recent years. This may be about to change.

Regulations have placed constraints on the management of trucking companies, particularly full load carriers. The Hours of Service regulations coupled with the ELD (electronic logging device) mandate are placing limits on the number of hours that a driver can legally operate a truck. These directives limit truck capacity. The difficulties in finding quality drivers and the high turnover ratio among current drivers provides additional challenges for many truck fleets. To address the potential erosion in capacity, truckers are applying a variety of technologies.

Good quality transportation management systems are allowing truckers to better manage their routes and balance their lanes. Dimensional scanners are helping LTL carriers manage the space available on their trailers by matching freight rates to cube utilization. ELD technology provides carriers with information on how long their drivers and equipment are held up at customers’ facilities. The net result of all this is that small parcel, LTL and truckload carriers can be much more accurate in tailoring their freight rates to the “carrier friendliness” of their clients.

How can shippers become more "carrier friendly”?  Here are a few items to consider.

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The essence of successful freight rate negotiations is an honest exchange of information. Carriers count on shippers to supply them with complete and accurate information on shipment weights, dimensions, volumes by lane, seasonal spikes and any special service (i.e. job site deliveries, weekend pickups etc.) requirements. Shippers expect carriers to be able to supply them with the correct types of equipment to pick up their freight at the designated time, to provide adequate amounts of equipment at the right time to move their loads, to meet their designated transit times over 95% of the time and to provide good customer service and quality information as they outlined in their submission and interview.

While this all seems so straight-forward and reasonable, there are a host of challenges that get in the way of committed shipper-carrier relationships. Here are a few to consider.

Changes in Shipment Volumes

Business conditions are constantly changing. There are ebbs and flows in the general economy that can impact on many industries, including both shippers and carriers. There is ongoing competition in the market where shippers win or lose customers every day. Then there are mergers and acquisitions and new product launches (or old product cancellations) that can lead to rationalization of locations for factories or distribution facilities. The net impact of these changes is that the shipment volumes discussed in an RFP may not come to pass or the actual volumes by lane may vary over time.

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The first part of this blog focused on the operational, service and equipment issues that constitute a strong shipper-carrier freight agreement. This blog will address the financial and business issues that need to carefully captured in detail.

6. Rates and Service Charges

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Motor carrier agreements or contracts are documents signed between shippers and carriers that set out the parameters and processes under which two or more companies work together to provide freight transportation services. These documents, often prepared by lawyers (with input from freight management professionals), set out a range of service expectations and freight rates that define the relationship between the parties. While freight agreements have come into widespread use, the question is if and when these documents are necessary?

One could argue that if two or more parties are operating in good faith, do they need a legal document to circumscribe the nature of their relationship? If shippers and carriers are supposed to work together as partners in an open and trusting manner, does a formal, written agreement get in the way of a business partnership arrangement? Does it inhibit open and honest communication?

Do motor carrier agreements create a rigid framework that reduces flexibility? Are they detrimental to the sometime unpredictable and fluid nature of freight transportation? Does a formal agreement make it more difficult for a shipper to obtain additional equipment or after hour’s service? Do they place carriers with a limited set of equipment into a straight-jacket? Does the fear of punishment or service failure force a carrier to provide equipment and service to one client (that has a contract) at the expense of another client (that doesn’t have one)?

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In a recent Stifel report, it was noted that the “mother” of all capacity shortages is expected to hit the United States in 2017 as a series of government regulations reduce the supply of fleet equipment by five to fifteen percent. Despite the efforts of carriers to raise pay, upgrade facilities and improve the lifestyle of drivers, annual turnover stubbornly remains at close to one hundred percent in many fleets. On the rail side, a huge upswing in the movement of energy products by this mode has had a deleterious effect on intermodal capacity and service. Wise shippers realize that trying to secure carriers on the spot market is a risky endeavor since this leaves them open to capacity shortages and rate volatility.

What can your company do to protect itself if there are capacity shortfalls?

Is your company ready for even tighter freight capacity? Will the integrity of your company’s supply chain be maintained in this ever-changing environment? What can your company do to protect itself if there are capacity shortfalls?

1. Bring your top performing carriers under contract

An important first step is to view your major carriers as business partners. As such, it makes good sense to negotiate formal multi-year contracts with capacity commitments and service guarantees. As you engage in these types of discussions, find out how your business fits within the parameters of their operation. Does your freight move on their primary traffic lanes? Do they have head haul or back haul in the reverse direction? Are you a valued customer?

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