What Shippers Need to Do Now to Mitigate Freight Rate Increases

Several years ago, a heavy-handed freight procurement buyer hammered a freight carrier sales manager. The buyer kept insisting on a lower rate, aggressively asking the sales manager if they were going to “give him the lower rates.”

After a long pause, the sales manager responded, “I can give you the rates that you are asking for, but I cannot give you any trucks at that rate.”

There is an industry term called “paper rates,” and it is best to avoid this scenario. By working with your carriers as partners to find reasonable rates and then collaboratively improving the asset utilization to lower costs and remove waste, which is better for the environment and the bottom line, you can come out of the cycle a winner. Here is how you can make that happen – and why you need to act now.

It is important to realize that freight rates are notoriously cyclical, with inevitable rises and falls every few years. As we approach an upward swing in this cycle, shippers must understand the dynamics at play and take proactive steps to manage their freight spend effectively. This post will provide valuable insights and strategies to help your organization navigate these changes.

The Freight Rate Cycle: A Fact of Life

Cyclical freight rates, like life, death, and taxes, are inevitable in the supply chain landscape. Historically, carriers expand their operations when rates rise, buying more trucks and hiring additional drivers. Conversely, when rates drop, the industry sees bankruptcies, consolidations, and layoffs, leading to reduced rates. Understanding this cycle is key to mitigating its impact on your operations.

Trucking executives have long been predicting this cyclical increase, which is driven by several factors. The post-pandemic recovery has spurred a surge in consumer demand, placing additional pressure on the transportation sector. Additionally, geopolitical tensions and trade disruptions have caused shifts in supply chains, leading to longer shipping routes and higher costs. Fuel prices have also been volatile, adding another layer of complexity to rate fluctuations. These factors combined create an environment for rising freight rates.

Understanding the Current Market

As of now, we are at a pivotal point in the freight rate cycle where rates are starting to increase. This trend is influenced by several factors, including increased demand for transportation, higher fuel costs, and driver shortages. According to the American Trucking Association (ATA), the industry is currently short by approximately 80,000 drivers, a figure projected to rise in the coming years.

Moreover, the impact of e-commerce growth cannot be overstated. The shift towards online shopping has increased small parcel shipments, straining carrier capacity further. Seasonal peaks, such as holiday seasons, exacerbate this situation, making it imperative for shippers to plan well in advance. The recent rise in fuel prices, driven by geopolitical instability and regulatory changes aimed at reducing carbon emissions, has also contributed to the overall increase in freight costs. Understanding these market drivers can help shippers develop more effective strategies to mitigate rate increases.

Strategies to Mitigate Freight Rate Increases

To navigate these challenging times, consider the following strategies:

1. Lock Down Key Lanes:

• Secure Long-Term Contracts: Engage in firm freight bids to lock down key lanes for a year or more. This strategy helps stabilize costs and ensures capacity. Long-term contracts provide predictability and allow for better budget planning. Additionally, they foster stronger relationships with carriers, who appreciate the commitment and may offer more favorable terms.   Move away from spot buying.
• Spot Market: When the market is about to rise, prepare by reducing the lanes you buy in the spot market. Only use the spot market for non-repetitive lanes or new lanes. When you are in the spot market, continue to test it with a few different providers.
• Network Optimization: Encourage carriers to overlay their network onto yours, seeking synergies and reducing empty miles. Collaborative efforts can lead to more efficient operations. By sharing network data and aligning schedules, both parties can identify opportunities to maximize truck utilization and minimize costs. Regular reviews and adjustments to these networks ensure ongoing efficiency improvements.

2. Develop Core Carrier Programs:

• Strategic Partnerships: Select key carriers to become long-term partners. Share forecasts, volume commitments, and ongoing needs to build trust and reliability. These partnerships go beyond transactional relationships, focusing on mutual benefits and long-term success. Regular meetings and performance reviews can help identify areas for improvement and innovation.
• Information Sharing: Providing carriers with advanced demand and load forecasts can help them plan better, resulting in more reliable service and potentially lower rates. Advanced planning reduces the likelihood of last-minute disruptions and allows carriers to allocate resources more effectively. Implementing technology solutions, such as transportation management systems (TMS), can facilitate seamless information exchange.
• Reasonable payment terms: Carriers pay 65% of their costs weekly:  40% for drivers and 25% for diesel fuel. 30-day payment terms are carrier-friendly, and shippers should not request more than 45-day payment terms. Cash flow is a real problem for most carriers and is a common cause of bankruptcy. 

3. Improve Carrier Asset Utilization:  the most important carrier metric

• Drop and Hook Programs: Implement these programs at your sites to reduce loading and unloading times, increasing efficiency. Drop and hook programs allow drivers to drop off a loaded trailer and immediately hook up to a pre-loaded trailer, minimizing downtime. This practice improves turnaround times and enhances driver satisfaction by reducing wait times.
• Provide Backhauls: Help carriers get their assets back to dense markets where they can find other freight. 
• Driver-Friendly Facilities: Create clean, comfortable break rooms, limit dwell times, and ensure no-touch loads to make your operations more attractive to drivers. Investing in amenities such as clean restrooms, comfortable lounges, and accessible parking and allowing drivers to take a break at your facilities can make your facilities more appealing to drivers, encouraging them to prioritize your loads. Reducing dwell times and providing no-touch loads further enhance efficiency and driver retention.

4. Evaluate Dedicated Fleet Options:

• Short-Haul Solutions: For repetitive short-haul moves, consider dedicated fleet options. These arrangements can provide more consistent service and cost savings. Dedicated fleets offer several advantages, including predictable capacity, tailored service levels, and potential cost reductions. They are particularly beneficial for high-frequency, repetitive routes where reliability and consistency are paramount.

The Cost of Inaction

Failing to address rising freight rates can have significant consequences:

1. Escalating Costs

Without proactive measures, your organization may face rapidly increasing freight costs, making managing budgets and maintaining profitability difficult. As rates continue to climb, the financial impact can become substantial, affecting transportation budgets and overall business performance. Companies that fail to act may find themselves at a competitive disadvantage, struggling to absorb or pass on these increased costs.

2. Loss of Key Carriers

Other shippers may attract your preferred carriers by committing to volumes and driver-friendly practices, leaving you with less reliable and more expensive options. In a competitive market, carriers prioritize shippers who offer stable volumes, efficient operations, and favorable working conditions. Losing access to key carriers can result in higher reliance on spot market purchases, which are often more costly and less reliable.

3. Increased Spot Buying

This is the worst possible time to be dependent upon spot rates. Relying on brokers and secondary carriers can lead to inconsistent delivery performance and negatively impact customer satisfaction. Spot market rates are typically higher and more volatile than contracted rates, leading to unpredictable costs. Additionally, using secondary carriers may compromise service quality, resulting in delayed deliveries, damaged goods, and dissatisfied customers.

Conclusion

Freight rate increases are a challenging but manageable aspect of the supply chain. By understanding the cyclical nature of these rates and implementing strategic measures, your organization can mitigate their impact and maintain operational efficiency. Stay proactive, engaged, informed, and collaborative to navigate these changes successfully.

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