By Matt Harding | Vice President, Freight Market Intelligence Consortium, Chainalytics |
At the beginning of the 20th century, low-cost tenement buildings in New York City were built to house thousands of workers. The phrase “waiting for the other shoe to drop” was born in an environment where tenants would hear an upstairs neighbor’s shoe hitting the floor, knowing full well the next shoe was coming. The phrase came to represent the certainty of a future event based on a current event.
Fast forward to 2016 and “waiting for the other shoe to drop” rings true for the nation’s truckload economy. As economists and industry analysts assess the main drivers of the current surplus of capacity, the state of affairs has many carriers and shippers perplexed and challenged to make their best transportation and supply chain choices.
Regardless of how we got here, we all agree that the current environment is unsustainable and the current abundance of truckload capacity will be rectified by the “invisible hand” of the market resulting from idled trucks or an increase in demand.
Three Takeaways from the 2016 Freight Market Intelligence Summit (FMIC)
At the 2016 FMIC Summit, major shippers representing tens of billions in annual freight spend discussed the market and their major challenges. The business cycle is creating a capacity environment comparable to 2009 post-recessionary levels. As a result, we are hearing of increased pressures on the following fronts:
- Top-down pressures dominate bid strategy: Regardless of the low rates transportation professionals obtained in first-round bid results, they still face management pressures to further reduce rates in subsequent rounds. Most shippers know full well that they will have to explain carrier rate increases in the foreseeable future. Delivering cash to the organization through lower rates is being offered via easy negotiations but the greater challenge is to limit downstream issues.
- Perception of opportunity extending beyond lane rates: Carrier rate reductions are not enough for all shippers; transportation professionals are also asked to change policy to benefit their companies, including extending payment terms, fuel and other cost drivers that impact carriers’ bottom lines.
- The spot market is challenging contracts: Shippers are assessing the balance between using spot and contract rates and how to get easy benefits now without damaging their carrier commitments and carrier retention.
Over the years, we’ve witnessed a number of down cycles at FMIC. And while we have learned much over the years, one point stands out: Shippers need to understand the “Potpourri Effect”: Potpourri goes unnoticed until you put heat under it. Likewise, if shippers in today’s market take aggressive measures with their carriers–adopting a potpourri of new, unfriendly or creative terms–they will only feel the impact on capacity when the market “heats up.”
Further, by taking aggressive measures today, shippers run the risk of earning lower rankings from carriers and out-of-cycle rate increases down the road, when trucking capacity is limited, or, more importantly, when it is needed most to capture benefits of improved economic output. Profitability is a carrier’s number one goal, but carriers understand that supply and demand impacts rates adversely during soft markets; some actually promote lower rates now as a means for greater fleet utilization.
The main point is that any adverse policy or position a shipper (or CFO) develops that drives more cost or reduces revenue for the carrier has a good chance of compliance in this market. But the more aggressive the policy, the more likely the shipper’s victory will be temporary, when carriers have more choices down the road.
The other shoe has yet to drop. But if history is any indicator, we are looking at no more than 12 months before this happens. We urge shippers to think carefully about redefining the carrier relationship in this environment.
Matt Harding is vice president of Chainalytics’ Freight Market Intelligence Consortiums.