August 25, 2014
By Matthew Harding | Principal, Transportation Practice
Here’s some good news: the general state of the economy appears to be improving. But this is not without unfortunate outcomes — divorces are also on the rise. Researchers have discovered a correlation showing that when the economy improves, more people get divorced because stabilizing personal finances give unhappy couples the financial means to do what they really want: pull the plug on their marriages.
This ”divorce effect” can also exists between core carriers and their shippers with a striking degree of similarity. Carriers see an improving economy and demand rate increases, backed up by the threat of changing partners. In the Freight Market Intelligence Consortium we have over 170 shipper-carrier relationships at $10MM or more in revenue per year, so we hear a lot about how the tone of the discussion about rates and capacity is starting to change. It appears that improving economic conditions are causing carriers to demand more out of their core relationship than the shippers are willing to give. And that leads to shipper/carrier divorces that can be just as messy as personal ones.
In recent months, there have been several shocks to the transportation market including the schizophrenic impact of winter storms in Q1 (rates go up as volumes go down), the resulting repositioning of inventory to account for that disruption in Q2, and labor strikes at key U.S. ports. The resulting spikes in freight movements have given many core carriers the green light to begin redefining relationships with their shippers.
The problem is that these recent events are temporary and don’t represent sustainable overall improvements to the economy. Therefore, any carrier that digs its heels in too deep and refuses to negotiate or demands off-cycle rate increases will drive many of its shippers to find alternatives. When conditions stabilize, as they always do, the question will be “was the short-term decision worth the long-term outcome?”
When I talk to shippers, the needs they want core carriers to fulfill are straightforward:
- Reasonable rates – “bare bones” rates are not expected
- Good service – on time and accept ratios are satisfactory
- Serious commitment and flexibility when needed
- Recognition for offering efficiencies at facilities
- “Real” engineered and collaborative opportunities
Carriers that satisfy these needs don’t just keep relationships humming along, they also create rock-solid bonds. When shippers find carriers that are reliable and reasonable, they often give them the benefits of first right of refusal in procurement events and offer opportunities for new lanes. The rewards of building a respectful and symbiotic relationship are long term.
But when carriers try to take advantage of changing market conditions, the communication takes a more vapid turn and falls into a cacophony of battle cries: hours of service impact, driver issues, equipment costs, regulation, etc. Recent shifts in the market have increased the volume of these age-old messages, coupled with demands for off-cycle rate increases.
The key point is that shippers are willing to invest time on issues they can manage. If core carriers can work in concert with their shippers, then long term relationships are likely to last well into the future. If the conversations move to areas where the shipper has no control (i.e. driver shortages), the default reaction is to let it work itself out in a bid. Shippers have turned a deaf-ear to carrier problems they have no way to solve.
So are out-of-cycle rate increases based on temporary shocks to the market good strategy for core carriers? If you are not worried about shippers finding alternatives, then fire away. But if you’ve got a good relationship, I believe you need to protect it. Using temporary leverage to try to strong-arm a partner always ends in resentment and will strain the relationship until it is forced to break. In the last 15 years, sell-side strength has always been fleeting, and shippers ultimately always have options.
Matt Harding is Principal of the Transportation Practice at Chainalytics, where he leads the Freight Market Intelligence Consortium. Matt also contributes to projects involving large-scale procurement events and transportation management systems implementation.