Shifting Strategies to Combat Rising Freight Costs

Between September 2020 and September 2021, shippers saw the average global container freight rate rise by 3x, with some spot rates climbing by more than 700%. By March 2022, the Logistics Manager’s Index (LMI) saw the highest recorded score in its history, driven primarily by surges in transportation costs.

To combat these rate spikes, shippers turned to the increased use of mini-bids, or the practice of putting selected freight routes out to bid monthly or quarterly, rather than annually as had been typical. The use of mini-bids allows shippers to shift specific routes to the lowest bidder wherever there is capacity in the market. The shorter-term commitment of a mini-bid could help reduce the risk of overspending if and as rates in the market decline.

Risks of the mini-bid strategy

Unfortunately, the overuse of mini-bids creates issues for both shippers and carriers. For shippers looking solely to offset rising transportation lane rates, the overreliance on mini-bids may turn the network into one run only by the lowest bidders. Internally, with the directive of “find cheaper options,” transportation procurement teams can quickly lose sight of the need to balance cost with service levels. A mini-bid strategy encourages carriers to underbid to win the business. Often, they are unable to adequately service those lanes while remaining profitable. For companies where on-time performance is critical, this strategy could quickly lead to costly disruptions across the business.

In addition, mini-bids are a time-consuming and resource-intensive strategy to deploy. Four to twelve times per year, per route selected for bid, shippers using this strategy must dedicate resources to vet the carrier pool, administer the bid event, analyze the results, finalize negotiations, and then operationally onboard the carrier to the lane. There is also no guarantee that the bid events will even produce the intended savings. In some cases, the resource cost alone overwhelms the savings identified.
 
Another unintended consequence of mini-bids is the significant damage the strategy does to carrier-shipper relationships. If carriers continually lose freight routes to the lowest bidder despite strong historic performance, their overall view of the relationship will sour. Even the most engaged partners quickly lose interest, resulting in a shallower carrier base which limits competition and increases the risk of uncovered routes in the future. Carrier partners can no longer count on your company’s freight fitting like a puzzle piece into their network. By degrading the relationship to a purely transactional one, shippers eliminate the opportunity to forge deep relationships with their carrier base that result in greater predictability for both parties, higher service levels, and increased efficiencies over time.

Optimizing your freight strategy

Mini-bids can be an effective tool to keep transportation prices close to the market, when deployed strategically.

We continue to see strong signs of transportation prices declining. As of June 2023, the average global container freight rate was back to pre-COVID prices of under $1,500. The August 2023 LMI has been tracking contracting transportation rates for five consecutive months. These conditions of a depressed shipping market across all modes might look attractive to shippers to forgo an annual bid event and continue to use the mini-bid strategy to recover the overspend of the last two years. Our best advice is to avoid the tendency to grab for short-term savings and think long-term.

The freight market is cyclical. The best thing a shipper can do is understand where the market is currently and what that means for rates. When negotiating rates, the focus should not be solely on dollars and cents. Instead, open up the scope of negotiations to discuss issues beyond just the price, to opportunities to drive efficiencies across your operations (thus reducing costs) and enhance service levels. For example, can the carrier share billing data electronically and reduce the time your accounting team spends auditing invoices? Can the carrier send automatic updates directly to the logistics team and reduce the manual track and trace element? These automated, value-added processes help to reduce the back-office burden of shippers which ultimately translates to savings.

While price should not always be the sole focus, shippers should also avoid overspending on freight simply to maintain a relationship with a carrier. Strategic mini-bids add value in helping shippers source dedicated capacity on new lanes as well as resource lanes serviced by under-performing primary carriers. They have a place in the transportation networks of shippers today but should be used in a limited manner and with visibility into the potential administrative and relational costs that come with the approach.

The companies that will succeed, whether the market is up or down, will have a clearly defined bid cadence and manage to excellence. In addition to a consistent freight bid cycle, companies must conduct regular reviews of their networks for irregularities such as high volumes of freight on the spot market and underperformance for on-time service or tender acceptance. Shippers should also work closely with their carrier partners to give them opportunities to provide value-added services such as automated invoicing and track and trace capabilities.

It is easy to see the continued downshift in freight rates as an opportunity to salvage transportation overspending from the past several years. Still, as companies prepare their 2024 budgets and strategies, they should remember that freight rates are one piece of a comprehensive transportation procurement strategy.

About the authors:

Corey DeSantis is a manager in BDO USA’s Supply Chain Practice where his work focuses on helping leading companies optimize their logistics and supply chain strategies, negotiate and manage carrier relationships, and implement technological solutions. He can be reached at [email protected].

Ashley Hetrick is a leader in BDO USA’s Supply Chain Advisory Practice. She has more than 15 years of experience working with procurement and supply chain organizations across supplier negotiations and relationship management, cost reduction strategies, procurement and supply chain transformation, supply chain resiliency, and business process mapping and reengineering. Ashley also designs and delivers training programs for procurement, supply chain, and operations teams. She can be reached at [email protected].

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