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Shopping for the lowest price seems like a no-brainer in any buying situation. But, how can seeking lower prices in the short term negatively impact your bottom line in the long term?
We’re talking about truckload and bulk shippers’ use of annual RFQs for determining the right carriers to handle specific lanes, usually secured early in the fiscal year. In this industry-standard method, shippers seek a predictable and repeatable schedule with one or a few companies over a long period of time. Contrast this with the spot market where shippers put individual loads out to bid from several carriers via brokerages.
In both cases, the transportation company with the lowest price usually earns the business. However, spot market rates are almost always higher than rates previously agreed upon between shipper and carrier. While the spot market and RFQs have their place in just about every shipper’s supply chain, there are disadvantages to relying too much on either of these practices.
Hidden Costs of Accepting Lowest-Bid RFQs
In any situation where bids are solicited, the lowest offered price is typically the one that is accepted. But, could this low price eventually come back to bite a shipper seeking dedicated lanes in an RFQ?
The typical terms of an RFQ arrangement last for one year. Over this time period, the shipper can expect for their load to be handled at a pre-set price, saving both parties from renegotiating on each shipment and protecting the shipper from mild fluctuations in market pricing.
However, during certain periods of reduced capacity, a carrier might not be able to offer their lane at the agreed-upon price. This is because when demand surges, the price to transport the same load increases alongside it.
If the carrier is unable to serve their awarded lane during a busy season, the shipper will be at the mercy of the spot market, and will often pay a substantially higher price than the RFQ rate they’re accustomed to.
Compromise on Price Instead
It’s in the carrier and the shipper’s best interest to strike an agreement price that is higher than bare minimum (the shippers’ initial target in the RFQ) but below the spot market rate. This way, the carrier can generate enough profit during the normal season to make up for missed spot market positions in the busy season. Their capacity is extended to the RFQ shipper as normal, and although the shipper is paying slightly more per mile throughout the season, their actual payments over the year are essentially flat. The shipper also saves resources against the logistics and communications requirements of shifting a load to the spot market.
Advantages of Dedicated Shipping Lanes
TSD Logistics is a big proponent of strengthening shipper-carrier relationships, and we have covered the benefits thereof extensively in this blog.
Better Customer Outcomes
When a shipper’s customers know the drivers who bring their loads, everyone works more efficiently and can anticipate each other’s needs. The driver is the face of both the carrier and the shipper (in most cases), so firms that excel at recruiting and retaining quality drivers should be the most attractive targets.
Taking Advantage of Innovation and New Technology
Any carrier serious about competitive advantage and growth in this crowded industry is constantly striving to find ways to improve their business. A shipper with a long-standing carrier relationship is likely to be selected to pilot a new carrier technology or program, giving them first-mover advantage versus other firms competing to lower their own supply chain costs.
Consider the Entire Value Chain
In short, the cost-effectiveness and efficacy of a shipper’s supply chain depends on a lot more than simply a per-mile rate. Strategic companies consider year-round carrier availability, the strength of their business relationships, and access the new technology and process innovation alongside the more obvious factors like cost when making shipping decisions.