The forecast for 2017 is that truckload shipping rates will rise. What can shippers do to insulate themselves from such increases? The best tactic is to hope for the best but plan for the worst, and that means locking in contracts, building relationships and thinking long-term.
The best course of action is the same we recommended previously, when we wrote about the Panama Canal expansion: Lock in your contracts now. Then, we reported that “shippers who wish ‘to capitalize on efficiency gains and infrastructure improvements already taking hold,’ as Inbound Logistics writes, need to move quickly to ensure they have motor carrier relationships in place before capacity tightens.”
Today, we would add that locking in contracts, potentially with multi-year agreements, is the best way to hedge against uncertainty. Shippers are likely to face an unenviable mix of higher rates and more uncertainty in 2017 based on a number of factors.
One factor to consider is how shippers use the spot market. When rates rise, some shippers try to avoid rising contract rates by using the spot market. Unfortunately, this strategy often backfires.
Looking for the lowest bids, shippers send out requirements to a long list of brokers. The spot market counts each shipment multiple times, artificially increasing demand. Of course, when demand goes up, truckers will look for the highest payouts, which raises prices.
While it may not seem logical at first, locking in contracts will produce the best outcomes.
The factors potentially driving higher rates do not affect all carriers equally, and some carriers will be partially insulated from the push to increase rates dramatically. Not all carriers are facing a correction in truckload capacity, and not all carriers suffer equally from the existing driver shortage.
For example, our company boasts driver turnover that is less than half of the national average. This is largely due to referrals from our current drivers. We find that word-of-mouth recruiting helps us locate drivers who already know about our business and have heard of how we treat our company drivers.
Of course, having a top-notch recruiting team able to find quality drivers in a pinch is another factor that helps shield us from experiencing a shortage of drivers.
In 2016, some shippers took advantage of market conditions, like falling truckload capacity, to re-bid freight. John Larkin, managing director and head of transportation capital markets research at Stifel Financial Corp., was quoted by FleetOwner as saying:
“Maybe 20 percent of the shippers out there went out to re-bid freight…. It is still our belief that greater shipper/carrier collaboration is an untapped resource.”
Both shippers and carriers need to get creative about finding ways to collaborate for their mutual benefit. For example, shippers don’t want to cut back production because carriers aren’t available to ship their products. On the other hand, carriers don’t want to reduce capacity in an uncertain market.
One solution to this problem could be guaranteed capacity contracts. Shippers can coordinate plant operations with shipping availability, and carriers can maintain capacity levels because they’ve been able to plan ahead.
Establishing strong working relationships with carriers offers several advantages. A strong carrier partner will be more likely to go out of its way if problems arise. In addition, shippers will get the best prices from strong partners. Overall, collaboration is the best way for shippers to ensure that carriers will prioritize their loads.
While 2017 may be a year of uncertainty for the trucking industry, among others, there are strategies that will help shippers prosper. Shippers that focus on establishing collaborative working relationships with strong carriers will avoid the worst problems typically caused by rising rates and falling capacity.