Goodbye, Goldilocks; Volatility Is Here to Stay, and RFP’s Play a Major Part
Historically, myriad reoccurring factors play into pricing volatility in transportation markets. Regulatory pressures, seasonal demands, weather-related disruptions, and driver supply and demand converge to shape the market. Now we have seen the staggering, unprecedented impact of Covid-19, and the resulting over-supply of capacity as transportation segments such as food service and energy came to a halt. But in the midst of all these factors, another essential catalyst to volatility is largely overlooked: the proliferation of RFP’s.
As more and more procurement departments take over transportation “buys” and roll out RFP’s, asset-based carriers find themselves in an untenable position. They need to keep their trucks moving, and often they are faced with the decision either to accept rates below cost-sustainability, or to choose to dig in, park trucks, lay-off workers and refuse to accept unprofitable business. Most choose the former, because experienced owners know that the markets ebb and flow, and the pricing market will eventually turn in their favor. The deleterious economic impact of the pandemic has certainly made that determination a more difficult call. An already weak transportation market became frighteningly soft. These conditions also entice many shippers to bid aggressively and extract deep rate concessions.
Yet asset-based OTR transportation is a high-risk, capital-intensive, low-margin business, and carriers cannot weather the storm as in years past. While rates and volumes have plummeted, costs are on the rise. Insurance markets are skyrocketing, with increases not seen in over a decade. Tolls are increasing and proliferating. Covid-19 related costs abound. Even the most well-run carriers are hurting.
Carrier bankruptcies will accelerate. Carriers with private equity ownership groups are generally the quickest to the exits, as they do not have deep-rooted connections to the company, the drivers and the employees as family ownership usually does.
Many well-run trucking companies are now forced to downsize, or to go out of business, particularly once short-term safety nets like the PPP Loan Program elapse. Owner-Operators, often overly dependent on the spot market, are exiting the sector. As capacity shrinks quickly, massive volatility invariably ensues, and prices spike more violently than they otherwise would.
Most large freight shippers now leverage their transportation spend via an RFP. Rates are frequently driven below cost, and then long-term contracts prolong the pain for asset-based carriers. Numerous RFP’s also erode a carrier’s ability to build and sustain a regular network, as awards vary year to year. A mercurial network is inherently less efficient and far more difficult to manage.
RFP’s truly exacerbate market volatility, and eventually one side or another is exposed to extreme market pressures. To best manage volatility, shippers and carriers must forge direct, sustainable partnerships. This approach hedges both shippers and carriers to the dangers of market volatility, and it creates a system in which shippers can effectively manage costs and forecast an accurate transportation budget, while carriers receive the volume and network assurance to invest in technology, sustainability, people, and safety.
The mission of Select Carriers is to forge such strategic partnerships. We stand ready to help you minimize volatility and create sustainable, high-quality capacity solutions with asset based carriers.