With all the uncertainty revolving around the logistics industry there is one thing that is constant – freight rates are rising. According to a report issued by Bloomberg midway through this year, spot rates have increased by 28% compared to 2017. Trans4cast reports that rates continue to make new record highs with no end in sight. It is projected that rate hikes will slow down in 2019; however, with a slew of new tariffs coming into effect in January, and FedEx and UPS announcing rate increases of 4.9%, it is clear that shippers will not be able to catch a break any time soon.
As logistics managers and operators, how do you respond to this? It is clear that shippers are now playing a whole new ball game when it comes to finding new ways to reduce freight rates and keep them as low as the industry will allow. How do you do this? The first step is to understand why rates are going through the roof.
Reasons For Rising Rates
A Strong Economy
The U.S. has experienced a substantial economic uptick in recent years and with that uptick comes increased consumer demand. With increased confidence and buying power, consumers are taking products off the shelves and ordering products online unlike ever before. Retailers, following in the wake of Amazon, are offering free or reduced shipping for an increasing number of products.
Needless to say, the logistics industry is pinned between the supplier, manufacturer, and consumer, making sure every customer gets their product delivered within that precious window of time. Demand for carriers has never been higher.
Driver Shortage and Regulations
To compound the problem, commercial drivers are retiring from the workforce and millennials are not interested in filling that gap. Consequently, capacity is tight and the driver deficit is as high as it’s ever been. Additionally, with the Electronic Logging Device (ELD) regulation imposed in Dec. 2017, Drivers are limited to 14 hours on the clock per day, 11 of which can be spent driving. Although this may seem like a lot, drivers report losing time and money due to ELD logging because a lot of that time can be spent at a dock or waiting for paperwork.
Rising Fuel Rates
Additionally, fuel demand has risen and so have prices. As of October 2018, the price of fuel has risen 20% from what it was the same time last year. Rising fuel prices have caused additional fuel surcharges from carriers and have consequently raised rates for shippers.
As mentioned above, tariffs and trade wars have also had their own impact on the economy and the prices required for the transportation and sale of goods. Tariffs are a hot topic in the shipping world these days and will continue to influence the rise of shipping rates in these coming years.
So what does this mean for shippers looking to get the best rates? What are the first steps you need to take in order to keep your rates low? In the remainder of this article we lay out some questions you ought to ask yourself to get started on the path to lower rates.
Questions to Ask to Determine if You are Getting the Best Rates
Is the Packaging Optimized for Shipping?
Logistics managers cannot understate the importance of packaging. The dimensions and weight of your freight and how it is packaged is huge in determining the price to ship it. Standardizing your packaging and cutting down the space it occupies could very well save your company thousands on each shipment. The NMFTA’s Freight Classification and True Density templates help standardize rates for every type of shipment and get updated periodically to make way for new products in the market or updated regulations.
Without knowing the class of your freight, you could be paying inflated rates without knowing it. If you send some class 60 freight and you misclassify it as class 65, you will be overcharged. Conversely, if you classify class 65 freight as class 60, you will have to pay a reclassification fee before shipping it.
In order to save a lot of hassle and money, always make absolutely sure that you package and classify your freight correctly.
Are the Accessorials Warranted and Fairly Priced?
Accessorials are often a necessary evil of shipping and almost anything can be considered an accessorial depending on the carrier that you use. In the event of an unforeseen accessorial, make a point to discuss and negotiate the accessorial fee, but the best practice is to be well-educated about the accessorials that could potentially be incurred.
Carriers have the right to implement their own accessorial rates; there is no standardized rule book for what does and what does not incur an accessorial fee and how much. However; every carrier is required to publish their list of standard tariffs and accessorial fees. Do the extra work to find out what each carrier charges for the each accessorial.
Also do the work to make sure that you do not accidentally incur the accessorial and negotiate with the shipper upon contracting to waive certain accessorials. Ask yourself, do we need lift gate service? Do we need that many ratchet straps? Do we really need them to call ahead of time? Cutting down on accessorials reduces costs substantially in the long run. Initiating the conversations to set your accessorial agreement in place is well worth the time.
Are You a Shipper of Choice?
In today’s market, shippers are at the mercy of the carriers. The more attractive you are to carriers the more likely they will be to do business with you and give you discounted rates on their services. Becoming a shipper of choice gives you leverage with carriers and puts you at an advantage in the market.
Review our pathway to becoming a shipper of choice here.
Are You using the Correct Mode?
Mode shifting has become standard practice in the logistics industry today. The Intermodal Association of America (IANA) reports that over 17.5 Million loads of freight have been shipped by intermodal in 2018. By evaluating the modes you use to transport freight you can reduce costs dramatically and improve the overall efficiency of your supply chain.
Learn more about Transportation Modes here.
Are You Using Your Carrier Network Effectively?
For the sake of negotiations and convenience, it is important that your company establishes carrier contracts. Last year, spot rates rose 28% for one time shippers. Contract rates, on the other hand, rose only 12% further showing that shippers that work on a regular basis with a carrier are guaranteed to get lower rates.
By working consistently with only a few select carriers, your company leverages economies of scale with the carrier and is able to negotiate lower rates than a shipper who works with numerous carriers periodically. If a shipper is in the habit of hiring one-time carriers, they are receiving unpredictable rates. By having a consistent network of carriers, you build relationships and are able to build a consistent schedule for moving freight, and consistent rates rather than having to negotiate rates with multiple carriers.
Are Your Carriers Giving You Honest Discounts?
When negotiating discounts with your carrier keep in mind: not all discounts are created equal and not all carriers use the same base rate. One carrier may offer you a 20% discount and another carrier may offer an 80% discount; however, depending on the different base rates the carriers use, you may end up paying higher rates with the 80% discount.
Was the carrier dishonest? No, they just weren’t transparent with the standard base rate they use. Czarlite® LTL Base Rate is the industry standard for base rate benchmarking. The majority of carriers operate by the Czarlite standard, but not all carriers do; some operate by their own standard. Every carrier is within their own rights to operate by their own standard but don’t be blindsided by an ambiguous rate structure. Request full transparency from your carrier and plan accordingly.
Is Your Information Up-To-Date?
With the rate fluctuations in the market it is important that a shipper stays up-to-date on market trends and standard practices. By knowing the trends in the market, you can properly benchmark where your rates should be. A good practice is to keep your rates just below the average national spot rates for TL and to judge the market trends and plan accordingly for LTL.
Building your knowledgebase with quality reporting, newsletters, and journals is advantageous. The Department of Transportation (DAT) releases national spot rates, fuel prices, and load-to-truck ratios on a regular basis.
Rather than doing the work yourself, you can outsource a 3PL. 3PLs keep up-to-date records for current trends and are constantly studying the market for the cheapest freight rates. A 3PL will establish well researched benchmarks for your company and work to keep your rates under those benchmarks and conduct educated and informed negotiations with all your carriers. A modern TMS also calculates the best rates for your freight and auto-updates with the best rates available on the market.
Where Do You Begin?
In this market, shippers have to be comfortable with spending more. Rates will rise despite your best efforts. But simply acknowledging that rates will rise does not justify rolling over and allowing your increasing transportation spend to eat into your bottom-line.
Now is the time to be proactive about keeping your rates as low as possible. Build the relationships, research the market, and have the conversations concerning your freight rates that no one else wants to have. The market is very promising for those who are willing to fight against the current.