People
Supply chain disruption has brought record high transportation costs over the past two years. Shippers – and eventually consumers – have been feeling the crushing pain of this inflation. However, we have likely reached the peak and are now beyond the inflection point for transportation rate increases. The time is now for shippers to act to take advantage of these cost reductions through rapid – and aggressive – renegotiations.
On average, freight rates have dropped 28% YTD across ocean, trucking, and air modes. Across major modes of cargo transportation, the same trend is apparent. Congestion in major U.S. ports has shifted from the West Coast to East Coast, and incremental available capacity is now within international (ocean and air) markets.
A key metric to prove this out is the Inventory to Sales Ratio of companies across the U.S. market. Since the beginning of the COVID-19 pandemic in the U.S., March 10, 2020, we have seen this metric drop to record lows as companies could not bring inventory to market fast enough to meet consumer demand. Now, for the first time since the pandemic, the economy is consistently seeing a rise in this metric over a 6-month period. Corresponding increases and decreases in transportation rates have mirrored this key inventory metric.
The magnitude at which rates have fallen over the last few months is astounding. As shippers navigate a potential freight recession, they must also consider the continual tradeoff between cost and service. The matrix below highlights just how much the cost and service dynamic has evolved this year across the three major freight modes.
Among the more subtle yet impactful reductions in freight rates is Truckload. The 21% YTD reduction in spot rates is significant for the U.S. economy. Importantly, this reduction has happened on both the spot and contract markets, while the premium between spot and contract markets has maintained a 20% average over the last few months. The market has presented a massive opportunity for shippers to take advantage of the spot market as dry van rates continue to drop.
How should companies who are shipping product take action?
The time is now for shippers to take action and leverage the recent favorable changes in the freight market. Shippers should consider:
- Rapid Renegotiation: Anyone not asking for a cost concession is leaving money on the table
- Setting rapid and aggressive goals for transportation procurement groups
- Don’t be afraid to “rock the boat” with carriers. These are exceptional times, and what has worked in the past may not be a reliable predictor of progress in the current market
- Don’t leave any rocks unturned. Shippers should target all lanes and modes for cost reduction and pressure test their volume allocation between contract, spot, and virtual load boards
- Don’t be afraid to ask. Ask current suppliers for reductions – everyone else is
- Rethinking volume allocation strategy. Adjusting the use of contract, spot, and virtual load boards across the network can optimize costs and also ensure core carrier base rates remain market appropriate
No lanes or carriers should be off limits to this exercise. No exceptions!
