Contract Rates: What to Expect on 2018 RFP Responses
It’s no secret that spot market rates are climbing and capacity is tightening. As we mentioned in our last blog post, the national load-to-truck ratio for dry shipments reached a seven-year high in September, up 120 percent over September 2016. Demand for refrigerated capacity in September was also up, reaching its highest monthly load-to-truck ratio in more than two years.
Hurricanes Harvey and Irma contributed to rate increases, but other factors were in play as well. Increased port volumes back in July led to more truckload demand in September, the economy continued to show signs of improvement in Q3, and growers experienced a strong harvest season. With the electronic logging device (ELD) mandate deadline looming and a robust holiday shopping season on the horizon, capacity is expected to remain tight for the coming months.
But what about contract rates? Evidence shows they are also on the rise, with many carriers already upping their prices—many by more than 10 percent, and in some cases by up to 30 percent. Because the freight market is in the midst of an inflationary period, shippers must plan carefully to avoid disruption as they head into the 2018 RFP season.
Evidence to Support Contract Rate Increases
When renewing annual freight contracts in the fourth quarter of 2017 or the first half of 2018, shippers can expect higher rates for a variety of reasons.
- The ELD mandate may cause a significant capacity shortage come December. Some experts predict it will remove 20 percent of capacity from the road, as truckers who currently drive over the daily hours-of-service limit will be forced to stop doing so. Further, a recent survey by C.J. Driscoll & Associates found that only 60 percent of carriers have ELDs installed to date.
- Manufacturing is on the rise. The PMI index, used by the Institute of Supply Management to measure manufacturing growth has been on an upward trajectory for 13 straight months and is currently at its highest level since August 2011.
- The retail sector is strong. The National Retail Federation has forecasted a strong holiday shopping season, estimating that holiday retail sales will be up 4 percent annually.
- The supply of drivers is decreasing rapidly. The shortage of qualified truck drivers is projected to hit an all-time high of 50,000 by the end of the year. Many drivers are nearing retirement, and other younger drivers are finding more favorable work elsewhere in construction jobs—especially in the wake of recent hurricanes—or as Uber drivers.
- We’ve seen this before. Many industry veterans will remember similar market conditions in 2003 when President George W. Bush and Congress passed a stimulus package that increased GDP and spending. Shippers began competing with each other for trucks and rates rose. At the same time, FMCSA’s hours-of-service mandate took effect, further reducing driver productivity. All of this didn’t let up until 2005. Some would argue that today’s market is worse, as trucking is at 95% capacity—tighter than it was in 2003 (Transport Topics).
When you pair a shortage of capacity and drivers with increased production and spending, truckload prices will inevitably rise. Primary carriers are likely to raise contract pricing in the upcoming RFP season to ensure reliable, on-time service for their shippers.
What’s a Shipper to Do?
Smart shippers should plan carefully over the next few months to mitigate supply chain disruptions. Below are four tips for navigating RFP season when capacity is tight.
- Set a realistic transportation budget. Analyze each lane and take into consideration the factors impacting price on a macro level—like rising fuel costs, natural disasters, import volumes, regulatory pressures, etc. The more informed you are going into contract negotiations, the better. To offset rate increases, consider operational changes you may be able to make elsewhere in your business when budgeting—from finance, to customer service, to panning, to production, to vendors.
- Negotiate short-term contracts. To ensure service standards are upheld through Q4, consider paying higher contract rates for a shortened period, with the option to revisit pricing on a quarterly or monthly basis.
- Expect revised accessorial schedules. Carriers may get more creative with surcharges and other fees. As often happens during peak seasons, accessorial fees could increase at a faster pace than general service rates in the coming months.
- Analyze your network. During the RFP bidding process, make sure your blend of primary and backup carriers have proven experience providing reliable coverage. Incorporate a few of your most dependable brokers alongside your core carriers to handle excess demand. The right partners will focus on long-term relationships and work with you on mutually beneficial solutions.
Economic change is inevitable in any marketplace and Capstone has experience helping customers navigate challenges along the way, from economic shifts and regulatory compliance to technology upgrades and disruptive trends. Contact us to get the most out of your shipping dollars in 2018 and beyond.