There was a time when the government essentially set freight shipping rates; there was no such thing as a dynamically fluctuating rate or dynamic routing guide. Today, the trend is for both contracted and spot rates to become more transparent, more contractually nuanced, and for more tools to emerge to get the best out of any procurement event. However, we are not at the apex of this moment. There's just as much chance that we're in a rather languished, uninteresting, and mediocre period. Twenty years from now, we’ll look back and say, “Man, we didn't have smart contracts. We didn't have third-party robotic enforcement of payment terms.” It will look as arcane to our future selves as the idea that the government would set the rate to go from St. Louis to Chicago in a truck.
This article examines traditional pricing and routing guide methodologies and explores how dynamic routing guides will shape the future of freight contracts for shippers and carriers.
The Problem with Static Pricing & Routing Guides
Volatility in the supply chain is neither new nor unusual. Industry veterans are accustomed to seasonal fluctuations in market conditions and freight rates, which historically have been relatively predictable based on produce seasons and holiday peak schedules. Over the last decade, an increase in natural disasters and extreme weather events created additional freight market fluctuations with far less predictability. Then in 2020, COVID-19 caused a market shift so dramatic that the supply chain has been unable to recover to pre-pandemic levels, with experts predicting market instability and high freight rates well into 2023. Unfortunately, while the freight market has become increasingly dynamic, routing guides and most freight pricing models have not.
Traditional pricing models utilize annual RFPs to collect carrier rates and static routing guides to award freight. When a primary carrier rejects a freight tender, the tender goes out to a secondary backup carrier and so on down the list until it is accepted or runs out of carrier options. If no carrier accepts a tender in the routing guide, transportation planners must take the load to the unpredictable spot market, where they are at the mercy of carrier bids. In a constrained market, spot freight rates are likely to be much higher than contracted rates, so consistent tender rejections can quickly destroy an organization’s transportation budget.
Dynamic routing guides are essential for shippers and carriers who operate in the freight market, as they provide a defined sequence for tendering freight. However, there are three primary issues with traditional routing guides in a dynamic freight market:
- Static routing guides rely on static data. Carriers provide one-time pricing based on historical rate data and independent predictions of what the freight market will do in the year ahead. It is impossible to foresee and consider future disruptions caused by things like weather, pandemics, or global politics.
- Static routing guides do not guarantee capacity. In a capacity-constrained market, carriers will likely abandon pricing agreements and reject tenders that do not reflect current market prices. Since routing guides are not airtight contracts, shippers have little recourse and must source alternative capacity to keep freight moving.
- Failing routing guides increase freight spend. When market changes are favorable to carriers, they begin rejecting tenders or renegotiating rates to reflect current market conditions. Shippers either pay more to contracted carriers or send freight to the inflated spot market. Either way, their transportation costs increase.
Antiquated pricing methods and static routing guides simply lack the flexibility required to be effective in dynamic markets. Shippers need dynamic routing guides and data-driven pricing solutions that reflect real-time market rates on a shipment-by-shipment basis to succeed today.
How Technology is Changing Spot Market Pricing
Technology is undoubtedly changing how most industries operate, including supply chain and logistics. Numerous technology solutions attempt to drive efficiency in spot freight procurement by digitizing processes, but digitization alone has failed to deliver substantial improvements. TMS bid management platforms replace outdated email request processes and centralize carrier offers into a single hub but lack data intelligence to inform decision-making or minimize freight costs. Digital freight brokerages (DFBs) streamline quoting and booking processes with well-designed interfaces, but they still use the same pricing methods as traditional freight brokers. Therefore, DFBs have not delivered substantial cost savings.
Advanced technology solutions for spot freight pricing utilize artificial intelligence (AI) and machine learning to improve predictive abilities and deliver better outcomes in the dynamic spot market. Rather than relying on historical lane data to calculate an average “best guess” price, AI utilizes machine learning to compare the same historical data against actual human behavior to develop real-time pricing strategies. This combination of data science (statistical analytics) and behavioral science (behavioral analytics) allows AI technology to predict spot market rates and guide carrier profiling and smart tendering. Dynamic routing guides leverage this technology to help shippers optimize carrier selection.
Understanding why carriers accept spot market loads and tendering customized, relevant offers quickly is paramount when navigating the volatile, dynamic spot freight market. Carrier profiling technology utilizes machine learning to determine the decision-making patterns of individual carriers and identify carriers most likely to accept a spot load at a particular rate. Smart tendering is an automated, AI-driven process of tendering spot freight to deliver a balance of speed, cost savings, and ability to secure capacity. Smart tendering eliminates bid systems by driving customized offers based on carrier profile data, providing carriers with instantly accessible load tenders. Combining these two powerful technologies in a dynamic routing guide approach ensures the best possible spot freight outcomes for procurement teams and streamlines processes for carriers booking spot loads.
AI and machine learning are rapidly changing how shippers navigate the spot freight market with advanced predictive pricing capabilities. How can we harness this same predictive power in routing guides and long-term freight contracts?
The Shift to Dynamic Routing Guides
Routing guides are essential for shippers and carriers who operate in the fast-paced, dynamic freight market. Traditionally, shippers have followed the same sequence of carriers in a static way, cascading tenders until a backup carrier accepts the load. The system works until it doesn’t—and constrained markets are fertile ground for routing guide tender rejections, increased exposure in the spot market, and overblown transportation budgets. Moving from a traditionally static routing guide to a dynamic one will help overcome this challenge.
To succeed today, shippers need a data-driven routing guide, with the data itself changing the routing guide’s sequence at runtime on a shipment-by-shipment, moment-by-moment basis. As long as there is trust that the system works correctly and it's not going to fail (crashing with no tenders going out), there's a tangible competitive advantage with moving to a dynamic routing guide. Fortunately, modern AI is capable of automating pricing predictions and tender strategies without any human oversight—significantly shortening turnaround time and streamlining processes. There still may be some hesitation to turn pricing entirely over to computers. However, it is important to recognize that AI technologies are designed to process a massive amount of data and perform complex analytics at a rate that humans cannot, allowing them to find solutions quickly, efficiently, and accurately.
Contracts Are Evolving Too
Some of the current players are starting to understand they can track pricing in a more dynamic way and build into some of the contracts to move with the spot market instead of being rigid. Things will be much more fluid, and contracts will evolve, just like NFTs (non-fungible tokens) or the blockchain. The handling of fuel contractually is an excellent example of this evolution.
There was a time when a shipper’s contracted shipment rate included fuel. Then significant indexes emerged where shippers could ensure that the fuel purchased for a vehicle correlated to a published index, and the indices were not free. Still, they were available if you got access to the relationships. The contracting process started splitting out, one paying for linehaul and another for fuel, tied to this index. With fuel obviously more volatile than the linehaul rate, shippers who don’t want to be exposed to the fuel can buy a hedge on that exact index. On the other side of that trade, the entity isn’t the trucking company but a financial institution willing to take the bet with a shipper on the fuel costs.
The cost of fuel is just one example of changes emerging in the spot market and contracted freight that allows other creative split-outs.
How AI & Machine Learning, Data & Behavioral Science will Improve Pricing Predictions & Contract RFPs
Dynamic routing guides help ensure shippers tender shipments to the right mode and carrier while securing the best rates in the shortest amount of time. Every carrier has its price; that sweet spot where historically they accept a tender. Shippers can utilize AI automation and machine learning technologies to quickly identify past pricing and tender acceptance patterns across a wide range of carriers without human emotions getting in the way—it’s solely based on data science. At the same time, behavioral science provides shippers with actionable data-based insights into carriers and gently nudges them toward the desired price point.
And all of this happens at the speed of business, making a dynamic routing guide an essential component in securing freight capacity. TNX Logistics helps streamline the process through a robust mix of AI and machine learning that harnesses the power of data science and behavioral science to accurately predict freight rate prices in a dynamic routing guide. To learn more, schedule a demo today.