Boom or bust: why dynamic RFPs are better for shippers and carriers
As the last year has shown, the time gap between cycles of boom and bust in the freight market has narrowed. This reality has led shippers to find new strategies to stay current with market conditions to more effectively buy transportation services at the best possible rates. During 2020 and 2021, shippers had to pivot from traditional request for proposal (RFP) processes. Many have found success with a dynamic RFP that enables them to work more closely with a limited number of preferred carriers to obtain lower rates on a consistent basis. Some cloud-based software systems are connecting shippers and carriers to conduct dynamic RFPs to lower costs and maximize service levels in tight freight markets. These systems can also position shippers to respond quickly when markets turn in their favor.
When markets are tight
Traditional shipper RFPs are large, annual events where shippers negotiate rates with carriers and award contracts for lanes and pricing. As soon as an RFP is complete the process begins to fall apart, however. Shippers cannot expect that carriers will commit to static rates months or years in advance of when they will actually provide the service. Freight contracts from a traditional RFP generally do not require carriers to accept all loads they are offered. The contracts are only for rates and lanes. Carriers have leeway to accept or reject loads, although shippers keep score. When the time comes to offer loads under contract, a shipper’s routing guide determines the order they are received by carriers. Those who submitted the lowest rates get the first choice.
If a carrier declines a load offer, the shipper offers the load to the next carrier in the routing guide at an increasingly higher rate. After a few carriers in the routing guide have declined loads the shipper is close to the spot market rate. In a tight market, shippers are competing for capacity that contract carriers are putting into the spot market to chase higher rates. The delta between contract and spot market pricing is usually between 23 and 35%, according to studies. If the load falls off a shipper’s routing guide it goes to the spot market, where it will most likely be hauled by a carrier that the shipper has not done business with before. With a Dynamic RFP, a shipper is able to offer contract loads to carriers to bid on through an open, reverse auction process that provides full transparency of market rates. When competing for repeat business, carriers will often submit bids below the market rate.
When markets are tight
When freight markets soften, shippers that use a dynamic RFP can more quickly achieve favorable rates. In a soft market spot rates may be lower than the contract rate, in which case a carrier that is first in a shipper’s routing guide is more likely to accept the load offer at a higher rate. In this instance the shipper misses out on cost savings that would come by having more carriers compete for its business. Motor carriers will adjust rates downward to prevent losing business in a tough market.
Dynamic RFPs create another cost-saving opportunity. They give carriers a chance to avoid a traditional RFP process that is tedious, time intensive and inefficient. Carriers are more likely to submit competitive bids when the process is fast, efficient and tied to present market conditions rather than having to predict the future. For more information about how the dynamic RFP process works in the Load Connex platform, read our latest whitepaper at: www.loadconnex.com/whitepaper or to request a demo of our platform, visit www.loadconnex.com.
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Boom or bust: why dynamic RFPs are better for shippers and carriers
As the last year has shown, the time gap between cycles of boom and bust in the freight market has narrowed. This reality has led shippers to find new strategies to stay current with market conditions to more effectively buy transportation services at the best possible rates. During 2020 and 2021, shippers had to pivot from traditional request for proposal (RFP) processes. Many have found success with a dynamic RFP that enables them to work more closely with a limited number of preferred carriers to obtain lower rates on a consistent basis.