Perfect Your Spot/Contract Mix

My thoughts on Autonomous Quotation, a trailblazing milestone in the digitization of Europe’s road transport industry​​

The benefits of market rates transparency and procurement automation for the capacity buy-side (shippers) are already becoming clear. The opportunity to transform and digitize the sell-side (carriers and brokers) is equally big – but nobody is talking about it. Until now – indeed, McKinsey has just released a White Paper which should help kick-start a long overdue conversation. 

As recently as 15 months ago, information about market rates in the truckload market was simply unavailable – you could find the stock price of any listed company with just a few clicks, but not ‘today’s spot price’ for a truckload between Frankfurt and Paris. It baffled me that, in 2021, there could be such a lack of transparency in an industry so crucial to society’s wellbeing. 

The good news is that the industry has now moved on, and that gap has now been closed, with the birth of Transporeon’s Market Insights. With the imminent launch of an Autonomous Quotation module for spot truckload in Europe, it feels like a good time to reflect on what these technology advances might mean for asset owners and brokers. 

Looking back, it is fair to say that spot procurement was often seen as a ‘bad thing’ by procurement professionals working for shippers; it was as if they saw it as a tacit admission that their procurement and execution strategy had failed. It has often been used by shippers as an exception management tool, such as when they are looking for extra capacity, or when their contracted carrier didn’t stick to a commitment, for whatever reason.   

Spot procurement ought to be an integral part of the tactical and strategic procurement toolbox for shippers. Our acquisition of TNX Logistics allowed us to offer shippers a way to automate their spot procurement as much or as little as they wish, up to and including a fully autonomous process.  

So, with similar opportunities now available to the other side of the marketplace, what might the future look like? 

Transparency + liquidity + choice = improved market efficiency (and all parties win)

Before the availability of Transporeon Market Insights, many carriers were pricing contracted and spot loads based on one or both of two starting points: either “We have always done it for that rate” or by assessing their most recent subjective experience about ‘the market’ as they viewed it. A typical example of the latter might be: “Three shippers told me over the phone today that there are no trucks in XYZ.” Sounds like fertile ground for confirmation bias, doesn’t it?  

Yes, the more advanced players had their own data science teams, building and refining pricing algorithms, but they were missing one key component to make things even better – neutral and statistically significant market information. That particular piece of the jigsaw is now available to them.  

Now we move to the next phase – from “What is the historical price development on a certain country-country, or region-region lane?” to “What should the fair market price be for a specific spot load, with the agreed operational requirements and lead times, plus the target margin, for me as a seller?”  

Why are we doing this? Because automated transactional pricing, where ‘buying’ and ‘selling’ algorithms compete, will continue to gain market share – in short, dynamic pricing is here to stay. Yes, people and relationships will always matter, but most spot transactions will be further automated to reduce friction for both buyers and sellers. 

Sounds too futuristic? I beg to differ. It has already been happening for several years – the more technologically advanced 3PLs (also the capital to invest) are automating their spot and even long-term contract pricing processes as you read this. They do face a challenge, though, because most are building their algorithms based on their own historical data. Due to the fragmented FTL capacity market, very few have enough data on enough lanes to ‘represent ‘the whole market’ (even if the data is already consolidated into a single data lake, which is rarely the case).

Increase selling opportunities at no extra cost

So, what is Autonomous Quotation exactly? In a nutshell, it automates the complete spot quoting process for capacity sellers, enabling them to significantly increase the number of opportunities they quote without increasing their operating expenses (i.e. by hiring more dispatchers / brokers to take the strain). 

Configuration allows every player in the marketplace to decide on their own what is an acceptable margin for them. What is your cost structure and profitability target? How well does that load/lane fit into your own existing network (taking into account, say, backload, reducing empty mileage, or repositioning your truck for the next secured load)? What is your overall strategy on this specific lane, both with this customer, and more widely? Do you want to grow aggressively, potentially sacrificing some margin, or do you prefer a more conservative approach to volume growth, putting your focus into maximizing profitability per load? All these factors can be part of the equation. 

At this point the system takes over and does the work for you, and it does it 24/7, 365 days a year. By integrating with major TMS vendors, we also serve as a demand aggregation layer, enabling carriers to access a much broader part of the market and quote significantly more spot business. We have carriers calling our API and quoting tens of thousands of spot loads per day, which is way more than before. There are multiple reasons for this: 

• Demand aggregation – imagine you have one place and one algorithm to quote business for all your customers and prospects. Incidentally, this also works for more advanced players with their own algorithms, as they can ‘write’ their price into the API. 

• Changing market dynamics – the increased liquidity in the marketplace and the choice that such solutions provide to shippers has not gone unnoticed by them. Many are now also checking every single contracted load on the spot market. This allows them to dynamically change the routing guide and promote spot to (usually) second place after their number one contracted carrier (you want to keep those relationships intact), but before the backup contracted carriers (as spot can be significantly cheaper in some cases).

What’s in it for carriers and brokers/3PLs? 

We believe these opportunities provide capacity sellers with the option to aggregate (spot) demand and price it automatically – in essence, this can become their largest sales channel on the spot market. Some of the benefits that come to mind:  

• For asset operators, there is an opportunity to utilise capacity in a better and more efficient way and maximise the return on their assets. We have other products available that, while conducting the itinerary planning for assets, consider which loads should be hauled via own assets and which might be subcontracted most effectively. 

• For asset-light and asset-free 3PLs, there is an opportunity to develop an automated quotation process and generate more demand. Companies can decouple the spot loads quotation process/volume from the number of account managers they have. The other large benefit is that, by accepting more loads, you can push your capacity teams to cover more loads and increase your velocity and absolute gross profit as a result (by the way, booking velocity is one of my favourite topics, but that requires its own article)
   

• For both parties, increased automation of your own processes improves productivity and reduces your cost-to-sell and cost-to-serve per load
    

• I’ll leave the sums to you, but just imagine if you could improve your win rate and/or your gross profit per spot load by 1%... 

We are still in the early days of dynamic automated pricing. Some innovators and early adopters amongst the asset-owners and 3PLs/brokers are already working hard but the real benefit for the industry will come when the early and late majority join them. And they will – this trend is irreversible.  

If you’re not convinced, just look at the financial markets. I had the privilege to visit the brokerage floor of a major global bank in London some years ago to learn about their digitization journey. I saw how the way people buy and sell financial instruments has changed dramatically in the last three decades. Back in the day, you had to call a broker, who was constantly talking on several telephones at the same time (sound familiar?). Five years ago, when I visited, it was all algorithms matching supply and demand and executing millions of transactions per day on behalf of customers. If you want to talk to a human being, you’d better have several million euros on your brokerage account, otherwise, you have no chance.  

The transportation industry is on the same journey. It started later than in banking, and it may take more time, – but we are making progress, and the pace of change is accelerating. Don’t get left behind.