3 myths about long-term carrier contracts with fixed rates by Transporeon

Glass globe on city street

What amounts to the highest costs in logistics besides fuel, driver fees, insurance and other fixed operating expenses? It probably depends on whether you’re a shipper or a carrier, but everyone’s list should include time-consuming manual processes, unscheduled truck waiting time, poor transportation visibility and empty miles. You may be surprised to learn that some of the largest contributors to high empty miles are static transportation contracts with fixed rates and fixed lanes per carrier.

Here are three reasons why this static setup can end up costing you more…and how to do it better.

1. False sense of security in transportation costs
Fixed freight rates provide what may be a false sense of cost security. For decades, shippers have opted for fixed freight assignment contracts, believing these will protect them from market fluctuations, carrier shortages and supply chain disruption. But the evidence simply doesn’t support this theory. Just ask any company that has experienced a carrier re-negotiation when its freight rates have been impacted by increasing costs. And consider what happens during a severe shortage of freight capacity in the market. Each carrier will only fulfill the freight contracts that generate the highest margin in the day-to-day business. Shippers must then re-negotiate or—even worse—search for an alternative carrier in a market with inadequate truck capacity. In both scenarios, logistics costs always skyrocket.

2. Huge volumes do not lead to higher profitability
Shippers often think they’ll get a better price by assigning huge volumes with fixed lanes to a particular carrier within a long-term contract. But in over-the-road transportation, there are simply very limited economies of scale. Each carrier accumulates the same costs whether it’s one truck or many trucks that are being sent from A to B.

Carriers often think they’ll get a better deal by focusing on huge volumes. But, in fact, they can make better margins by focusing on profitability—getting loads in the trucks that optimize their own operations by reducing empty miles.

3. Inflexible load and capacity balancing
Many shippers think that static contracts with fixed rates enable carriers to plan their loads in the very best way. However, logistics in day-to-day business is not static but highly dynamic with different shipper demands and carrier capacities:

  • Shippers do not have the same number of loads per lane every day
  • Trucks are not always unloaded at the same locations
  • Carriers do not have the same connecting load requirements every day

These factors force carriers to accept additional empty miles and, as a result, they must add this extra operating cost into their freight prices. That´s why carrier price calculations for static contracts always contain a significant amount of empty mileage costs.

How to do it better?
In an ideal scenario, carriers will match their capacities with shippers’ demands in real time. Shippers will access the best available trucks, finding empty trucks near the loading sites and sending them to destinations with suitable connecting loads. Carriers will obtain loads that optimize their operations to lower empty miles, increase margins and enable them to give better prices.

Using manual processes to find best-connecting loads on a daily basis means exponential complexity and, in the end, you will never find the perfect load matches. You need the right digital tool to identify your shipment assignment strategy and cut transportation costs.

Simply implement a smart shipment assignment strategy

To cut transportation costs, Transporeon Shipment Execution solutions enable the best of both worlds: a combination of spot market matching and assignment based on fixed freight rates.

Use our ‘Best Carrier’ solution for capacity and demand matching in real time:

  • Shipper sends freight order to a closed pool of reliable carriers, receives offers, makes comparisons and, with a mouse click, selects the one with the best price-performance ratio—a process that takes just a few minutes.
  • Carriers bid on freight orders that perfectly fit their capacities, minimizing empty miles so that they reduce costs, increase margins and are able to charge better rates.

Our solutions also support what we call ‘No-touch Order’ for fully automated assignment of the freight order to one carrier:

  • Shipper sends freight order to a carrier based on pre-set criteria such as freight rate, quality and/or carrier performance history.

Subscribe to our Newsletter now!