How to segment lanes for the perfect assignment mix

In our second session of the Science-based transportation logistics masterclass series, we take an operational perspective on the spot vs. contract debate. 

In our first masterclass, we discussed the best practices for determining what should be procured via contract, and what should be left to spot procurement, especially in cases where more information becomes available during the execution stage.  

In this follow-up session, we explore the decision-making process during the execution stage, after the contracts have already been established, using a portfolio approach to freight procurement. Specifically, we examine which factors should be considered when deciding whether to send a shipment through an existing contract or directly to the spot market.

The billion-dollar question 

To kick-off the session, Jan Rzehak, Transporeon’s Director of Business Consulting, posed his billion-dollar question: If you were a logistics manager deciding between contract and spot, what would you do? 

My short answer: consider your carrier’s perspective. How does the load impact their operations? If it causes operational difficulties for your carrier, consider sending it direct to spot. 

What does the research say? 

I’ve come to this viewpoint based on a series of research projects. Over the past few years, we have studied how contracted carriers respond to certain operational factors and the corresponding cost implications. We can then extrapolate these results to demonstrate when a shipper should go directly to the spot market, rather than using a contract. We call this a segmentation approach: which segments of a shipper’s network lend themselves better to spot than contract, and vice versa. The main factors to consider fall into the following categories: 

• Carrier attributes 
• Shipment characteristics 
• Lane/demand patterns 
• Facility processes 

Carrier attributes 

Asset-based carriers (those that own and operate the transport equipment) and third-party, non-asset brokers (those that contract with shippers and buy spot capacity as demand materialises) have fundamentally distinct revenue structures. As a result, they respond to operational factors differently. For each of the operational factors we explore, we will look at asset and non-asset carrier behaviours separately and identify when there are significant differences. 

Shipment characteristics 

First, let’s explore surge volume offered to a contracted carrier. That is when shipments within a week are above the contracted, expected volume on a lane between a shipper and carrier. We measured how contracted carriers respond to surge volume – in particular, surge volume’s impact on that carrier’s probability of accepting the shipment and the resulting cost implications. 

Figure 1 shows the price premiums above the contracted price, which are needed to keep contracted carriers’ likelihood of accepting surge loads at least 90%. Asset carriers are depicted in blue while non-asset brokers are in orange. Asset-based carriers in particular have difficulty accepting surge volume that they have not planned for due to their fixed capacities. Instead, non-asset providers have access to a large pool of capacity, so they are better able to find the needed capacity at lower prices. Shippers can use this knowledge to distinguish between their base demand and surge volume and consider sending the latter directly to the spot market or use a brokerage provider instead.

Next, let’s explore the impact of lead time on load acceptance probability from contracted carriers. While lead time doesn’t have a large, consistent impact on the likelihood a carrier accepts a load, short lead times do come with additional costs to the shipper. We have found that rushed shipments are costing an average additional 30-35% more than the contract price. Identifying customer or supplier locations that tend to require rushed shipments presents an opportunity for shippers to either pinpoint areas for process improvement, or explore the spot market as a cost-saving alternative to contracted carrier cost escalations. 

Lane characteristics 

Lane-level volatility and frequency of demand: Variations in demand are difficult for carries to cover – particularly those with finite capacity and networks to keep in balance. In fact, highly volatile demand volumes in lanes can cost the shipper up to 20% more than the contracted price, while lanes with low demand frequency can cost up to 7% more. This suggest shippers should consider historical demand patterns, as these lanes may be a good opportunity to offload to the spot market rather than making the job more difficult for contracted carriers. 

Contract age: A key factor in our research, which predicts whether a shipment is accepted, is the competitiveness of the contract price, compared to current spot market prices. Contract prices are fixed for a given time frame, but the market fluctuates around those prices after they are set. Shippers expecting to use a contract price that is out of date is likely to be exposed to the spot market anyway. It is important for shippers to keep track of which contract rates have aged and no longer reflect market prices. Carriers may already be signalling that contract prices are out of date. Shippers can either update the contract accordingly, or expect to use the spot market to serve a larger fraction of the demand. 

Facility processes 

As mentioned earlier, the best opportunities to use the spot market are those that would otherwise negatively impact the contracted carrier’s operations. One such instance is when a facility experiences extended driver detention times. Our research indicates that carriers are less likely to accept shipments from facilities with a history of wait times exceeding two hours. Additionally, the fees charged by carriers for this service can vary significantly. 

Moreover, detention at drop-off facilities, rather than at pick-up facilities, tends to have a greater impact on the carrier. This is because dwell at drop-off facilities influences the carrier’s ability to show up on time to its next shipment. Facility ratings systems have been integrated into existing and new transportation management solutions to help warn other carriers and identify areas of improvement for shippers. Similar to the lead time recommendations, our findings on facility dwell time suggest that shippers should examine nodes in their networks to identify where acceptance or price performance is being negatively impacted by detention. 

Wrap-up 

Most of the factors highlighted in our research suggest that segmenting freight and utilising the spot market is good practice, for types of freight that can be difficult or cumbersome for carriers to cover. I encourage shippers to consider the carrier, load, lane demand, and facility segments discussed here as opportunities to more easily serve their business while also reducing their costs.