For many shippers, logistics providers and freight carriers, the request for proposal (RFP) process can be time consuming and stressful.
The constant work of rebidding freight and wrangling over price can cause major business disruptions, as well as build friction between shippers and carriers.
“The reason companies do RFPs is because they want to know they’re not getting screwed by the market,” Craig Fuller, FreightWaves’ founder and CEO, said at the Future of Supply Chain event in Cleveland on June 23. “The problem is that 40% of a carrier’s relationships with shippers are turned over simply because someone has underpriced him or someone has bid below them.”
To help shippers and carriers navigate the marketplace, Fuller said the FreightWaves SONAR platform has launched a solution called Index-Linked Contracts.
“One of the things we’ve been working on at FreightWaves is how do we help empower shippers and carriers to mitigate their exposure to the volatility of the freight market,” Fuller said. “Index-Linked Contracts is essentially using a third-party index to index your prices to the rates. As the market goes up, the shipper pays more, and as the market goes down, the carrier gives up a little bit more.”
Contracts linked to market indexes have been around in other industries for years, such as agriculture, energy and mining. But the trucking industry still mainly relies on RFPs to bid out freight lanes to transportation providers when capacity is needed.
Fuller said constantly having to rebid lanes is bad for both shippers and carriers.
“It creates havoc on the shippers, it creates havoc on the carriers, and it’s time we put a stop to it,” Fuller said. “It’s time we said enough is enough, that this bidding process that we all have built businesses on can be changed.”
The FreightWaves SONAR platform will serve as the basis for Index-Linked Contracts, which will float with the market and make sure that both shippers and carriers are getting a fair price.
FreightWaves’ Index-Linked Contracts solution can be indexed to spot rates, as well as contract rates, with quarterly or monthly adjustments.
Using Index-Linked Contracts, different rules can be set for different lanes, with a shipper aiming to award freight on a troublesome lane at the index plus 50 cents per mile, while a lane where capacity is more available could be set at the index plus 10 cents.
Fuller said Index-Linked Contracts can also benefit carriers by helping them retain more truck drivers.
“It’s also better for the drivers. At asset-based trucking companies, driver turnover is a major issue,” Fuller said. “One of the primary reasons that drivers turn over is that they aren’t getting home, and that they’re not getting home as often.”
Trucking companies plan their road network and where they hire and recruit drivers from based on the lanes they are servicing, Fuller said.
“If my network is constantly turning over, from constantly having to take freight from different locations, or being moved to different locations, it’s incredibly disruptive. The only reason that happens often is because somebody else undercut you in the RFP,” Fuller said.
Zach Strickland, FreightWaves’ head of freight market intelligence, said using Index-Linked Contracts could also help companies operate more efficiently.
“The efficiencies gained in the process of not dealing with an RFP and all the bids, you can spend your time working on things that provide a little bit more return on investment, a little bit more value,” Strickland said. “It’s really a blank slate. Shippers and carriers just agree that we’re going to agree that as the market shifts and moves up or down, we’re just going to let our routing guide pricing also do the same.”
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