Supply Chain Council of European Union | Scceu.org
Procurement

Rethinking freight procurement and the RFP process

As better market information and transparency inform logistics procurement, wasteful and inefficient request-for-proposal (RFP) processes are coming under pressure and in many cases being entirely reconceived.

It takes a long time to complete an annual RFP process — four months on average — and market conditions render the agreed-upon rates obsolete about six months after that in a typical year. Truckload carriers bid aggressively on underpriced freight to maintain asset utilization, knowing they’ll have to walk away from their contracts when the spot market heats up so they can turn a profit. 

Meanwhile, shippers overpay, or under tender during soft markets, and are underserved during hot markets: the worst of both worlds. The spot market can be so volatile that even when shippers agree to pay contract rates 10% above current spot rates, a normal market inflection will send spot rates well above contract. In response, carriers that have already entered into contracts with shippers abandon those commitments in pursuit of the spot market’s more lucrative margins. 

Sometimes shippers try to save money in soft periods by going directly to the spot market to find capacity, but covering freight with one-off carriers is outside their core competence, incurs higher operating costs and risks bringing on untested carriers with inconsistent quality to move their freight.

“We found that for a typical shipper, their true contract rate is actually between 3% and 21% higher per mile,” said Convoy’s Ryan Gavin, who is the chief marketing officer and marketplace growth at the digital freight network. “We call it a ‘true contract rate’ because it’s the combination of RFP administration and the operational overhead of sourcing capacity when contracts fail.”

Newer strategies to mark contract rates to market more accurately have the effect of increasing overhead and RFP administration costs, keeping “true contract rates” stubbornly high.

In recent years, mini bids have become more popular as shippers use data to isolate volatile and problematic lanes and award freight on those lanes on a semiannual or quarterly basis. While a mini-bid strategy may allow a shipper to “hug the market” and keep published rates as close to market rates as possible — and thus let the shipper avoid overpaying or underpaying — mini bids actually multiply the administrative work that shippers must do to move freight. A mini-bid strategy involves multiple RFPs for the same lanes and potentially leads to new primary and secondary relationships on a given lane every three months. Not only does the shipper have to work more to run the bid process more often, but new carrier relationships introduce their own friction and inefficiencies.

Convoy’s solution to these problems is called Guaranteed Primary, a program that guarantees service to shippers at a market rate and fixed gross margin. The rate the shipper pays changes based on fundamental market conditions, but Convoy makes its costs transparent, keeps the margin stable and guarantees 100% tender acceptance. Even better, shippers don’t have to run costly administrative processes to ensure they’re paying fair market rates — Convoy’s technology automates price discovery and handles carrier assignments.

“In tight markets, Guaranteed Primary means that shippers never have to worry about failing over to a backup or spot carrier,” said Gavin. “In soft markets, the program enables shippers to ride the market down, saving costs as truck prices dip. For small shippers, Guaranteed Primary can reduce shipping costs by up to 19%, and for large shippers, the program can result in millions of dollars in annual transportation savings.”

According to Gavin, the gross margin that Convoy takes is up to 50% lower than the industry standard 15-18%. Convoy runs on narrower margins than traditional freight brokerages because it has significantly reduced the cost to cover a load through automation.

Critics of Convoy’s Guaranteed Primary program — typically competing traditional freight brokers — have said it is nothing other than a cost-plus program, but that isn’t accurate. In a cost-plus model, the broker would cover the freight, assess its costs and then tack on a margin. But Guaranteed Primary is forward-looking and predictive. Using its machine learning-driven models of freight markets, Convoy assumes the risk of making an accurate prediction of its cost and offers the rate to the shipper. If Convoy can’t cover the load for the predicted rate, it pays more to the carrier and takes a loss. There is no subsequent reconciliation of billing or upcharge to the shipper like in a cost-plus program.

“Guaranteed Primary was born out of the challenges that both Convoy and our customers face with regard to contract freight,” said Gavin. “The entire goal of the program is that whether rates go up or down, our customers know Convoy is always going to be there to service the freight. Today, no shipper can confidently say that with the RFP.”

Convoy created Guaranteed Primary in partnership with forward-thinking shippers who had a sophisticated understanding of freight markets and knew that at certain times of the year, service would be paramount. The digital freight network first piloted the program in 2019. A major home improvement retailer started working with Convoy on one of the original Guaranteed Primary pilots with just a handful of lanes that grew to dozens. In the last year, Convoy rolled out Guaranteed Primary to small, medium and large shippers in multiple industry verticals, including retail, CPG, food and beverage, automotive, and packaging.

Now Convoy is opening up Guaranteed Primary to truckload shippers of all sizes in all industries throughout the country.

Proponents of mini bids have the right idea about marking contracted freight rates to the market on a faster cadence and making sure that rates work for both shipper and carrier to keep relationships strong. But mini bids, insofar as they require manual work, process management, negotiation and even auctions, introduce more shipper overhead and operating cost to move the same volume of freight. 

By leveraging advanced technology and data, Convoy’s Guaranteed Primary achieves shippers’ and carriers’ long-sought goal: guaranteed service at a fair rate with a modest margin paid to the intermediary.

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