Executive Briefings

Back to the Future for Shipper-Carrier Relations

Expect shipper-carrier relations in 2009 to take a more shipper-centric shape with the shippers dictating the terms. While this is probably not the best long-term strategy, short-term cost pressures will drive many shippers to behave as if this is 1999 and not 2009.

Transportation, like all businesses, is cyclical. Demand and supply are always in flux and, therefore, so are the relationships between shippers and carriers. During times of excess supply-as was the case in the late 1990's-shippers tend to dictate the terms of relationships. Likewise, when demand exceeds supply, as happened from 2004 to 2006, carriers will be very selective of their customers while shippers will try to make their freight more "carrier-friendly" to attract capacity.

However, this simple fact of business is often conveniently forgotten during an extended or severe peak or valley. When one side has the advantage, it tends to overplay its hand. Carriers will demand surcharges for services during peak demand while shippers will look for extreme price cuts during periods of oversupply. Both parties seem to forget that the cycle will turn and that their short-term actions will be remembered during the next turn of the cycle. And so, where are we for 2009? The cycle has taken the full turn away from the carrier-friendly days of 2004 - 2006 to the point where shippers will think they can party like1999 when it comes to carrier relations. This will manifest itself in three ways in 2009.

First, there will be more bids. Most manufacturers, retailers and wholesalers had their transportation budgets totally blown to pieces in 2008. Much of this was due to the doubling (and then halving) of the cost of diesel fuel coupled with more liberal fuel surcharge programs pushed through by carriers. These shippers are under severe pressure to recover some of their transportation budget, and running a bid during a time of high excess capacity usually presents an opportunity for cost reductions.

Second, the bids will be more price-focused than over the last three years. The technology and expertise exists to conduct any level of capacity assignment between shippers and carriers. These can range from pure price-based auctions to highly constrained optimization models that ensure that carriers are provided appropriate earmarked capacity levels. Because shippers are looking to recover lost budget, expect more of the pure price auctions in 2009. This means pitting carriers against each other for securing freight.

Third, more shippers will start measuring and managing their fuel expenses separately, as indeed they should. The fuel bubble of summer 2008 will haunt transportation professionals (on both sides of the aisle) for many years. There is active debate as to whether the summer price surge or the precipitous drop in the fall was the anomaly, but in any case, the dramatic movement in the price of fuel causes problems. One small silver lining is that shippers seem to be getting this right. Fuel surcharge programs are starting to better separate out the fuel component. Smart shippers are isolating the fuel costs and then managing these costs very aggressively through the use of increasing fuel mileage standards and strict compliance. Interestingly, these actions can be marketed as green or sustainability initiatives by the shipper. The net effect is that the practice of carriers using fuel surcharge programs as revenue sources will start to disappear.

Overall, the smarter shippers should look to minimize their tendencies to squeeze their carriers-but carriers should prepare for such tactics all the same.

The Outlook

The upcoming year will bring a rush of transportation bids that are very price focused and pit carriers against each other for securing freight. Many shippers will find it hard to resist the temptation to act as if it were 1999 and squeeze the margins out of their carrier base. Smarter carriers will know that in 2 to 3 years, the recession will recede and the tide will return - and they will keep solid relationships. A silver lining will be the more frequent removal of fuel from all line haul costs into a separately measured, monitored and managed cost bucket. Rational management will come to fuel surcharge programs and they will leave the shadowy world of secret revenue pools for carriers.

Transportation, like all businesses, is cyclical. Demand and supply are always in flux and, therefore, so are the relationships between shippers and carriers. During times of excess supply-as was the case in the late 1990's-shippers tend to dictate the terms of relationships. Likewise, when demand exceeds supply, as happened from 2004 to 2006, carriers will be very selective of their customers while shippers will try to make their freight more "carrier-friendly" to attract capacity.

However, this simple fact of business is often conveniently forgotten during an extended or severe peak or valley. When one side has the advantage, it tends to overplay its hand. Carriers will demand surcharges for services during peak demand while shippers will look for extreme price cuts during periods of oversupply. Both parties seem to forget that the cycle will turn and that their short-term actions will be remembered during the next turn of the cycle. And so, where are we for 2009? The cycle has taken the full turn away from the carrier-friendly days of 2004 - 2006 to the point where shippers will think they can party like1999 when it comes to carrier relations. This will manifest itself in three ways in 2009.

First, there will be more bids. Most manufacturers, retailers and wholesalers had their transportation budgets totally blown to pieces in 2008. Much of this was due to the doubling (and then halving) of the cost of diesel fuel coupled with more liberal fuel surcharge programs pushed through by carriers. These shippers are under severe pressure to recover some of their transportation budget, and running a bid during a time of high excess capacity usually presents an opportunity for cost reductions.

Second, the bids will be more price-focused than over the last three years. The technology and expertise exists to conduct any level of capacity assignment between shippers and carriers. These can range from pure price-based auctions to highly constrained optimization models that ensure that carriers are provided appropriate earmarked capacity levels. Because shippers are looking to recover lost budget, expect more of the pure price auctions in 2009. This means pitting carriers against each other for securing freight.

Third, more shippers will start measuring and managing their fuel expenses separately, as indeed they should. The fuel bubble of summer 2008 will haunt transportation professionals (on both sides of the aisle) for many years. There is active debate as to whether the summer price surge or the precipitous drop in the fall was the anomaly, but in any case, the dramatic movement in the price of fuel causes problems. One small silver lining is that shippers seem to be getting this right. Fuel surcharge programs are starting to better separate out the fuel component. Smart shippers are isolating the fuel costs and then managing these costs very aggressively through the use of increasing fuel mileage standards and strict compliance. Interestingly, these actions can be marketed as green or sustainability initiatives by the shipper. The net effect is that the practice of carriers using fuel surcharge programs as revenue sources will start to disappear.

Overall, the smarter shippers should look to minimize their tendencies to squeeze their carriers-but carriers should prepare for such tactics all the same.

The Outlook

The upcoming year will bring a rush of transportation bids that are very price focused and pit carriers against each other for securing freight. Many shippers will find it hard to resist the temptation to act as if it were 1999 and squeeze the margins out of their carrier base. Smarter carriers will know that in 2 to 3 years, the recession will recede and the tide will return - and they will keep solid relationships. A silver lining will be the more frequent removal of fuel from all line haul costs into a separately measured, monitored and managed cost bucket. Rational management will come to fuel surcharge programs and they will leave the shadowy world of secret revenue pools for carriers.