Today Noël Perry speaks to the ins and outs of contracts. What should you consider when entering one? How do you know the right rate? Can technology make us better at pricing, or is human instinct still king?
Anticipating the launch of Rate Forecasting, the new week-by-week, lane-by-lane forecast from Truckstop.com and FTR, we sat down with Truckstop.com and FTR chief economist Noël Perry to talk about rates. This article is sixth in a series of articles about the topic.
Nick: Speaking to creating killer contracts, in this series, first we chatted on the NASSTRAC blog about The Key to the Right Freight Contract: Know Your Rates. Then we talked in the TIA Logistics Journal about Four Tips for Creating Killer Contracts and the value of a contract beyond just the rate, to relationships or positioning.
What advice you would have for somebody creating freight contracts, and how can Rate Forecasting help?
Noël: Reduce risk. One of the things Rate Forecasting does is support the increasing trend of putting spot freight under contract. Now it’s not contract freight in the traditional sense of stable, predictable freight, but it is contract freight in the sense that both the shipper and the carrier know who’s going to move it and what the price will be. Well, there’s a lot of risk in that strategy because spot prices move pretty rapidly. There are a lot of brokers getting into the contract business and taking huge risks. Rate Forecasting reduces the risk.
Plug this data in against your own experience. Know what Rate Forecasting does and what it doesn’t do. You’ll have to correct, you have to understand. We’re talking about the average rate in a particular lane, which is based on average freight—and that average may be based on good or bad freight. I mean it’s in the spot market, but beyond that, we don’t know whether this is the best customer or the worst customer. And so it’s very dangerous to take the absolute number that Truckstop.com has and apply it to your conditions—even though it might be the same city pair—because every move has a different productivity profile. A lot of customers have tried this without thinking, and they’re disappointed. What this information shows is whether or not the city pair is higher or lower than other city pairs. So if we’re talking about Boise to Portland again, and let’s just say that our data shows that the rates out of Boise are 10% higher than they are out of Salt Lake to Portland, then you look at your rates and you say, “Hey, am I getting more out of Boise than I am out of Salt Lake?” If I’m not, I may have a problem. So that’s a legitimate use. The relative strength of one lane versus the other.
Use Rate Forecasting to know when those rates are going to change. We might not be able to tell you whether it’s $2.10 or $2.20 cents today, but we’re going to be able to tell you it’s going to be 20% higher a year from now. And what that says is whatever rates you have in Boise, assuming that you’ve established that it’s appropriate compared to other lanes using our tool, you can then add the 20% and get legitimate rates. So it may be that you’ve got the good freight, the efficient freight, in Boise and it only gets a $1.90…well you add the same 20% to that. Or maybe you’re moving the bad freight that has to bear $2.30, you add 20% to that. So it’s very important to understand what you can do with this data, and what you can’t. What you can’t do is you can substitute a single Truckstop.com number for the number you have in absolute terms. What you can do is use it to establish the relative strength of your position both now and in the future. Very important.
Nick: Right. The conditions of that shipment, even down to what you are hauling or how much is required of the driver at the shipping locations. So what’s the high level short list of the things that make that freight good or bad? In other words, other factors that our forecast doesn’t help you adjust for?
Noël: Well there are three obvious factors:
- Is this headhaul or backhaul? Rate Forecasting will account for that.
- Is the freight regular or not? What Truckstop.com does is to correct for that broadly, because it differentiates between volume or activity at one origin and another, but it doesn’t handle what’s happening at that particular shipper. So you’ve gotta ask that shipper, “How regular will this load be?”
- What are the loading dock conditions? Do I get in and out of there easily, or do I have to wait? And time is money in our business. You got to factor that in too. Truckstop.com only handles this indirectly.
Nick: So the Rate Forecast can’t tell you if you have good or bad freight; you have to know that, and know your relationship with that partner. The Forecast just lets you know about this lane’s relative price and trend.
Noël: What it does is confirm the intuitive knowledge that a good trucker, broker, or customer has. They say “Well you know if I’m going to come out of Boise, I’m going to have to pay more than I do out of Salt Lake,” or vice versa, and “You know ELDs are going to be tight in the market. Well next year, I’m going to have to charge more”. Well, what we do is take that intuitive guess the best truckers already have and we give it a shape. We say it’s 10%, or Boise is 30% higher than the next place, or whatever. That specificity makes it a lot easier to manage. You don’t have to guess.
In the past, if you were shipping to Boise, you’d say, “Well, you know I looked up at the ATA numbers, and rates are up by 5% across the whole country. I wonder what that does for Boise.” Well, we’ll tell you exactly what it does for Boise. Localization is such a big difference compared to just “now rates are up 5%”.
Get specific, local contracts with Rate Forecasting, the groundbreaking, lane-by-lane rate forecast which projects spot market rates for each of the upcoming 52 weeks from leaders Truckstop.com and FTR.