Transportation leaders should debunk these six common myths to help their C-level executives understand truckload freight and get executive buy-in.
Unprecedented inflation and supply chain bottlenecks have made logistics a boardroom topic. Transportation leaders are now positioned to influence business outcomes, but they first must educate executives on truckload freight nuances. They need to debunk these six common myths to help their C-level executives understand truckload freight and get executive buy-in.
Myth 1: Increasing volume always reduces cost per load.
Most goods that companies procure exhibit economies of scale, where increasing quantities decrease per-item costs. Truckload freight instead exhibits economies of scope.
Truckload carriers load at an origin, move to a destination to unload, then reposition for the next load. Costs are lower only if the next load’s origin is near the initial destination. Carriers try to balance inbound and outbound shipments, yet markets like Miami lack outbound freight. If a shipper increases their inbound volumes to Miami, this exacerbates the carrier’s challenge of finding outbound loads, so the carrier may raise rates in response to increased volumes.
Myth 2: The purpose of an RFP is to find the market rate.
The RFP determines a rate that aligns a shipper’s service needs with a carrier’s capacity. Shippers’ internal operations and policies vary widely, such that, for the same lane, service needs may significantly differ between shippers. Executives may assume the lane has a market rate, but these different requirements make the market rate almost irrelevant.
Myth 3: The RFP creates the routing guide, which defines the budget.
The RFP creates a routing guide that helps determine which carriers move freight at what rate. Executives may then assume the routing guide sets the budget, but unplanned shipments, carrier capacity shortages, and other challenges cause routing guide failures that impact costs. While the routing guide is a good starting place for budgeting, transportation leaders should plan for a percentage of freight to cost more than the rates in the routing guide.
Myth 4: Carrier contracts ensure capacity.
Truckload transportation contracts are unlike other business contracts in that they are binding in price, but not in shipment volume or carrier capacity. Reiterating the dynamic nature of transportation will help executives wrap their heads around this. Carriers face market conditions that impact truck availability, while shippers face supply chain challenges and sales pressures that impact shipment volumes. The contract does not guarantee capacity will be available exactly where and when they might need it.
Myth 5: Paying higher rates leads to better service.
With truckload freight, higher prices aren’t associated with higher service levels. Several dynamics are at play. Smaller carriers tend to provide superior service at lower rates on the lanes they operate to keep the shipper’s business. National carriers provide wider capacity coverage to service the lanes that smaller regional carriers can’t, but at lower service levels and slightly higher rates. Low-cost, low-service carriers quickly get cut out of the network, since the shipper’s top priority is getting products delivered to customers.
Myth 6: Transportation is a simple make vs. buy decision.
Businesses frame procurement decisions on whether to make the service internally, or buy it from a vendor, yet transportation best practices suggest a portfolio approach with both “make” and “buy” components. The “make” decision aligns with dedicated and private fleets where you bring capacity in-house to service steady, balanced lanes. The “buy” decision can include both contract carriers for relatively consistent lanes with moderately high volumes, and spot carriers for one-off lanes and more sporadic freight.
These myths have come up more often since the onset of the pandemic, giving transportation leaders an opportunity to educate executives. Debunking them and building effective transportation strategies require comprehensive analytics on rates, capacity, and performance to support continuous improvement.