February 12, 2019 at 12:00PM - February 13, 2019 at 12:30PM
This MIT CTL Roundtable is exclusively for members of the MIT CTL Supply Chain Exchange and invited guests. If you are not a member of the Supply Chain Exchange and are interested in attending this roundtable, please reach out to CTL Events at <ctl-events@mit.edu>.
Location: MIT's Samberg Conference Center, 50 Memorial Drive, Cambridge, MA 02142
Registration for this Roundtable has closed. If you have any questions about joining, please contact ctl-events@mit.edu.
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The United States truckload transportation market has been a roller coaster ride over the last eighteen months. Whether due to labor shortages, increased demand, more restrictive regulations, or other reasons, truckload capacity has been at its tightest point in decades. The primary outcome of this tightness has been an increase in transportation costs for shippers across industry as well as a degradation in level of service.
One potential contributing factor to these recent challenges that has not received as much attention is the dominant freight procurement methodology. The process of procuring freight transportation in North America has not changed in over 20 years. Despite the presence of dozens of highly visible tech startups in this space, the vast majority of shippers and carriers still practice the same methods, use the same technologies, and rely on the same form of contractual arrangements as they did in the previous century.
The hallmarks of this traditional process are:
- Annual (or bi-annual) reverse auctions of individual lanes with averaged volume levels to a large set of incumbent and new carriers,
- A sophisticated (and typically months long) carrier to lane assignment process using an optimization engine to minimize the expected costs while adhering to level of service and business constraints,
- Awarding static annual contracts to selected carriers that specify a static rate to be charged the entire year but does not bind the shipper to produce volume on the auctioned lanes nor the carrier to cover 100% of the loads on the lanes they “won,” and finally,
- Populating the shipper’s routing guide within their Transportation Management System to be accessed throughout the duration of the contract when a shipment materializes.
This Carrier Bid Optimization process was very innovative when it was introduced in the mid-1990s. It served the industry quite well after deregulation of the trucking market in the 1980’s. Prior to this, carriers were restricted in the number of shippers they could contract with, all rates were published and submitted to the ICC, and there was very little competition on lanes between carriers. In the decade following deregulation, shippers struggled to determine the “market price” for truckload services on the thousands of lanes that they operated over. Auctions, or to be more precise, reverse auctions were the perfect tools to efficiently discover market prices in these perfectly competitive markets. The methodology fit the times.
The situation today, however, has changed. New technologies, shifting market conditions, faster communication, and an overall dislike of the current practices by all involved players is leading towards a potential disruption of this dominant design. Any substantial redesign of the freight transportation procurement process will need to involve:
- Changes to both shipper and carrier business processes,
- Introduction and use of new technologies and analytical methods (software, communication, visualization, and hardware), and
- Modifications to legal contracts and relationships between carriers, drivers, shippers, and 3rd parties.
These three threads (process, technology, and contracts) are intertwined and should not be addressed in isolation. For example, changing procurement to include fixed carrier volume assignments requires contracts that enforce “take or pay” conditions. Similarly, establishing evergreen contracts with rates based on a mutually agreed upon index requires a sophisticated indexing and forecasting algorithms.
The goal of this roundtable is to explore and better understand the current and possible future state of art and practice in freight transportation procurement and management. Participants in the roundtable will include representatives from shippers, carriers, brokers, third parties, technology providers, and other stakeholder groups. It promises to be an interesting and exciting event!