Curated Spot: A New WayPosted August 15, 2016
Transport services have typically been procured as true spot contracts, or in the form of multi-year RFQ type contract. TNX introduces a middle ground between these two extremes, called Curated Spot. It combines advantages from both extremes: Full control over the group of hauliers, agreed service and price boundaries, and dynamic price setting based on actual market factors.
Introducing a new middle ground is important, as market participants agree that both extremes have severe shortcomings. One extreme is Wild-West Spot Buying, where any haulier can win business by offering the lowest price irrespective of protecting existing relationships, ensuring health and safety protocols, and up-front evaluation of operational reliability. The other extreme is Multi-Year Commitments where rates are fixed, and hauliers act as a sort of dedicated fleet for the cargo owner.
RFQs and Long Term Contracts
Long-term contracts clearly have positive characteristics. In particular, they make budgeting easier for hauliers and cargo owners. But they are not perfect. The long-term rates agreed between the parties incorporate a large set of assumptions on future business: How much volume does the cargo owner need to transport over the contracts lifetime? What is the cost structure for hauliers concerning fuel, labour, financing? What are the hauliers and cargo owners alternatives?
A small variation in these assumptions can already lead to large changes in resulting rates or profitability. As the business runs on a day-to-day basis, the assumptions come in contact with reality and need to be updated. However, the rigid structure of long-term contracts makes any flexible adjustment cumbersome, which stresses or breaks contracts and results in wasted efforts for everyone involved.
Moreover, long-term contracts by definition force slow decision cycles. Consider the famous OODA loop— observe, orientate, decide, act— that defines the agility of a business decision. If the procurement process happens once per twelve months their window to “decide and act” is annual. If cargo owners and hauliers make prudent decisions, they tend to err on the side of caution. Testing a new service provider, for example, cannot be done without incurring considerable risks when the minimum timeline is measured in years.
Spot markets are attractive because the haulier getting a load has the strongest economic alignment to move it. In major markets spot transactions make up 14 to 20% of trucking spend. Over recent decades, prices for spot transactions average 10% lower than similar services when procured under a long-term contract.
This price difference runs contradictory to a basic premise of long-term contracts: Long-term contracts concentrate buying power and always lead to lower rates for the cargo owner. While the premise might be correct, it gets mingled together with the myriads of assumptions that go into a long-term contracts. Empirical evidence then suggests that the negative factors on average tend to outweigh the positive ones.
However, spot transactions carry some downside for hauliers and cargo owners. They are harder to budget since prices and availability of business can potentially be more volatile than under long-term contracts.
Managing counterparties is also a significant factor. Annual or bi-annual RFQs give procurement teams some time to get to know and research possible hauliers or 3PLs. While they might miss out on a good haulier from time to time, or include a substandard one, they tend to select a good group of hauliers.
Reducing the timeframe from an annual to a daily cycle raises though one important question: Can they do this for every load, every day, with an increasing number of hauliers? Most likely the answer is: No. The result is a lower achieved service level. The spot market does a good job of finding the lowest market rate, but a sub-par job of guaranteeing an acceptable level of service.
TNX offers a blend of the two procurement alternatives. Cargo owners can conduct their due diligence and curate a list of hauliers and 3PLs they like doing business with. A part of this process can be to agree with this group on minimum and maximum prices.
Then, for each load, the cargo owner uses TNX to auction it among the group of selected capacity providers. Hauliers and 3PLs can offer rates anywhere in the agreed range, and the most aggressive quote wins the business.
By agreeing to minimum and maximum prices, the hauliers achieve certainty on business and budget. If they always price on the minimum, they have certain that they get at least a promised number of loads, as they cannot be outbid. If they price higher, they can optimize pricing but lose the certainty of business. Each day the actual composite of loads assigned to each haulier or 3PL changes based on their price aggressiveness compared to their peers, contingent on meeting service standards agreed with the cargo owner.
Why do we like this approach? It captures the advantages of long-term and spot procurement. It gives both sides budget certainty: the cargo owner can budget to the maximum of the price range and the capacity provider can budget to the minimum. And it still ensures that the matched cargo owner has the best economic alignment for doing so.
Hauliers who are already busy and needed to employ overtime or an extra vehicle will tend to bid higher that a haulier who has unused capacity heading the same direction as the load. As a result, this leads to higher load factor utilisation across capacity providers, lower rates for cargo owners and higher return on assets for the carriers.
Curated Spot also mitigates some weaknesses of long-term and spot markets: It resolves the lack of agility in procurement decisions. A cargo owner running Curated Spot can add a new haulier to their pool to test them. If they perform well, their volume award can increase continuously over the course of days, not years. Thus, a haulier or 3PL can grow via performance instead of salesmanship. RFQs are a gamble: even poor performers can get lucky. Curated Spot takes a big one-shot decision and makes it continuous, rewarding dependable performance over high stakes promises.
Curated Spot also helps resolve one of the secret distortions on trucking prices: the incumbent’s advantage. Long term rates come with baked-in assumptions. In an RFQ, the incumbent has a tremendous informational advantage. This information difference leads to the challengers either overpricing or underpricing. Overpricing reinforces the power of incumbent since they retain the work and appear to lead the market. Underpricing results in a winner’s curse, where the new provider makes sub-standard margin on the work.
Curated spot solves this in two ways. First, is benchmarking. TNX offers transparency on average costs for similar moves and achieved service levels. Second, the hauliers can form better assumptions by winning and executing loads on a continuous basis reducing the reliance on assumptions about the future in favor of actually observing market conditions.
A last argument for employing Curated Spot: Neither long term contracts nor spot necessarily create a self-powering cycle between performance and market share. Exceptionally performing hauliers have an advantage in the wallet-share game of winning RFQs from existing customers, but they have virtually no advantage in winning net new business.
TNX’s benchmarking and community rating make great hauliers visible to everyone, not just the cargo owners who already know and love their service. Curated Spot significantly speeds up the rate at which an exceptional haulier can win volumes from new customers by enabling them to enter and then grow within a Curated Spot pool. Crucially, it does this without requiring investments in a sales team by relying on the only true measure of excellence: Actual performance.
TNX is proposing an alternative way you conduct transport procurement. A middle-ground approach does price discovery for each load, but within a curated group of hauliers who have agreed to a pricing range and proven their service levels. Not a big bi-annual RFQ, not a wild-west, lowest-bidder spot.
We call the middle ground Curated Spot. For the cargo owner, it brings agility to the procurement function, reduces transport costs by helping improve load factor, and reduces the risk associated with high-stakes changes after a big RFQ. For hauliers, it avoids having to make and live with a 24-month rate card full of baked-in assumptions. It empowers the exceptional hauliers to compete and take market share daily instead of over the course of years. It shifts the focus of business growth from sales to operational performance. And it solves for the incumbent’s advantage with the double edge sword of over and underpricing.