Hybrid Transport Procurement StrategiesPosted January 17, 2018
Closing out, we asked if it is possible to combine these three strategies to improve the risk / reward profile of such a hybrid strategy over the basic strategies.
Decide Between Long-term Contracts and Private Fleet
A hybrid strategy combines using private fleet, spot contracts, and long-term contracts for the same services, e.g. for the same product on the same laneways.
At the macro scale, 45% of transport spend is on private fleets, 44% is via long-term contracts, and 11% is via spot contracts.
For individual companies, however, it is much more common to procure the lion share (70% to 90%) via either private fleet or long-term contracts. The remainder is spot contracts.
Long-term contracts and private fleets can be seen as serving a complementary function: they provide transport capacity for a long period of time at rather predictable cost.
In contrast, spot contracts are different in characteristics and supplement other alternatives.
How does one decide between private fleet and long-term contracts? For most companies, long-term contracts are the de-facto default choice. A private fleet can outperform in three scenarios:
- Cherry Picking: A private fleet is placed on lanes where utilisation is high, and the costs are lower than long-term contract rates.
- Negotiating Leverage: A private fleet ensures the shipper has bargaining power with carriers. This is especially useful in situations when the shipper has to transport on lanes with tight capacity.
- Service-Level Insurance: A private fleet ensures that transport service is available irrespective of its economics. A typical example is to keep trucks at a site on standby in case of urgent orders.
By far the most common use of private fleets is as service-level insurance, followed by cherry picking, and then negotiation leverage.
The split of 70-90% of private fleet or long-term contracts and spot contracts for the remainder is only a plan. Reality impedes on this, such that daily dispatching will make the split different every day depending on the transport needs and resources available to meet them. How then can we figure out what the correct split is on a given day?
One way to handle it is to have a rules engine in place, configured something like this:
If private fleet trucks are available in the region, use them. If not, and capacity demand is higher than supply according to the experience of the dispatching team, then use only long-term contracts. If supply is higher than demand, procure half of the capacity via the spot market. If it is neutral, procure 80% via long-term contracts, and 20% via the spot market.
We call such an approach Curated Spot, and it serves as a good introduction to more dynamic transport procurement strategies for shippers that have predominantly relied on fixed routing guides.
As most companies pursuing Curated Spot have historically procured via long-term contracts and private fleet, the missing piece in their infrastructure is usually a way to perform spot procurement easily and cost-effective. Typical minimum requirements for a spot procurement platform are:
- Curation of carriers meeting specific quality and functional standards
- Automated communication of all decision-relevant and execution-relevant information to carriers, including cargo details and service requirements
- Automated evaluation of carrier responses
- Integration into existing TMS infrastructure
With such a system in place, a shipper is ready to reap the rewards from diversified transport procurement sources without impeding on existing processes.