Solvay and Leaf Logistics are creating certainty within the U.S. freight industry — and it ... [+]
The $1Trillion U.S. freight industry is known for its volatility with radical swings in freight rates as shippers and carriers try to balance supply and demand.
For example, DAT reported the number of spot market postings in December 2022 had fallen by 57.3% from the previous year and prices had dropped by 15.2% despite rising fuel costs during that same period. Shippers such as Solvay are turning to new providers such as Leaf Logistics to drive business certainty by focusing on collaboration and advanced data analytics to coordinate supply and demand.
Post-pandemic supply chain inconsistencies drive companies like Solvay — a global leader in materials, chemicals and solutions — crazy. While the rates rise and fall as predictable as the sun rising and setting, the length of a cycle and the extreme limits within that cycle drive is frustrating for companies like Solvay that require reliability to serve their customers.
While lower freight rates were welcome — Solvay’s logistics team knows all too well how the market swings to a seller’s market. As such, Solvay set out to find an innovative solution to create more certainty in their uncertain freight market.
Innovation is not new to Solvay. Their website states, “You can count on our innovative solutions to contribute to safer, cleaner and more sustainable future.”
So when the logistics team grew frustrated with the radical swings in freight market rates they sought an innovative solution in how to deal with the daily headaches that come from the volatile freight market. Their goal? Finding ways to better manage the highs and lows in shipping rates and truckload capacity to build certainty in the uncertain freight market.
3 Factors Contributing to Freight Volatility Chaos
Chris Pickett, the Lead Market Analyst and Founder of Pickett Research, has been analyzing the freight market for years and points to three key factors in a Journal of Supply Chain Management, Logistics and Procurement article. The first is seasonal demand cycles. For example, there is a produce season in the southeast and the holiday season for Christmas trees.
A second factor is the freight market itself. The highly commoditized and fragmented marketplace create the perfect storm for confusion and speculation that acerbate variability.
Pickett explains, “The real world is governed by economic and geopolitical uncertainty, shifting technology and regulatory landscapes, and human psychology that often drives irrational behaviour, so those mechanical properties and input signals can be exceedingly difficult to separate from the noise.”
The third key driver is caused by shippers — who in an attempt to produce some certainty in their transportation planning — do annual requests for proposals (RFPs) where they try to lock in rates from logistics service providers (LSP)s. Interestingly the industry has a norm that even if there are contracted volumes and rates the is no commitment to honor either the rates or volumes.
The Freight Coach podcaster, Chris Jolly, explains: “Over the years the freight industry has created a commercial norm where contracts really are not contracts. The negotiated rates are unenforceable so shippers often scramble for last-minute coverage when a contracted rate does not materialize. On the flip-side, the trucking companies are left to scramble for work when a shipper is unable to honor a contracted freight commitment. This process continues to feed the problem, shifting the market equilibrium further off its axis.”
Siva Narayanan, Global Director of Logistics at Solvay, shares his frustration: “Solvay had experienced the pain of contracting freight across multiple carriers via the typical RFP routing guide and spot market. For example, in 2018, even though we had negotiated contract rates, the transactional contracting practices left us with only 60% tender acceptance at times. This meant we needed to go to the spot market find carriers which were well over our negotiated rates and left us over budget.”
Emerging Solutions to Solve Freight Headaches
One emerging trend shippers are adopting to smooth out freight volatility issues is the shift to a ‘mini bid’ process. A mini-bid process is where shippers use shorter bid cycles (e.g., quarterly) versus the traditional annual RFP cycle. The logic is that with a shorter contract window shippers will have higher acceptance rates for their freight.
Anshu Prasad, co-founder and CEO of Leaf Logistics, believes the trend to shorter-term bid cycles is actually causing a bad situation to become worse. “If we take a step back we can understand that the LSP requires some certainty to schedule and deploy their fleet of drivers. The annual RFP, though unenforceable, does offer the LSP a degree of longer-term visibility into their staffing needs based on their customers’ freight needs. Yet when that certainty is shortened from a year down to three months, the LSP is left with more uncertainty into their own business if they are required to rebid the same work every few months. This leaves the LSP with fewer incentives to make good on their quoted rate if they can find a higher rate elsewhere, leaving the shipper with less certainty around their supply than they had with an annual RFP to begin with.”
Firms such as CH Robinson have introduced real-time pricing options to take the mini-bid process one step further to give shippers up-to-the-second pricing so they can capture market savings. While this sounds good in theory, many transportation experts suggest this is simply training logistics service providers and shippers to think in even shorter increments — making a bad situation even worse.
Yet another class of providers is tackling the more systemic issues of supply-demand mismatch by finding ways to optimize freight across shippers and carriers. Startup Leaf Logistics is one of those firms. Leaf uses predictive analytics and artificial intelligence to identify and optimize transportation between shippers and carriers. Prasad explains, “Leaf uses a unique forward contracting approach to introduce a different way for the industry to rethink the way they manage their transportation.”
Leaf uses advanced data analytics to move the industry away from the transactional nature of transportation contracting and towards longer-term planning to increase business certainty for both supply and demand.
Prasad shares the philosophy of their solution: “The transportation industry suffers from a lack of coordination and the inability to contract with any certainty. At the end of the day, shippers are looking for reliability. And the same thing can be said about carriers. The foundation behind what Leaf does is to use data and analytics to help match supply and demand over a longer-term horizon to the benefit of both shippers and carriers. For example, today 30% of the trucks on the road sit or drive empty. Our software helps coordinate shipments across shippers, and this not only reduces costs, but it also drastically reduces our industry’s carbon footprint by dramatically reducing empty miles driven by carriers.”
Win-Win Results
Solvay turned Leaf Logistics innovative solution in 2019. Narayanan shares his perspective: “An optimization focus such as Leaf’s is a win-win solution for both shippers and carriers. For shippers like Solvay, the traditional contracting approach to fill trucks on a load-by-load basis is replaced with an approach that coordinates our data and allows us to contract with transportation providers for a longer duration — often months at a time.”
Carriers also benefit from this approach because they get insight into shipments well in advance and can optimize their routing to fill empty trucks and ultimately increase their profitability as asset utilization goes up in a predictable way.
Solvay’s logistics team is seeing the benefits of partnering with Leaf Logistics for a new way to manage their freight. Today Leaf uses its analytical tools to identify patterns in Solvay’s transportation data to lock in capacity and rates with a single carrier over a longer six-month time horizon. Now Solvay is able to plan ahead, which has had significant positive impacts across Solvay’s freight performance because they are no longer reliant on last-minute coverage and rates.
Narayanan is pleased the logistics team challenged the status quo. “We increased our tender acceptance from 60% to 100% and our rate compliance to 100%. And we were able to rein in costs to meet our budget.”
The Bottom Line
The bottom line?
As both the freight industry and the macroeconomic environment race towards more volatility it is more important than ever to identify ways to introduce certainty into the market. What is necessary to truly fix the industry is not to run towards more frequent bidding, but to address the underlying forces and planning processes that have limited the industry for decades.
