True or False? Higher Truckload Rates Brings Better Carrier Performance 

For many products and services, it’s a common—and often correct—assumption that the more expensive, higher quality option will outperform the less expensive, lower quality choice. But does the adage “you get what you pay for” apply to carrier service? When a shipper pays higher transportation rates per mile, do they really receive better on time performance and load tender acceptance patterns from their carriers?

That question was the catalyst for a deeper investigation into the potential correlations between truckload rates per mile and performance in the U.S. truckload transportation sector. C.H. Robinson collaborated with MIT’s Center for Transportation & Logistics and TMC, a division of C.H. Robinson, to look into the matter.

Setting the stage

The research used 27 months’ worth of tender and shipment records for dry van truckload shipments from TMC. Only single stop loads between 250 miles and 3,000 miles within the continental United States were considered. The dataset included tender information from 40 shippers and 963 carriers, with more than 1.7 million shipment tenders to secure the movement of 807,662 shipments.

While carrier performance can be impacted by many factors—planned transit times, mechanical failures, driver and hours of service (HOS) planning, weather, and congestion, for example—researchers defined it in two ways for the study:

  • Timeliness factors—on time pickup (OTP) and on time delivery (OTD)
  • Acceptance ratio—percent of load tenders accepted by a primary carrier

What the research revealed

In the study, researchers focused on two key questions. First, does paying higher rates to truckload carriers yield better on time performance? Second, does paying higher rates to truckload carriers yield better load tender acceptance? After analyzing the information, four insights emerged.

Insight: Paying higher rates to truckload carriers does not result in better OTP percentage.

Insight: Paying significantly above market price to truckload carriers does not notably improve OTD.

Insight: Paying significantly below market price to truckload carriers notably degrades OTD.

The survey found no relationship between OTP and freight rates. And while rates did have more impact on OTD than OTP, the correlation was weak.

However, the research showed a meaningful decrease in OTD when shippers paid below market rates. For example, a $50 drop below market rate led to an OTD performance below 40 percent. A rate of $20 below market resulted in 40 percent to 70 percent OTD.

Research also indicated that there was almost no additional cost to reach the 90+ percent OTD range. Shippers who paid market price had OTD between 70 and 80 percent, and those who charged less had an OTD below 70 percent. A possible hypothesis may be that when faced with more loaded trailers than drivers, carriers might choose the higher-paying load as first priority to assign a driver.

Insight: The study found no correlation between acceptance ratios and carrier pricing in a lane.

Carriers increasingly pursue freight consistency. When shippers offered consistent load volumes, the tender acceptance ratios of truckload carriers rose. However, if a shipper was highly inconsistent in a lane over the course of one year, research suggested they would pay up to $170 more per load. Those with highest demand consistency tended to pay a slight premium of $10 per load. A possible reason could be a correlation between very high-volume lanes and available capacity that must be repositioned to meet the demand.

Predictable demand affords carriers greater opportunity to optimize their networks. Third party logistics (3PL) providers also benefit from predictability, as their carriers are then able to commit volume aligned with their networks. When shippers stay engaged with carriers and 3PLs, their plan has more elasticity and they are able to respond to demand fluctuations. Instead of using a primary carrier and a backup, this research supported using a ratio tendering strategy, which awards loads to a group of carriers.

Bonus insight: The research did not ask specifically about the relationships between OTP and OTD, but the data showed an unexpected correlation.

First, the survey found that 80 percent of loads that were picked up late delivered on time. In other words, more than 80 percent of the time, carriers make up for delays in OTP and deliver on time. There is often a buffer of time built in between the required pickup and delivery. That extra time between origin and destination is needed, because there are many external factors that can impact transit: traffic or weather delays or equipment breakdowns, for example. Carriers use that buffer of time to maximize their HOS, and some choose to be late at pickup so that they can match the HOS and distance with delivery schedules in order to increase efficiency.

According to the survey, 50 percent of loads delivered late also picked up late. This illustrates that there is still value for shippers and transportation providers to work together to get loads out on time. To identify problem areas, shippers can conduct a lane-level analysis to identify patterns in carrier and location performance, or times of day for pickup and delivery. This may reveal not an extensive issue, but rather a specific problem that the shipper can address to improve performance.

Identifying the next steps

The research suggested two action items for shippers.

First, work with the right transportation providers. The best carrier for a lane is neither the cheapest nor the most expensive, but the one whose service network complements the shipper’s freight. Again, paying market rate produces the best OTD, while paying below market correlates to a drop in OTD, and paying a premium doesn’t provide a significant improvement. Carrier networks will constantly change, and it’s critical to recalibrate with your transportation providers to align demand with capacity.

Second, monitor performance for OTD. Good customer relationships depend on reliable carrier service levels. Shippers can use a transportation management system to obtain insights, like OTD levels, for each carrier used and determine how often carriers perform as expected.

 

Steve Raetz, Director, Research and Market Intelligence, C.H. Robinson

2017-03-04T16:14:02+00:00 March 4th, 2016|Ask the Experts|