Contract, Backup, and Spot: How Convoy’s Digital Freight Network Delivers in all Market Conditions
The recent demand shocks driven by COVID-19 created a ripple effect throughout the freight market, destabilizing contract rates and driving surges in backup and spot loads. As the market quickly tightened and then just as quickly contracted to pre-crisis levels, our industry saw market conditions in a period of several weeks that normally play out over the course of many months.
These volatile market dynamics highlighted the importance of a comprehensive transportation strategy consisting of primary contract freight, a backup routing guide, and spot transactions. In this post, we explore how a digital freight network (DFN) like Convoy is uniquely positioned to serve contract, backup, and spot freight, and how shippers can reduce risk in tight and soft markets by allocating freight to a DFN.
Contract Freight and the Dream of Market Stability
The goal of contract freight is to create stability in the supply chain and minimize surprises for logistics professionals. An RFP locks in rates for a given period of time – typically a year. And ideally, these locked-in contract rates would give shippers peace of mind, providing budget predictability and familiarity with the carriers running each of their lanes.
Of course, contract freight is a far cry from this ideal. On any given day, the market is either either tightening or softening, creating pressure on truck prices that threaten the stability of contract rates. To make matters worse, contract rates aren’t legally binding. Shippers have no legal recourse when carriers reject contracted loads, and carriers can’t get reimbursed when shippers tender less than the agreed-upon volume.
Faced with this inconvenient reality, shippers can mitigate their contract risk by allocating lanes to a digital freight network (DFN).
Massive Freight Networks Reduce Contract Risk
The more trucks that are available for any given shipment, the lower the chance of tender rejection. As a result, digital freight networks like Convoy, with instant access to a massive carrier base, mitigate risk for individual shipments and over the course of the entire contract. Convoy’s DFN consists of tens of thousands of carriers and hundreds of thousands of trucks. By contrast, even the largest asset carriers have between 10 and 25 thousand trucks each.
For any individual shipment, the chance that Convoy will be able to find a truck is substantially higher than carriers and brokers with smaller fleets. This is particularly the case when an unexpected problem occurs, such as a mechanical issue that affects an inbound truck. In these situations, our technology can automatically identify and book a replacement carrier.
Over time, Convoy’s network is also more durable to macroeconomic headwinds that, in extreme circumstances, can cause carriers to shutter their doors. In the first three quarters of 2019, more than 800 carriers went out of business, including Celadon (3,300 trucks), New England Motor Freight (more than 1,400 trucks), and Falcon Transport (more than 700 trucks). Convoy’s network of tens of thousands of carriers reduces this risk and insulates shippers in the same way that a mutual fund insulates investors from the risk of an individual stock.
Machine Learning Increases Tender Acceptance
When a DFN provider like Convoy bids on lanes during an RFP, the rates submitted are based on a computational model that improves bid accuracy and ultimately leads to higher tender acceptance. Specifically, every bid that Convoy submits is based on millions of historical shipment data points and machine learning algorithms that project truck prices and contract rates sustainable to Convoy over the course of the contract.
As part of this complex modeling, we take into account that every shipment on every lane is unique. The price can be affected by the cargo on the truck, the pickup and drop-off locations, whether carriers like the pickup and drop-off facilities, the time of day, the time of year, whether the lane is a head-haul or back-haul, etc. Using this data to understand how an individual shipment’s price will change over time, we’re able to bid on lanes with much higher confidence that we’ll be able to service the freight over the entire contract period. This in turn leads to much higher tender acceptance rates compared to industry averages. Even in tight markets, Convoy has maintained a tender acceptance of more than 95 percent.
The reliability of our network and our tender acceptance are two of the reasons that the vast majority of Convoy’s freight is contracted. It’s also why we’re a top-five carrier for Fortune 500 companies in multiple industries, including food and beverage, consumer packaged goods (CPG), retail, packaging, equipment pooling, and more.
Backup Freight for Tight Markets
A tightening market can be caused by a reduction in truck supply, growth in product demand, or both. For example, extreme weather events, major holidays, DOT week, market exits by major carriers, and new hours of service (HOS) regulations can reduce the supply of available trucks on the road. Conversely, strong economic conditions or high season for specific segments like produce can have a tightening effect on the market by increasing product demand. Most recently, the extreme demand spikes in household goods, food, and water caused by COVID-19 created an acute tightening event for US freight.
The effects of these market dynamics are felt first in the spot market, where prices increase based on the laws of supply and demand. For example, a shipper needing to book a last-minute spot load for hand sanitizer or non-perishable food in March would’ve expected to pay more for a truck given the demand surge.
For carriers, a tightening market means that their contract rates (many of which were locked in months prior) aren’t as lucrative as rising spot market prices. Not surprisingly, this leads to carriers rejecting more of their contract freight, turning contractual obligations into paper rates, a term for contract prices that are no longer working and are “only good on paper.” During tight markets, rejection rates can spike above 25 percent.
For shippers, a tightening market with higher rejection rates means that they need to fall back on their routing guide, running through their list of backup carriers. The goal is to secure a known carrier and avoid going to the spot market, where they’d pay the highest rates and increase the risk of inconsistent service levels. To do this, the shipper typically gives each backup carrier a couple of hours to accept or reject the shipment based on the rates that the carrier submitted during the RFP process. Each rejection takes valuable time, and as shippers continue to go through their list of backup carriers, their shipment price continues to increase.
In these situations, a digital freight network like Convoy can provide the fastest, most reliable option for shippers. Rather than slowly making their way through a list of backup carriers in hopes that one of them will accept the freight, shippers can instantly see and book a price that Convoy guarantees. This provides shippers with peace of mind in two ways:
- They know they won’t have to resort to the spot market
- They won’t have to wait hours to secure their load with a backup carrier
Convoy is able to guarantee capacity at a given price because, at any moment, we know the status of the hundreds of thousands of trucks across our network.
In addition, shippers get peace of mind knowing that Convoy’s price reflects real-time market rates. Using machine learning, we combine the unique characteristics of any individual load (described above) with Convoy’s massive set of historical data to deliver a rate that most closely reflects the market rate up to the minute.
Spot Freight for Soft Markets
Soft markets are defined by a reduction in product demand, an increase in truck supply, or both. These dynamics lower spot market rates. For example, if a shipper needs to book a last-minute load and there are more than enough trucks available to service that load, the increased competition drives down truck prices.
In a soft market, the way shippers react depends partly on their annual shipment volume. Large shippers are less likely to skip their routing guides and go straight to the spot market even if doing so could lower the unit cost of each shipment. The reason is that it would be too labor-intensive to cover the high volume of shipments through spot market transactions. By contrast, small- and medium-sized shippers often have low enough shipment volume to more easily take advantage of the reduced spot market prices.
As shippers allocate freight to the spot market, Convoy’s DFN can provide several benefits.
First, Convoy provides an instantly bookable, guaranteed rate (similar to the guaranteed backup rates discussed above). In situations where shippers need to move freight urgently, this instant quote and easy booking provide additional peace of mind by eliminating the time that would otherwise be spent waiting for carriers to accept a tender.
In addition, Convoy reduces the risks of working with unfamiliar carriers. On the spot market, shippers worry about inconsistent service levels, the safety of their freight, and customer satisfaction. To mitigate these risks, Convoy uses the industry’s most stringent quality and compliance standards to help ensure that loads get to their destination safely. In fact, Convoy’s network of carriers is 15 percent safer than the industry as a whole, and is safer than the majority of the nation’s leading asset carriers. As part of this, Convoy is involved in far fewer cargo claims than the industry average. In domestic full truckload movements, a load is subject to a cargo claim about 1 in every 100 loads on average. With Convoy, the ratio is less than 1 in every 2,200 loads, approximately 1/20th of the industry average.
Convoy also gives shippers peace of mind with 24/7 visibility into their spot shipments. This capability is provided through Convoy’s online shipper platform, or through an integration with leading transportation management systems (TMS) and partnerships with supply chain visibility companies like FourKites, Project44, Macropoint, and 10-4.
A Durable Solution in Volatile Markets
The recent COVID-19 demand shocks have highlighted the need for shippers to implement comprehensive transportation strategies that support high contract tender acceptance, instant backup capacity, and reduced spot market risk. During this time, Convoy’s digital freight network was able to quickly adapt and deliver even higher performance as measured by on-time pickup (OTP) and on-time delivery (OTD) rates. As Gartner recently noted, “Digital freight networks can help companies that are looking for real-time available capacity or looking to reduce transportation costs during the current crisis, as well as during future challenging times.”
Regardless of whether the market is experiencing wild swings as we’ve seen in the last couple of months, or it’s going through more traditional cycles of expansion and contraction, a DFN is uniquely positioned to adapt to shifts in supply and demand, and to provide logistics teams with greater peace of mind. If you’re a shipper looking for a reliable freight service provider with a proven track record in contract, backup, and spot freight, we’d love the opportunity to chat and figure out together if Convoy can help support your freight needs. Simply fill out this form and a member of our team will follow-up with you.