2020 taught us a lot: how to wear a mask properly, adjust to Zoom meetings and, of course — how to navigate through volatile shipping periods. In 2020 alone, tender rejection rates took quite a few sharp turns, moving from just 10% on the Outbound Tender Reject Index (OTRI) to nearly 30% by the end of Q4.
Although we’ve seen some recovery since these especially volatile days, shippers should remain cautious when creating their Routing Guides to account for possible market volatility and rejection rates. Depending on how they’re prepared and executed, a Routing Guide can be the most crucial tool for staying on budget while meeting the needs of the business.
Here are five key tips on how to move away from using Routing Guide “killers” and create a killer Routing Guide:
1. Align Your Procurement & Operations Teams
Typically, a procurement team’s primary focus is optimizing a Routing Guide for cost, while the operations team's primary focus is optimizing performance. These two objectives may seem in conflict, it’s about finding the right balance between the goals of both teams. Adjusting carrier bids to account for this balance is a great first step.
Some shippers use a method of nominal and effective rates to account for both. Nominal Rates are the rates bid by the carrier during the bid event and are most effectively applied with incumbent carriers. Effective Rates are the rates bid by the carrier during the bid event that take into account their performance.
It's also important for procurement teams to collect all of the operational requirements from their operations team and ensure that they select carriers that can meet those requirements. Some of the pricing submitted by carriers may look enticing, but if the needs of the business can’t be met, the rates are of little value.
2. Only Bid-Out Lanes that Have Contractual Freight Characteristics
Not all lanes are created equal. Shippers often get frustrated when they bid out lanes thinking that securing a contracted rate from a carrier will reduce or even eliminate the need to source capacity on the spot market. The reality is that certain lane characteristics are highly conducive to contracted rates and some are not.
The best lanes for contracting are lanes that have weekly consistency and operational components that are highly repetitive. On the other end of that spectrum are lanes that ship less than once a week, might be seasonal in nature or have operational characteristics constantly in a state of flux.
Carriers will often provide rates on all lanes on a bid, but are far more likely to honor the rates on lanes that are viewed as highly consistent. Less consistent lanes may be better suited for capacity options via the spot market or a cost-plus arrangement.
Bidding and awarding freight with more consistency will increase the likelihood of the Routing Guide holding together.
3. Create Accurate Forecasted Volumes
There are three main steps to a bid event: building the bid, running the bid, and awarding & executing. Most shippers spend the vast majority of their time on the latter steps, but step one, building the bid, is foundational to the entire process and an area that should be of focus.
Forecasting is a difficult task. Some shippers deploy small armies of analysts to try and get it right, but even the best laid plans can go sideways. Several studies have found that shippers only tender 50%-70% of the freight that they award to carriers. Many issues could cause this, from consumer volatility to manufacturing hiccups; it’s challenging to get forecasting correct. With that in mind, it’s hard for a carrier to maintain capacity on a lane when the volumes are not being realized. Even if the lane aligns with the forecast over time, even a few weeks of mismatched volumes can lead to tender rejections.
It’s easier said than done, but taking the time to forecast as accurately as possible will increase the likelihood of Routing Guide resilience.
4. Find Balance Between New Partners and Incumbents
There is nothing more attractive than a rate on a lane that looks like it can offer significant savings to a shipper — on paper. To the procurement professional, the thought of a double-digit savings opportunity is too good to pass up. Often, these appetizing rates are coming from new carrier entries into the shipper’s network. Because the carrier is new, they may feel the urge to “buy” their way into the shipper’s network with the hope of raising rates overtime or making up the difference by covering spot shipments for the shipper. Sometimes, a new entry may genuinely have a competitive advantage that allows for below-market pricing.
On the other hand, the incumbent is familiar with the operational nuances of the shipper and has likely priced the business accordingly. The carrier likely isn’t trying to make a fortune but knows what it takes to run the business profitably while meeting the shipper’s expectations.
To drive competition and ensure incumbents don’t remain stagnant, it’s important to take calculated chances on introducing new carriers to the network. The reality is that with over 928,647 for-hire carriers, there is likely always a carrier that is a better fit for the lane and can do it better and cheaper. The key is to ask the new carrier enough questions upfront to ensure sustainable pricing.
5. Properly Prep New Service Providers For Your Operation
Onboarding a new carrier is like onboarding a new employee. To ensure a new carrier can meet the demands of the Routing Guide, ensuring that the carrier is adequately trained on the nuances of the business is critical. Often, shippers award business to new carriers with little to no training and expect the carrier to figure it out on their own.
Take the time to introduce the carrier to the people they will be working with daily, providing them with relevant contact information, standard operating procedures, escalation points, etc. Some shippers even allow carriers to come on-site for in-person training to review the shipper’s TMS, review operating procedures, and meet and build relationships with the people they will be working with daily.
Like an employee, the more time a shipper takes to onboard a carrier prior to the launch of the Routing Guide, the more likely that carrier is to have success operating the business.