Today’s RFP Culture
After the year we had in 2020, and despite everyone becoming accustomed to the new normal in freight rates halfway through 2021, the term request for proposal (RFP) has taken on a new meaning and impact when it comes to freight spends, budgets, and ultimately the bottom line.
RFP’s were once used to contract and secure year-round pricing with guaranteed capacity, but as demand has increased and capacity has tightened, RFP’s have morphed into a paradoxical vessel that if left to its course can destroy routing guides, bust budgets, and drive rates up. In 2020, many shippers found themselves victims of these circumstances as tender rejections rose from 10% to more than 30%, and the dreaded “paper rates” began to surface in many shipper’s routing guides. As a result, increased amounts of loads hit the spot markets, which lead to an increase in competition and rates — and the blood pressure of every transportation manager. But as a business, shippers learned it’s important to adapt or die and since, the transportation industry has seen new RFP strategies emerge that if used correctly can successfully combat the volatility of today's freight market. Learn how to protect your routing guides in this new RFP culture.
As a shipper, there are several different ways you can structure your RFP to protect your routing guide, all of which revolve around the concept of segmenting or focusing your bid around core characteristics of your supply chain. For example, if your supply chain is built on consistent and easily forecasted volumes, the same model for a company whose supply chain is built on inconsistent projects wouldn’t work. All supply chains are different, but when the RFP focuses on the unique characteristics of your supply chain, it will set you up for success.
Quarterly Pricing
Do you have the ability to accurately forecast your freight? Are you mainly project or seasonally driven? If so, an effective way to combat RFP volatility and protect your routing guide is to move to a quarterly pricing model. A quarterly pricing model allows shippers to tailor RFP’s to match the busy season and lock in pricing that is less affected by seasonality. When using quarterly pricing, the idea of spreading the cost of a lane over a year is gone, allowing you to retain savings in less constrained markets. You will not become a victim of locked-in paper rates for the year that only lead to your loads hitting the spot market. Quarterly pricing also gives performance leverage for shippers to use when negotiating with their carriers for the next quarter. If your freight is seasonal or volumes are hard to forecast, a quarterly pricing model might be a good fit for your network.
Single Source
Another strategy to combat RFP volatility — and to avoid mass tender rejections and paper rates — is to employ a single source model. This model isn’t for every shipper, and only works well with organizations with multiple fixed shipping locations that have predictable volumes of freight.
In a single source model, one carrier is responsible for all shipments to and from a certain location. The real driving factor for success in this model is a strong relationship between the shipper and the carrier. In the model, customers know that carriers will uphold capacity because they are the only carrier in their network who is moving that location's loads. One might think that this can give the carrier all the cards, resulting in rejections and high spot rates, but in reality, it is quite different.
A good relationship between the shipper and carrier is critical for success in this model because there needs to be understanding that as the carrier, you get the good and the bad freight — you get all the freight. This model then creates ownership by the carrier of these lanes that they then can build a network around. Another good thing to note on this model is that it also cuts down on broker competition, therefore preventing increased rates due to multiple brokers working on the same loads.
Regionalized Capacity
Regionalized capacity is very similar to a single source model, but on a broader scale. A regionalized model allows shippers to assign carriers certain areas that they can focus on as a sole or limited provider. This model works great for larger shippers with too many facilities or too much freight to single source. The concept is quite similar as are the benefits to your RFP. A stronger, more loyal carrier base, decreased carrier competition, and a symbiotic shipper carrier relationship are all results of a regionalized model that shippers can employ to protect their routing guides.
Cost-Plus Model
As technology and visibility moves to the forefront of logistics, a new pricing model has emerged that changes the way transportation is priced. In a cost-plus model, freight rates move from a set negotiated rate to more of a service charge for providing transportation service. The cost-plus model isn’t for everyone, but shippers with high volumes for freight with predominantly broker carrier bases can greatly combat RFP woes and lower freight spends by employing this model. Basically, this model is a fixed markup on freight rates. For example, a broker will pay a truck $1,000 to move a load, share this information with their customer, and then mark up the load a fixed amount. Chariot Logistics utilizes a proven cost-plus model called Price Proof. The cost plus model is the most complicated, but it does offer the most defense against RFP volatility. A strong shipper/carrier relationship and strong tech capabilities are critical for this model to work. If you are interested in learning more about Chariot’s cost-plus Price Proof model, please email aschnitzer@chariotlog.com to learn more.
As supply chains and transportation continue to evolve, so will the ways in which shippers bid out and secure capacity. Employing some of these models could help with your RFP problems and lead to a better bottom line.