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July 24, 2020
What Shippers Can Learn From the Evolution of Transportation Procurement
Who remembers 1980? Transportation capacity procurement, as we know it, was virtually nonexistent until the industry deregulated that year. Since 1887, when the Interstate Commerce Act created the Interstate Commerce Commission (ICC), rates were regulated and published in public tariffs for all to see.
Deregulation Gave Way to A New Procurement Landscape
Darius Gaskins, the Republican Commissioner of the ICC in the Democratic Carter administration led the way to deregulate a significant part of the transportation industry. Two key pieces of legislation in 1980 enabled his visionary leadership: The Staggers Act and the Motor Carrier Act of 1980. They resulted in immense freedom for trucking and railroad companies to compete across modes and with each other.
With this development, trucking companies could freely operate anywhere, at any price rather than being restricted to specific routes. This change in the market also revealed that large-scale inefficiency and over-capacity was rampant in the industry. Railroads, and most particularly their intermodal business units, achieved complete pricing flexibility, without the need to file public tariffs, allowing them to compete head-on with over-the-road (OTR) trucking.
Learn more about the ICC, Motor Carrier Act, and how they led to modern-day fuel surcharges, here.
The Introduction of Carrier Competition
This led to two major waves in this tsunami of change: significant reductions in cost for shippers as carriers fought to gain or retain market share and a large-scale shift in the composition of the market.
Railroads began to consolidate and get much larger (from 70+ Class-1 carriers to 5 today) and the number of trucking companies proliferated, as barriers to entry evaporated. This also spelled the doom of many established trucking companies that could not adapt. If you compare the Top-100 motor carriers in 1980 v. 2020, very few remain, yet there are many more for-hire companies to choose from, as newer carriers like J.B. Hunt, Schneider and Swift saw significant opportunities and jumped into the market.
This tectonic shift completely altered the way shippers sourced transportation capacity. Prior to deregulation you simply looked to see who had operating authority on the route of shipment and then paid the published tariff rate.
Post deregulation, while the market was seemingly chaotic, shippers soon realized there was an opportunity for reducing their operating costs. This gave birth to the competitive bid approach for having carriers compete for their business. One of the game-changers was the advent of computer-based spreadsheets (solutions like Visicalc , Lotus 1-2-3 , and, of course, Excel ). This allowed electronic bids to be compiled and distributed, although without the internet the process was typically conducted by sending diskettes via mail or courier services.
New Advancements to Navigate a Wave of Change
In the early days, it was easy to look really smart, as rates were falling steadily, and carriers scrambled to cut prices so they could maintain or expand market share. In October 1993, while at Andersen Consulting my team and I developed one of the first (if not the first) enterprise-wide holistic, multimodal sourcing event. Prior to this event, bids were typically done by mode (i.e., TL/LTL/Parcel/Marine).
By exposing the entire transportation network (inbound, outbound, and interfacility) to a broad spectrum of carriers, across all modes, competitiveness could be enhanced, and we would also learn quite a bit more about mode-shift options. This also allowed for the carriers to surface opportunities, which they could see and we could not. We expected the carriers to tell us how they could best serve us by the way they approached our business, in terms of price, service, and capacity. This also gave them the ability to pick freight that best fit their network of capacity.
When “New School” becomes “Old School”
The approach referred to above was unique for its time because it was across all modes and all facilities in North America and included liquid and dry bulk truck and rail as well as standard van and container truckload volumes as well as LTL for approximately 10,000 lanes.
This experience taught us a lot about how carriers would approach freight bids and what was attractive to them. This approach and methodology have been refined over the next 25-plus years, with major game-changers like the advent of the first bid-optimization technology (Optibid).
While the math was sophisticated, the process was slow. Responses had to be physically sent in for analysis and report generation and then the results were transmitted back the same way. In most cases, it could take a week or more to complete a single scenario.
The Rise of Data and Computing Power to Optimize Procurement Processes
Two things drastically upgraded this model: the widespread expansion of laptop computers and the advent of the internet, which allowed close to the real-time transmission of data.
The net effect was that by the dawning of the 21st century, the foundation for robust, facile transportation sourcing and optimization had been laid. Soon, other technology providers entered the market, and today shippers have an array of tools to select.
Read about how industry-leading shippers are managing capacity in complex networks more effectively, with the latest technology and data on the market.
This is important in the context of this article, because the structure built on that foundation has, by practically all measures, changed very little as we head into the tail end of the 21st Century’s Q-1.
Time for a Change in Transportation
Sound advice, given many years ago by an anonymous source says, “When your business model is the same as it was 10 years ago, it’s time to consider a change.” We are now approaching 25 years and for many shippers the process remains the same: An annual, mode-specific (e.g., TL, LTL, Parcel, Marine) bid that is generally seen by all players as a rate-shopping exercise. While these sorts of projects frequently produce benefits on paper, they seldom are sustainable over the course of the contract period, unraveling the results along the way.
Interested in learning more about how this process has evolved? Read how this process has been revolutionized with better data and a “new-school” approach.
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