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Understanding the Need for Variable Freight Pricing Contracts

by John Rediehs on April 8, 2016 No comments

First and foremost, all shipments are not equal in the realm of transportation planning. Many companies approach their shipping needs with a one-size-fits-all model, and are leaving money, service, and opportunity on the table.

Questions you should ask yourself about your current logistics company or department:

  • Does they truly understand the characteristics of your shipments?
  • Do they see opportunity?
  • Do they understand the market?
  • Are they optimized to provide you with the best service and cost?
  • How do they define your bidding process?
  • How do they define market pricing?
  • Do they know the market pricing?
  • How do you handle market shifts in demand?

The answer to all of these questions is data. But you are probably asking what data? How does your logistics company/department check itself? And how do you know that you are getting fair pricing that reflects your specific shipments’ characteristics?

Critical Freight Shipment Data

On a daily basis, there are millions of shipments moving across North America, and each shipment represents multiple pieces of data.Organizing this data into useful information give us insight into current market conditions, the ability to predict future market conditions, and an opportunity to react to current conditions.

Let’s see how a little data can be put to work to give us a probability on a rate that will secure capacity for a given lane.

What we need:

  • How many trucks are going to be dropping off in an area vs. how many trucks are domiciled in an area?
  • What rate did the shipment run to the area for – what are the chances of reloading out the area home? (is there a point of equalization taking place?)
  • On average, how many outbound loads originated from the drop off area in the past 48 hours, and to what destination?
  • Are there weather conditions that need to be taken into consideration?
  • What is the baseline cost of operation for the carriers (daily vs per a mile)?
    • Equipment cost
    • Driver cost
    • Fuel cost
  • How do we define the term “Area”?
  • What are the historical rates for outbound rates vs. current market conditions?
  • Is there a demand not based in numbers but in preference and how do we weigh it?

reddog-instant-freight-quote

A Real-Life Scenario of Variable Contract Pricing for Transportation Planning

To see how this works, let’s work with the following lane from Chicago, IL to Orlando, FL. This project was bid out in January of 2015. The shipment moved twice a week, and the contract was awarded on an annual basis.The pricing encompasses the entire year and will not fluctuate.(Equipment: 53’ Reefer)See below for spend assumption:

total-sept-2015

All the data above is from historical databases from Red Dog Logistics and the scenario that plays out below happens on an automated schedule daily within Red Dog’s computers. For demonstration purposes we have condensed daily analysis to a monthly analysis, otherwise the charts get out of control.

How to Put Variable contract Pricing Structures Into Action

calculating shipping rates

Step 1: Ratio of Loads Delivering and Picking Up

The first consideration that Red Dog Logistics takes in to developing market price is to compute a ratio of loads delivering and picking up in a specific location based of the lane number. Red Dogs’ network consists of 100,000+ different lanes numbers going to and from 349 different zones across the domestic United States. Once the system compiles the ratio information, it will compare it to running averages for both pick and destination areas. (Figure A & B)

figure-a

Figure A

figure-b

Figure B

The system will take into account the specific trend lines and will move in 5% in either direction to factor in errors in the ratio. The ratio is a great place to begin looking for market shifts and when charted out below you can see the anomalies appear that are clearly cost opportunities. (A chance to capitalize on Inbound or Outbound capacity).

In Figure C you can see there is a cost opportunity when you see a ratio jump from April to July in outbound shipments for Florida. The system has pinpointed a cost opportunity – the next step is calculating the cost that will take advantage of this opportunity.

figure-c

Figure C

reddog-instant-freight-quote

Step 2: Assessing the Baseline Price

The next phase calls on more data and we will look at the historical average of inbound and outbound pricing over the last 15 months for the lane. This data will give us a baseline price from which to factor fluctuations. (For purposes of speed, we are not factoring in equipment cost, fuel, driver pay, weather, behavior and tolls, but all these factors are considered in Red Dog’s instant quoting engine’s algorithm.)

This number gives us a baseline all miles rate to work with, for the round trip lane. Now depending the on the market shifts of the ratio we are able to give an on demand market price.

figure-d

Figure D

During the months of May & June, the market experiences an anomaly (due to produce season), but why should companies that are entered in annual pricing contracts not reap the benefits of the shift in market? Our hope with our variable contract pricing is to give shippers the flexibility of fixed pricing to protect them from top market fluctuations but also offer them the mobility to take advantage of market conditions that can present cost savings for the supply chain. Red Dog is able to supply these services through our data crunching and market knowledge.

Why Variable Contract Pricing Structures?

So ask yourself, what is your logistics company/department bringing to the table that is new and innovative that will provide the same stable contract capacity but give you the ability to benefit from downward market shifts in real time?

During the life of the contract, the above calculations will be going on daily and it will automatically be compared against the contract pricing in place. When the market price drops more than 5% from the agreed upon price, the shipment will move at the new market price and the cost saving will be passed directly to the shipper.

With variable contract pricing there is only an upside potential for customers as they are only exposed to savings and not exposed to the risk if the market shifts higher.

Variable Contract Pricing from Red Dog Logistics

Red Dog Logistics Inc. is proud to introduce variable contract pricing, giving customers the opportunity to capitalize on savings during market shifts, while enjoying the security that the price will never go higher than the agreed upon amount. A win-win situation for our customers and for Red Dog Logistics Inc.

Our customers rely on our technology and market knowledge to save money and secure capacity on shipments year round.

As seen in Figure D(for the above scenario), variable contract pricing against market and regular contract pricing can prove to offer significant savings.

Given the opportunity we would be more than happy to retroactively run our variable pricing structure on any lane that may be of interest to you. We make the process easy; we monitor pricing, adjust pricing automatically, and bill adjusted invoices to our customers with discounts added to help our shippers account for the fluctuations in pricing. We want to make running with the Dog easy, innovative, and cost effective. Contact us today to learn more about our variable contract pricing!

John RediehsUnderstanding the Need for Variable Freight Pricing Contracts

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