Scarcity and collaborative contracting

The current squeeze on truckload capacity is affecting some shippers more than others. For shippers who are really feeling the pain of lower service levels and higher costs, let me assure you that this is a cycle that we have seen many times in my 40-plus years as a shipper and 3PL operator.

While tactically scrambling for coverage, shippers need to begin now to strategically build relationships that will sustain competitive cost and service metrics over many years. There are three common strategies for tight markets. I refer to these as confrontation, conciliation, and collaboration.

These three strategies also refer to the tactical stages of adjustment for shippers, 3PLs and brokers who have been acting poorly in their buying methods with carriers.

When the market turns tight, domineering shippers move from surprised and angry at spikes in costs and delays in shipments to being friendly and conciliatory and then finally being open and “vested” with service providers with an eye to building and sustaining a healthy, collaborative relationship over many years.

To avoid the pain, my suggestion is to think long-term up front and pick the right strategy:

• Confrontation consists of a win/lose approach. The shipper sees the carrier as an easily replaceable commodity and “allows” carriers to aggressively bid for the business. Shippers insist that carriers conform to a shipper-centric contract, and committed volumes go from zero to too many to handle depending on the shipper’s needs. In this case, the carrier assumes the risk and has to guess how many resources have to be ready while sales cost are high as the carrier tries to please the shipper and renew the contract. This strategy fails when carriers stop aggressively pursuing the business—like many in the market are doing right now.
• Conciliation is when the shipper realizes that they don’t have an advantage and the carrier has other choices for loads. In this case, the carrier becomes more distant and less pro active in maintaining the relationship. The shipper tries to attract carriers with concessions on price, pickup times, volume commitments and payment speed, while carrier employees find the buyers and loaders much more friendly and flexible. The question in the carrier’s mind is: how long will this last?
• Collaboration requires a culture change for many shippers. The most difficult step in this strategy is openness. Truly sharing our price and service needs with service providers feels risky, as we let them know our goals up front. Will they take advantage? Could we have gotten a better deal if we used confrontation?

The response to the shipper of an open disclosure is that the carrier explains how they make money and the ROI needed to sustain their business. The shipper explains how much they can spend on freight and still be competitive. This is an eye-opening exercise, as it opens the door to a business model where the two sides become collaborators.

In this case, the collaborators agree on a pricing model for good times and bad. They agree to govern themselves as partners with a long-term view of the relationship, and neither party has to absorb unnecessary costs or service interruptions. When the market for either shipper or carrier becomes more challenging, they work to innovate their way through it.

The shipper adjusts hours to allow carrier time to turn trucks faster, while carriers help shippers understand their customers, the freight market and where the shipper can save money. Again, trust is key in this scenario. When collaborative partners are faced with tough times, they stick together to get both parties back to a place where they can meet their business objectives.

How we act now when there’s stress in the market sets the stage for our relationships in the future.