It is hard to believe it has been almost two years since the onset of the pandemic. We still don't fully understand the extent of the disruption that has overwhelmed the global supply chain, nor do we know what to expect in the coming year. It is uncharted, unfamiliar territory.
From short supplies and depleted inventories to delayed shipments and order backlogs, the movement of goods has never been so unpredictable and stress inducing. But the biggest issue for shipping managers, and dare I say, the elephant in the room, is not so much the daily struggles that come with tight capacity, employment woes, and lack of raw materials, but the result of it all, which is soaring freight rates.
Just How Much Have Freight Costs Risen?
It seems as if every month shippers are seeing their profit margins wane as transportation costs take up more and more of their already squeezed profits. At first, consumers were protected from these rising costs. Warehouse managers who are used to seasonally fluctuating freight rates, hoped the higher rates would be a temporary situation. It soon became clear, however, that not only were the higher rates the new norm, but they were continuing to escalate.
On the spot market, during the week of September 20-26, shippers saw dry van rates 14% higher than the same time a year ago. Reefer rates too at 18% higher than this same time last year, and flatbed outpaced them both, up 17% year-over-year.
(The chart below shows the escalation of spot rates from June 2020 through August 2021)
(Chart: Statista) Blue = Dry Van, Gray = Reefer, Black = Flatbed
On the contract rate side, the national average rate increased between 6-7% in Q2 of this year. If you look at the average dry van contract rate, it has increased by nearly 25% in the last 12 months. It is no wonder bosses are asking their transportation managers tough questions. (Chart below.)
Why Are Rates So High Right Now?
The short answer to this frequently asked question is that there is too much freight for the existing supply chain infrastructure to handle. The long answer, however, offers a much clearer explanation.
The Driver Shortage
Even before the pandemic, supply chains across America were stressed. The driver shortage has been dogging the industry for almost half a decade now. In 2017, the American Trucking Association stated that by the end of that year, the driver shortage could reach 50,000. They even predicted that the shortage could grow to more than 174,000 by 2026. Currently, the U.S. is anywhere between 60,000 and 100,000 short on drivers. And no wonder with the unprecedented uptick in freight volumes.
Labor shortages are prevalent in every sector of the supply chain, and it is not just truck drivers. Employment challenges have affected warehouse workers, dock personnel, and railyard employees.
Record Volumes and Tight Capacity
The chart below from Freightwaves/Sonar shows just how much more truckload freight volume there is this year on a national level (shown in blue) compared with 2019 (in green), and 2020 (in red). As a result, shippers vying for capacity are now paying more to secure trucks.
Shippers are also finding that carriers are being more selective about what loads they accept, which is evident from the outbound tender rejection index shown below. This year is shown in blue, compared with 2019-2020, in red. (Source: Freightwaves/Sonar)
Bottlenecks at Ports and Railyards
In addition to the driver shortage, record volumes, and tight capacity, the port and railyard situation has been struggling too. Last week, the country's largest port, that of Los Angeles/Long Beach, had over 70 vessels waiting at berth to unload container freight. In an effort to avoid logjams, some shippers are opting to use East Coast ports instead. Just this week, there have been accounts of ports on the Atlantic side, such as Savannah, facing backups similar to West Coast congestion. A few large retailers like Costco and Home Depot, in desperation, have contracted their own private dedicated vessels.
Ships are much, much bigger than they used to be, which is one factor compounding the problem. They take longer to unload and more manpower and trucks to process.
The intermodal railyards are also facing substantial headwinds. A huge amount of freight that comes into the United States goes directly from the ports onto rail. Railyards are dealing with labor shortages and driver shortages too. To make matters worse, there is a shortage of chassis at ports and railyards, leaving containers that are stacked on the ground often sitting for extended periods of time.
Not only are transportation costs soaring, warehouse space is also at a premium these days. Shippers are no longer using the "just in time" inventory model, but instead are using the "just in case" model. This is adding to a shortage of warehousing space, driving prices up even further.
What Factors go Into a Truckload Freight Quote?
When it comes to providing a freight quote, there is no such thing as a standard rate. Too many variables are in play to offer a set price per load. But there are a number of factors that 3PLs must evaluate before providing a shipper with a rate.
Current market conditions
When we talk about market conditions in any given area, we are looking at multiple criteria, such as load-to-truck ratios, truck postings, head haul indexes, how attractive the lane is for a carrier, will the carrier have to deadhead to get back home, is weather a factor (hurricanes, snow, or wildfires), and how in-demand is their equipment.
Tight capacity means having more freight than equipment to transport it. This has been the scenario for much of 2020 and 2021 with record volumes of goods and too few trucks to haul it. Some of the factors that have contributed to the tight capacity market are the driver shortage, COVID-19, and stalled out new truck orders due to chip shortages.
The length of haul is a big part of the equation when calculating a rate. There are long-haul, tweener shipments (more than 250 miles but less than 400), or short-haul (within a 150-mile radius) loads. The more miles traveled, obviously the higher the rate. If team drivers are required, that will cost more too.
Lane Choice (location of origin & destination)
We have all heard the saying, "It's all about location, location, location." That business motto holds true for freight rates too. If the pickup origin is a place that is out of the way, or hard to get into, it is going to cost more. The same holds true for a shipment's destination location. Having other freight available in the area to pick up after the initial load is delivered is also a consideration.
- Value and Weight
High-value shipments will cost more because they are considered high-risk if damage or loss occurs. Added insurance is more costly and is usually required for these shipments. If the product is overweight or oversize, it will also add cost to a freight rate.
Special requirements will add cost to your shipment. The need for specialized equipment, for example, like step-decks, goosenecks, or lift-gates will drive up the rates. Requiring specific delivery or pick-up times will also cost more.
If ample lead times are not provided by the shipper then added costs will be required to expedite the load if it is to reach its destination in time. The basic rule of thumb will always be the more lead time you give a 3PL, the better.
Shipping your freight during peak season is going to cost more than when you ship during the off-season. Peak seasons occur around holidays and during summer's busy produce season.
Spot Rate or Contract Rate
Generally speaking, spot rates (or "on-demand" rates) are higher than contract rates. Sometimes the market flips and contract rates can be as costly as spot, but that is the exception, not the rule.
Fuel costs have always been a part of the freight rate variable.
Accessorial fees (meaning additional fees) can vary widely from one 3PL to another, so be sure to get a full listing when you ask for a freight quote. These added fees can include everything from lumper fees, truck-ordered-not-used, layover, redelivery, limited access, hazardous materials, after-hours delivery, additional stops, storage, and detention charges, to name a few.
How to Ensure You Are Not Overpaying for Freight Services?
- Know the current market
Are the rates in line with current market pricing? If you don't know, read our weekly market report to follow the latest trends, see what volumes are doing, and know where weekly spot market rates are heading.
Do you have full visibility into your shipment at all times? Not knowing where your cargo is, or what condition it is in (especially for temperature-controlled freight), can cost you money and put you at risk for freight theft or damaged cargo.
Many 3PLs, such as Choptank, have made huge investments in shipper technology. Choptank offers a free, proprietary customer portal called ORBIT TI. This intuitive software platform provides all the necessary information a shipper needs in one convenient place. It offers real-time tracking, data-driven analytics, information on shipments such as pickup status and delivery, as well as start/stop times and capacity utilization metrics. ORBIT PAY offers shippers a simple way to download invoices and other important shipping documents. You can also easily pay online with the click of a button.
- Frequent Review
Make sure to re-evaluate pricing on lanes that you frequently ship by requoting rates when you have time. Pay special attention to high-rejection lanes to see how you can improve or possibly avoid them.
- Lead Time
Are you giving your shipments ample lead time? If not, you may end up wasting money paying for expedited freight.
Is your freight consistent? Shipping the same freight every week saves costs by making it easier for a 3PL to schedule with repeat, reliable carriers, improving efficiencies.
- Relationship Building
Do you have a good relationship with your 3PL? Do you know your salesperson's name? Solid relations can save you money too! Make sure you are working with a 3PL that truly understands your business and makes cost-saving suggestions such as consolidating loads or changing the mode of service.
Shippers are wondering when rates will hit their ceiling. According to Steve Covey, Executive Vice President at Choptank, "Over the road rates are up 25-30% year-over-year. We still are seeing weekly spot rate increases and a greater disparity between loads and trucks. Will rates continue to climb? Yes. There are five key factors that will determine when the rates will finally reach their ceiling.
- PORT CONGESTION - Has port congestion subsided? Port congestion is a pivotal data point. As of Friday, there were 74 container vessels at berth off the LA/LB ports. The port of Long Beach has seen a 32% increase in processed cargo this past year.
- DEMAND - Is demand is still increasing?
- CAPACITY - Are transportation options decreasing?
- LABOR SHORTAGES - Are labor shortages still impacting all of the supply chain?
- RATES - Are high prices creating inefficiency, such as reducing length of haul and total miles?
"As long as these 5 factors stay the course," says Covey, "rates will continue to rise."