By: Sujen G George -- Senior Research Analyst, Logistics and warehousing
08 August, 2017
The seasonal swing in demand for trucks is tough to meet, especially at the last minute when the required trucks are not in the premises. Many a times the procurement managers are left with very little option to obtain the trucks. However, with the development of technologies such as on-demand platforms, the demand can be met as and when required.
Currently, procurement managers across the industry rely on middle men or agents who source trucks at exorbitant rates to meet the need of the spot market. However, if the excess requirement is planned early, they normally have to engage with a 3PL for certain pre-requested number of trucks.
The development of on-demand platform for truck sourcing can help the procurement managers to obtain trucks as and when required on current day’s spot market rate, without the need to engage with an agent or 3PL provider. This can help the procurement mangers to keep a tab on the time, safety and price of transported goods.
Increasing and changing demand across season in a year has never helped sourcing managers to predict the number of trucks required to carry their goods. It was identified that in the U.S. about 75-80 percent of trucks used are under contract market rates. However, the procurement organizations especially in FMCG and e-commerce companies are forced to opt for spot sourcing of trucks during holiday season when the demand peaks. From the below DAT spot freight rate index we can see that during March every year the demand for spot trucks increases and it gradually reduces by the year end.
During the peak season, procuring companies generally engage either with a 3PL or a middle man (who act as broker) or use the load board.Though these methods have been in practice for ages, most of the transportation managers still struggle in terms of:
These issues led to the emergence of a technological platform offering a solution for on-demand trucking. The on-demand trucking solution is spot market where sudden truck requirements are met as per the demand.
Engagements for spot trucks are majorly through an agent or load board. The agent is generally engaged on a commission basis at about 1-2 percent of the entire load. On the load board, shippers still face challenges such as posting a load and negotiating with carriers. The shippers have to post an ad every time they require a carrier.
After the shippers shortlist the carriers, they have to negotiate for the best rate. Though these processes of engagement have been in practice, the sourcing companies still have trouble in implementing them. This is due to the negotiations involved each time when brokers or shippers are identified from load board.
Current solutions in the market
Due to limited options in the market, a majority of the sourcing managers still prefer brokers to save time in terms of searching for trucks. However, this results in higher sourcing costs. Very few organizations are capable of planning their truck requirements in advance and booking contract rates with their 3PL.
The solution models can be better understood by the following assumption of a company and its various engagement models to source spot trucks.
Company A (F&B company) with $10 billion in revenue spends an average of 6-7 percent in logistics (about $600 million), from which 2 percent (about $12 million) is spent on contract trucks and about 1 percent ($6 million) on the spot market.
Solution 1: Engagement with a 3PL
The procurement managers foresee the demand and engage with their current 3PL for the extra trucks required during the peak season. However, the procurement organization has to pay higher cost as the 3PL operators are engaged on spot rates for the extra trucks.
Solution 2: Engagement with a middle man or agent
When there is a sudden rise in demand, procurement managers are forced to engage with brokers or middle men who arrange the trucks on a commission basis which is about 1-2 percent of the entire cost.
Solution 3: Using load boards for identifying trucks
Load board is a web-based platform where sourcing managers post their requirement for carriers or the carriers post an ad with respect to the route they are plying. Once the carriers are shortlisted by the shippers they normally negotiate the best rate based on the spot rate.
Solution 4: Using on-demand tucking platform
During a sudden rise in demand from the consumer, the sourcing companies can now book a carrier for their cargo through the app and even track their cargo right from dispatch to receiving it at the point of delivery.
The cost comparison of various engagement models provides a clearer picture of the cost incurred by the company A in managing their freight demand in a year.
From the above chart, it can be understood that 3PL and on-demand platforms are cost-effective options. While with 3PL, the company may have to pre-order the number of trucks for spot market. However, this is not the case with on-demand platforms.
Comparison of engagement models and its effect on the sourcing company
On comparing various solutions on parameters such as time, safety, reliability and pricing, we can identify that the on-demand platform has better effect on the sourcing company.
From the chart, it is evident that the on-demand platform can help the sourcing company to source trucks at effective rates with the lowest sourcing lead time and without compromising safety of the transported goods.
A cardboard box manufacturer in Seattle, WA normally uses 20 to 25 trailer worth of sheets of cardboard, and by end of the day converts them into boxes to ship out. If on an occasion they have to encounter unseen demand or they run out of glue used to hold the boxes together, then the case explains the two scenarios faced by the procurement team with and without on-demand platform.
On-Demand truck platform is a new idea and vendors are mostly just startups. Given below are some of the startups in the U.S.
Procurement action plan summary
15-20 percent of the freight engagements in the U.S. are through spot market, which till few years ago was either through middle men or using load board. On considering the implications of adopting these solutions, sourcing companies are faced with issues such as safety, sourcing lead time, reliability and the burden of negotiating the best deal with the carriers. However, with the development of on-demand platform, the shippers are now open to broader market of suppliers who are willing to provide the service at the best possible price.
The growth of startups such as Convoy, Cargomatic, TugForce, Deliv and Kanga has facilitated this change. They provide a wide range of services for shippers and ensure that the supply of trucks is always available for them at any point of time. The on-demand platforms have started to make changes in the sourcing practices and are expected to improve the sourcing experience for shippers at an affordable price tag.
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