Home Safety Apparel Truckload rate inflation suggests that service was extremely undervalued by shippers

Truckload rate inflation suggests that service was extremely undervalued by shippers

Chart of the Week: Van Contract Initial report average base rate per mile, Van Outbound Tender Rejection Index – USA  SONAR: VCRPM1.USA, VOTRI.USA

Contract rates for dry van truckload have increased roughly 25% over the past year, or 59 cents per mile, according to FreightWaves invoice data. In the meantime, carrier compliance rates for accepting electronic requests for capacity have only improved to 81.9% from 78.5%, according to FreightWaves tender data — basically simple cost inflation for getting the same product. 

The 17 cents per percent acceptance rate improvement suggests two things: Shippers were violently underpaying for transportation costs prior to the pandemic in regard to the value of service provided, and the current capacity shortage is not going to be solved on the supply side alone. The second point is a topic for another day. 

Transportation capacity has been largely taken for granted over the past two decades. The truckload space has been largely oversupplied for most of this period of time due to low barriers to entry. This relative ease of entrants has effectively spoiled many companies into thinking they will need to devote little resources to managing this extremely crucial function. 

While it is true that any commodity that is supplied in overabundance for a long stretch of time becomes nearly invisible to the entities that rely on it, the inherent value becomes visible in times of shortage.

Since January of 2019, freight transportation costs have grown 28% compared to the general Producer Price Index growth of 23%, which includes the freight figures. This suggests that transportation is of equal or greater importance than most other inputs, including the raw materials themselves. The difference has largely been availability. 

Supply chains in theory should be a symbiotic environment where each piece trusts and relies on the other for success. The cost-cutting mentality driven by a financial sector motivated by a strong bottom line is largely to blame — not that this is an entirely incorrect way of doing business. 

Focusing too much on cost controls is widely considered to be a death sentence to companies as they can be counterproductive to building quality relationships. Transportation and many aspects of the supply chain have simply been some of the easiest targets of this cost control mentality and are only just now revealing how indisposable they really are. 

The truckload transportation sector has endured multiple recessionary periods over the past 12 years, while the general economy has consistently grown. Its services did not become less valuable during those periods, but simply easier to manage. 

This is not to suggest that companies should have been spending 25% more on trucking prior to the pandemic, but only that transportation services had become more undervalued than many other inputs. Companies should strive to recognize what aspects of their business are more foundational to their success. 

Companies, like people, that form mutually beneficial relationships have the largest chances of long-term success. While cost controls will always be an important aspect of successful businesses, they should not be the sole focus of the decision-making process. Business relationships that are too one-sided are unhealthy and will manifest as such in the long run. 

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.

The FreightWaves data science and product teams are releasing new data sets each week and enhancing the client experience.

To request a SONAR demo, click here.

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