I realize we are getting ahead of ourselves since the details have yet to be laid out to my next statement, but let’s just say it does not make sense to execute a freight RFP when volumes are typically at their highest time of the year.
With that statement out of the way let us start the discussion on when it is the best time to quote your company’s freight in an RFP.
From the first to the last economics course one takes is packed full of theory around the law of supply and demand, which for simplification states that as demand increases up the supply curve (without additional supply brought into the equation) causes price to increase.
Having started my career in finance and being a part of annual budgets and the RFQ process for 32 years, I understand why finance departments ask for a bottom up budget every year to address the needs of banks and investors. However, the way in which the budgeting process is executed by logistics professionals should change to obtain the best freight pricing for their company.
Over the next several paragraphs we will provide the basis of how to find the best time to perform a freight RFP by looking at seasonal and cyclical freight patterns, along with a handful of easily found economic data points to find the low point in the freight market to hit the send button on the freight RFP for your company.
The key to the best negotiated freight rates is to quote freight when volumes are at its lowest points. The reason for this is in a world of uncertainty freight companies price with what they know at the time they do pricing and feeding their freight networks with the most possible volume is key to their success. When volume is at its lowest, they will do all they can to push volume in their direction by driving rates down to entice shippers to choose their freight service over the competition.
With that said, to determine the lowest volume points in a given freight cycle shippers need to know and understand the following elements associated with the freight market:
With the above information in full view a company will better position its RFQ cycle in a given year or given freight cycle, which may extend beyond a year, to drive the best freight rates for its business.
So with the foundation of this article in place, let’s start with the freight market’s seasonal patterns.
The freight and logistics industry has essentially three seasons:
The season is driven by several factors:
In the 1st two weeks of January the freight market is in a hangover cycle from the prior year. The freight network keeps logistics professionals busy managing return shipments, along with freight that could not make the year end push.
The other impact to the slower first quarter is Chinese New Year falls within the period. China all but shuts down for the week as its citizens celebrate the holiday. A side effect of the Chinese New Year is a mini capacity shortage on the front end and back end of the week as shippers either rush to beat the holiday shutdown or make up for last time because their freight was not moving during the holiday.
With all that in mind, truckload rates tend to be lower and in favor of shippers over motor carriers and freight brokers during the 1st quarter of every year.
March is the transition month with volumes gradually increasing into the 2nd quarter spring shipping season.
Over the April through June period truckload shippers will begin to see the market tighten with decreased carrier availability.
The produce coming off the West Coast and out of Mexico create “mini-peaks”.
As the spring season rolls toward higher summer temperatures, so does the increased demand for temp controlled truckload capacity to reduce spoilage of the produce shipments.
June closes out strong, as shippers push their mid-year financial goals and beat the rush for the July 4th week, which can be a challenge to find capacity with carriers looking to get off the road for the holiday.
The true “peak season” in the intermodal market can come into play as early as mid-July, which if it does, then prepare your company for a capacity constrained 2nd half of the year for all freight modes. Both 53’ freight capacity, intermodal and truckload, will experience escalating spot rates.
However, in most years the “peak season market” runs from the end of August to the first week of December.
The months of July and August carry the greatest risk of hurricanes. Hurricanes not only put severe stress on those families and communities that live in their path, but they also cause a breakdown of balance in the freight patterns for two reasons:
The four wildcards in the seasonal freight patterns:
There is no slowing down on freight capacity demands put on the market from ecommerce. The trend of brick-and-mortar retail moving to ecommerce was accelerated and cemented into consumer buying patterns because buyers were forced to go another direction in their purchase habits as a result of the COVID-19 pandemic. While on the surface one would think that only the small parcel carriers are affected by the change, the reality is every freight mode is impacted and has changed the freight seasonal patterns and freight providers are playing catch up to what that means to their business.
Imports can wreak havoc on any seasonal freight pattern. For example, if peak season imports hit the USA shores earlier than normal it causes significant strain on outbound West Coast freight capacity demand moving into the interior of the US because it bumps up a portion of the produce season capacity requirements. The freight capacity constraints are further exacerbated by the fact that it derails the overall freight flows throughout the United States and creates a mega imbalance of capacity supply and demand.
Natural disasters tend to be a Spring and Summer problem and when they hit they cause a severe imbalance in freight supply and demand, which we touched on with the impact of hurricane season in July and August.
As a result of COVID-19 public health emergencies need to be added to the discussion of wild card impacts that impact the typical freight seasonal patterns.
The next topic to cover is the cyclical nature of freight.
To the surprise of some, freight demand is not static. Freight is an economic leading indicator that ebbs and flows with the strength and weakness in the overall economy and because of it logistics professionals need to understand where the freight market is in the economic cycle to grasp whether capacity is going to tighten or loosen in the coming months.
One of the best graphs that we pay attention to at InTek is the Coyote Curve. (pictured below)
As the Coyote Curve chart illustrates there is a definite freight pattern that plays out cycle-after-cycle and to ignore it is to one’s own detriment. There have been plenty of folks thinking their “new” freight leadership was doing a tremendous job in driving their freight budgets down and service up only to discover later they were riding the win was nothing more than they were on the downside of the freight market cyclical cycle.
Supply Indicators: EIA Diesel Index, Class 8 Truck Orders
Both the diesel price and class 8 truck orders give one a sense on the supply side of the equation. The higher the class 8 truck orders are the more bullish the motor carriers are to drive their equipment supply up to meet shippers’ demand.
Demand Indicators: Consumption, Industrial Production, Inventory-to-Sales Ratio, ATA Truckload Tonnage
All the above demand indicators are important to include in the review of where the freight market stands and where it is headed.
The two InTek watches the closest are industrial production and the inventory-to-sale ratio. Industrial Production, IP, tells us the direction manufacturing output is headed, which manufacturing drives freight demand. GDP looks at the overall economy, thus it includes a number of sectors that do not move freight.
The inventory-to-sales gives vision into how the consumer consumption patterns are affecting inventory levels. The key to note with the inventory-to-sales ratio is too much in the channel drives freight demand down and too little is going to drive freight demand higher, as retailers work to build their sales channels to ensure the store shelves are not bare.
To procure the best freight rates you need to take into account the seasonal freight patterns, along with the cyclical economic data that is driving freight volumes up, down or sideways to find the lowest freight volume point in the market.
It will require a bit of tea leaf reading to time out the market on when it will be at its lowest. Keep in mind, you will never hit the exact bottom but the closer you are the better it will be for your company’s freight pricing.
To close and drive the point home again we’ll go with a quote by Alfred Lord Tennyson, “Ours is not to reason why. Ours is but to do and die". In other words, don’t follow the pattern that many in the industry does today, which is execute your company’s RFP bid every 4th quarter.
Also, don’t fall under the thinking your company must go out for its freight RFQ every 12 months. There is no harm or foul to either pull your bid forward or push it out based on what you believe is happening in the market.
There is always an exception to timing on volumes and that is with intermodal freight. The Class I Railroads operate on an annual bid process, but in a more favorable manner it is best to price in the 1st quarter.
We hope you found this article to be useful for your freight RFP process and the how and why that drives the best freight pricing.
If you're ready to take the next step, at InTek Freight & Logistics, we can help. Just tell us what you need and we'll discuss how our expertise can help with the unique shipping challenges your business faces. Rather do a bit more research first? View our Freight Guides for comprehensive articles and eBooks on all things freight and logistics.
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