The key to freight contracts

In a game of poker the best transparency you get is what’s already on the table versus in-hand. The transportation industry and its clients go to dinner with placemats instead of poker chips but the game is still poker. Once over, each side gets turn in grievance about not having transparency around the terms or execution of the agreement until the next game. The devil is in the details, which go to either’s posse to execute.

I’m a lousy poker player, but I may have a key to keep tabs on the outcomes for the benefit of all.

At the worst of the pandemic, truckload tender rejection rates ballooned to 25%. Meaning, of 100 shipments offered, 25 were turned away. If the overall for-hire market is $4-500B, about $100B in business was up for grabs in 2021. A slow market akin to the last two years at 3-5% brings that figure down to about $20-25B in available revenue. An 80% reduction in the aftermath.

Considering the top 1,000 freight brokerages, made up $114B in revenues last year, one can see inroads made into the contract market beyond the meager spot pool. While those most exposed to it capitulate. Smaller brokerages and carrier formations carrying the largest brunt of the downturns.

Those that live by spot, die by it, so they say. Even in the best of times from the service provider standpoint, 75% of freight was still moved under acceptance and loose agreement throughout the heydays of the pandemic era. The good stuff doesn’t go to auction. The desire for it keeps adherence over legalese. That’s good enough to keep most out of courtrooms yet leaves the gray areas wide open between RFPs and awards.

There are very few dishonest people in this process. Simply, no one can predict the future and ship happens. If an order falls through or a plant goes down, the award goes with it. Providers break down or go out of business. Relationships exist because so much is massaged in between award and fulfillment. On one end a shipper entity is providing volume over a period of time at a fixed linehaul rate. On the other, a provider promising to adhere and provide capacity for said business.

A large chunk of this volume offered is known and easily forecasted. Beverage companies, for example, have a high expectation of a base level of cola or coffee demand each year. They’re less sure if you like the diet or iced seasonal flavors. This information then translates into lanes and awards. The short run plant transfers of basic inputs to the thinly projected or copy/pasted points much deeper down the list are carried in each RFP.

Knowing how fragile and difficult the lumpy, sporadic, or projected parts of the business are to offer and uphold, many resort to zonal and state level layers of agreement in lieu of futile point-point listings on the longer tails of awards. The simplicity of these layers erode into horror at the admin and operational levels, however.

Take a Pascagoula, MS to Dallas, TX high volume lane of pallet paper. Easy peasy. Now, Pascagoula, MS to Zone 3 (east TX zip3 =750-775) and finally a dumpy MS to TX state rate matrix on top. Suddenly, 10 orders come over with the 39570 to 75206. Which rate and agreement structure applies?

Worse is when the details are the exact same save for accessorial. You’ll know because of a commodity name or a UN code added. Others may ask you check the weather first. It may freeze tomorrow so the adhesive load will need a reefer instead. Outside the operational maladies this brings to all parties, the larger nightmares come at time of invoice and billing. The zone 3 loads are paid by the suppliers first. Accessorials are billed separate linehaul and fuel. Then, there’s the matter of rejecting the shipment for a spot or surge fee. The list goes on.

As numbers of providers increase with advances in technology, the handshakes become less reliable. The communication across parties is less reliant on few players disseminating downstream. Marketplaces exist all over needing to offer and agree on a laundry list of details in short windows of time. There is no room for gray. EDI or electronic data interchange offers some relief via sending over 204s, but these shells are often limited in information, prompting consistent need for clarifications of a freight tender.

In 2009 an e-mail would come in, or a slew of faxes, and you’d call a transportation manager and facilities to confirm all details of a shipment. Sometimes there’d be an attachment while others a faxed note.

Thankfully, this is now replaced with well integrated systems and APIs, but they are only as successful as the information able to pass and translate between them. The verbal equivalent of the above is “I need six loads out this week from the MS plant to Dallas. 43K of paper palletized. van only. you know the rest” used to work fine in tighter communication channels. It will travel through the computer much differently today.

Below are examples of what a computer system may see from the same interactions. The EDI-204 sends a preview of the order detail in a standardized format for a provider to see. In many cases, this is a formality as everything gets practically accepted, but that doesn’t release issue of accuracy.

To the non-tech folks, the lines below showing a 204 simultaneously look like gibberish and way too much information. There’s a lot of structure within this payload of information, it just can’t do it all. There’s also complete aversion to muddy things further with financial information so these usually only come with location, time, and numeric reference fields only.

To prove the earlier point, some of the most important information in the example tender comes in a section of highlighted pass through text the computer operation is blind to under NTE**. It’s up to a human to read and decipher what this all means towards any decision to accept or reject in the 990 response. This means parsing and translating elements and variations of EDI exchange across players and platforms. It means surfacing all this information to users that is accurate and easy to read.

Next, the provider must find which rate was last uploaded. Or is it in the email? I think there’s a sticky note somewhere. Meanwhile, the client houses a 1,000 lane RFP and routing guide with 14 providers, and must know award order, rate, and expectations of their own customers on demand. Or a TMS/ Managed Trans does it for them.

In one system the information loads on a zip code pair. The other passes city and state names to other databases to search for what the right rate on file is supposed to be. The nerds all claim its harder than it looks. They’re not wrong. The reason is a lack of transparency, not technological prowess.

During the RFP, every shipper or intermediary in service of, should have a lane ID for each row on file. To the nerds, it is a primary key to store location, provider, rate, and other information associated with all contract freight offered. Each ID needs to be unique but there’s flexibility between parties as ranges may relate to a five digit zip code pair while further down or prefixed are zonal, accessorial or equipment flavors.

The standard needs no industry wide agreement. What matters is consistency between parties. They can be encrypted and anonymized as needed further, but these keys should follow every offer, tender, and invoice through the freight funnel.

The benefit lies with all parties minimizing context needed to load and find agreements and order from the bid through the award process. Adherence improves on less error while billing receives an initial OK from verifying 204 details to the master lane ID and rates tables. The three pronged MS to TX load from earlier is now parsed accordingly. We’ve slayed the dragon.

The solution is simple. The devil is giving away auditable details. Scorecards for utilization rates from the award at various points within a year can be assessed by both parties or even pseudo-publicly via the right authentications. Transparency in reporting becomes more paramount. Visibility to spend and service metrics find better alignment among parties. To answer the perennial, “Why were the quarterly numbers on the presentation off again?”

The industry yearns for this level of transparency and reporting. It faces resistance by having parties commit to facing all cards up on the table. There’s vulnerability in that level of tracking by big enough vendors or financial institution. It’s not without trade-off.

I’d rather as much of the truth we can all agree upon. Doesn’t so hard to do, does it?