When Tendering Loads, Don’t Go Chasing Waterfalls

Transportation procurement has two phases or “moments of truth” — a strategic phase, where shippers develop a long-term plan and select a group of carriers to handle freight for that period, and an execution phase, where loads are actually tendered.

Over the last few years, shippers have focused on improving the first phase. They recalibrated supply chains during the pandemic. They invested in technology to help forecast demand and costs. They analyzed volumes and service needs and determined which lanes are suited to dedicated or private fleets and which are best for dynamic or spot procurement.

And they’ve fine-tuned the RFP process, using market intelligence and historical rate data to produce more accurate and competitive bid evaluations and make contracts more resilient to market fluctuations.

However, less attention has been paid to the second moment of truth — actual tendering. Poor tendering practices, specifically on contracted lanes, can wash away the savings and efficiencies from careful planning.

Ripple effects

You’re probably familiar with the transportation RFP process. Carriers and brokers submit bids for moving loads on specific lanes, and the winners are named primary carriers — the first option for tendering the load. Bids not selected as primary are listed as alternates in the routing guide. This is where the waterfall comes in.

In an RFP, a “waterfall” refers to a tiered tendering process. When a primary carrier rejects a load, it’s made available to backup carriers in a predefined order. A transportation management system (TMS) can automatically make continuous offers until a carrier finally steps up and accepts the tender.

Cascading Inefficiencies

Because carriers aren’t obligated to accept loads, their acceptance rates (tenders accepted versus tenders offered) are a key performance indicator reflecting a carrier’s commitment to providing contracted capacity. However, alternate carrier acceptance rates are rarely monitored since no capacity was explicitly (or even implicitly) guaranteed under contract.

Shippers also track routing guide depth or how far down the list they have to go before a carrier accepts the tender. As you might expect, routing-guide depth increases when the market tightens, and carriers have better-paying options.

Excessive routing-guide depth often leads to higher costs, as alternate carriers typically charge more than primary carriers — which might explain why they weren’t awarded the contract in the first place. Studies at the Massachusetts Institute for Technology’s (MIT) FreightLab show that the median rate on a lane increases from 8 percent above the primary carrier rate for the first alternate to 35 percent for the 10th alternate. The range is huge, with the 75th-percentile increase jumping from 25 percent for the first alternate to 62 percent for the 10th.

And there’s another factor: time. Offering loads to alternate carriers can add hours to the tendering process. In many cases, a TMS will keep the waterfall flowing until the available lead time has shrunk to the point where the shipper needs a carrier immediately and their costs are about to go over the edge.

How to Go With the Flow

The routing guide and waterfall tendering method were created to secure potential rates on a given lane when a primary carrier couldn’t take a load. Why not just dig up the next best rate from the RFP and avoid the turbulence of the open spot market?

Times have changed, and there are far better ways to generate rates for a lane than defaulting to a rigid routing guide with losing bids from an auction held months ago. Here are some points to remember as you navigate the choppy waters of freight tendering:

No time for failure. Dynamic pricing has become more sophisticated. Algorithms, artificial intelligence (AI) and market data can calculate rates that reflect current conditions instead of static contract rates from an RFP. If a primary carrier rejects a load, instead of chasing the waterfall all the way down, the TMS can move directly to a dynamic selection process.

Dynamic selection can be sophisticated or simplistic. A shipper can use application program interface (API) connections to reach digital freight platforms that provide almost instantaneous rate quotes. On the simple side, the shipper can reach out to multiple carriers simultaneously using any method, request rates, and manually select.

Stick to your KPIs. Shippers can engage a private or selected load board and still have KPIs that increase the effectiveness of the process. These KPIs might include a carrier’s time to respond, or a minimum number of tenders the carrier must respond to. Additionally, telling carriers how their bids fared will help them refine their pricing algorithms.

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There are many ways to implement a dynamic tendering mechanism that replaces the outdated and rigid waterfall. These same mechanisms can be used for the sporadic, inconsistent and low-volume lanes that were not included in the RFP in the first place.

Shippers can save time and money by adopting more flexible approaches while strengthening carrier relationships and building more reliable supply chains. It’s time to stop chasing waterfalls and start using better techniques for tendering loads.

(Photo credit: Getty Images/Vitpho)