Great expectations or paper rates?

The term “paper rates” is getting a fresh look with recent research by researchers from the MIT Center for Transportation & Logistics. Angela Acocella, Chris Caplice and Yossi Sheffi divided into how shippers, carriers and market dynamics play into freight contract performance. The recently released paper defines this relationship interplay as a buyer-supplier relationship. To translate this into trucking terms, the buyer refers to a shipper who is buying transportation capacity from a seller, which is either an asset-based carrier or a third-party brokerage that buys capacity from other asset-based carriers.

Current research on shipper-carrier relationships shows that more frequent interactions, longer relationships, and consistency in either sending agreed upon volumes or accepting those tender volumes predict better service. What the report notes and examines is what happens to those relationships when market characteristics change, and if external factors can change those relationships. The report notes that this is new territory, as little research exists on impacts from the latter.

The for-hire truckload space is unique, as nonbinding, relational contracts between shippers and carriers dominate the industry, yet “Incomplete and relational contracts are the norm.” For the study, researchers examined a large transactional dataset from major transportation buyers in the U.S. truckload sector over five years, including the supplier’s decision to accept or reject the load, prices involved for each contracted load, and information about the shipper in the market. Spot market data was also examined to determine which loads were exchanged on the spot market compared to the contract space.

One big takeaway from the research was that 3PLs were better able to handle operationally difficult transportation demand than asset-based providers. Part of this came from the dataset, which included the pandemic-inspired freight demand spike. That datasheet showed that despite carriers and shippers having a long relationship, “we do find that market condition impacts relational factors: during a tightly constrained market when the outside financial option is high, suppliers are pulled from customers with which they have long-term relationships.” To put it more simply, market forces like short-term demand surges in the spot market that spike rates there can pull a carrier away from contracted relationships, making the rate “worth less than the paper it’s printed on” to steal Chicago commodities trader parlance.?

For asset-based carriers, constrained by the number of trucks they have, this research helps explain why non-asset-based freight brokerages were able to grow their market share during and following the pandemic. From being a backup service provider with a reputation of overcharging, the brokerage space has exploded in growth and now competes with asset-based carriers on network capability and service.

At the end of the day, the price to move a load remains king. The research adds, “The impact of market conditions on relationship duration and supplier acceptance suggests buyers should not expect to rely solely on long relationships during tight markets. Instead, they should emphasize keeping contract prices competitive.”