Lately people have been asking me a pressing question: “Mike, if there’s a freight recession headed our way, shouldn’t we be seeing freight rates and our freight costs going down?”
Ideally the answer to that question would just simply be “yes”. However, these are not simple times. Which is why the answer to this question is a bit more nuanced and requires a bit more analysis.
On one hand, there is ample evidence that freight rates, especially rates for truckload moves, are coming down. For example, for the first in a long time, spot quote rates are running lower than contract rates in more and more lanes. And that is leading some analysts to predict that contract rates for truckload moves will also move lower.
A recent FreightWaves article about truckload van spot rates reported that “the spread between contract and spot rates has never been wider” coming in at $0.77 right now, but that some food shippers are waiting until after produce season to potentially push for adjusted contract pricing. After two years of shippers being willing to pay higher rates to secure capacity, how hard will shippers press carriers in seeking rate reductions?
But as we have often pointed out in these Two Minute Warnings, freight rates are just one part of the "Total Freight Costs Equation". The other parts of that equation include fuel surcharges and accessorial surcharges. And that my friend is why a lot of shippers are continuing to see their freight costs go up – way, way up in some cases.
Recently a shipper and good friend called me about how the increase in diesel prices has affected her freight budget. She noted that one year ago when they were starting their budget process for 2022, most “experts” predicted that diesel prices would be “stable.” Unfortunately, that prediction has been blown to smithereens! As of this week (May 16, 2022) the rate for diesel is $5.61 as reported by the U.S. Energy Information Administration. That’s an increase of $2.36 from May 2021.
Add it all up, and shippers are, depending on the fuel surcharge formula in their contracts, paying anywhere from 15% to 20% more in freight costs because of fuel alone. And with carriers being much better at identifying the cost to serve customers and being more aggressive in passing along these costs, accessorial charges are another reason why freight budgets are getting slammed.
And that is why it is so important for shippers to focus on and address the things they can do to bring down their freight costs – even with everything that is going on today. In our Navigating Your Supply Chain in Survival Mode webinar last month, we heard great advice on this topic, including six practical tips for reducing LTL rates. To learn more, you can read about the advice our panel shared in this blog or watch the webinar recording.
Of course, we have other proven tips for shippers who are serious about reducing their freight costs. If you’d like to learn more about strategies that have been successful in making supply chains more efficient and lowering freight costs, send me an email or give me a call at 630-530-6190.
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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