Critical to consider during RFP preparation — awarding. With several awarding methods available to shippers, it’s essential to understand what each method means and how they can be used to boost efficiency in your operation.
More commonly known as “carrier award types,” we’ll be looking at the pros and cons of each award method and what they mean to shippers when loads start moving. Considering factors like shipper seasonality, tender rejection rates and general market conditions, here are some of the more common award types to consider during RFP (Request For Proposal) preparation:
One of the more common methods for awarding loads: allocation. In this award type, shippers will divvy up or “allocate” lane-specific and/or overall FTL volumes between approved carriers. For example, if a shipper has 1,000 loads a year on a specific lane, they might allocate 500 loads to Carrier A, 300 to Carrier B and 200 loads to Carrier C.
The critical factor to remember about allocations is that there has to be clear communication, understanding and commitment between the shipper and its carriers. Starting with an RFP award letter and through the details of a Service Level Agreement and Routing Guide, all parties have to understand what they’re signing up for.
The other point to remember is that allocations are a two-way street. Just like a shipper can allocate loads to different carriers, the carriers themselves can commit to allocating assets (power units, trailers and drivers) to their customers. In other words, the shipper can allocate all the loads they want, but if the carrier doesn’t commit to respect those allocations, it’s all for nothing.
A downside to the allocation method is that the allocations themselves are often based on average loads per week, month, or even year. For that reason, it’s not unusual to see unclear RFP award letters that state allocations as general as, “500 loads per year on the Atlanta to Dallas lane” or “100 loads per month in the Mid-Atlantic Region”. The problem with this approach is that there isn’t enough detail for the carrier to make reasonable commitments, and as the year unfolds, tender rejection rates will likely rise.
Daily/Weekly Capacity Limits
As the name indicates, the daily/weekly capacity limits method puts a cap on the number of loads a shipper can tender to a carrier. A very balanced approach, in this type of model, not only does the shipper allocate loads to a carrier, but the carrier also comes back with limits on how much volume they can handle. Ideally expressed on a weekly or daily basis (not monthly), both carrier and shipper have to agree on what the limits will be.
The obvious advantage to this method is that it forces both shipper and carrier to “get down in the weeds” on matters like forecasted volumes, the shipper’s peak volume day(s) and changes in a carrier’s capacity. When both parties do their homework and can truly coordinate together, there’s a greater chance of minimizing load rejections and meeting price and service commitments.
On the flip side, one potential downside of this method is that this requires a lot of detailed work by both parties and that it can be difficult to line up a shipper’s specific volume needs with a carrier’s capacity. Additionally, forecasting accurate volumes an entire year ahead is difficult, making this approach most effective in short-term scenarios. For this reason, it might be a good idea to redo daily/weekly capacity limits every quarter.
Flex for Seasonality
One of the challenges of using the allocation or weekly/daily capacity methods is that they are typically based on average volumes. In other words, regardless of peaks, valleys or seasonality in a shipper’s contract year, they always get the same allocation or daily/weekly limit.
This is a common problem across all modes of transportation (rail, ocean and air freight shippers have the same issue) because most shippers don’t move goods in the same quantities throughout the year. That’s where the flex for seasonality method comes in — allowing the shipper and carrier to agree that both volume and capacity will flex up or down depending on shipper-specific high and low seasons.
Again, this requires a lot of upfront work and constant communication between both parties, but the shipper and carrier will both benefit if done right. For the shipper, they’ll get the capacity they need when volumes are high (with minimal tender rejections) but won’t be penalized when volumes go down. For the carriers, they’ll be better prepared to meet service commitments while being in a much better position to manage their assets across all shippers.
The Waterfall Method
The “Waterfall Method” is a powerful approach to awarding loads because it prioritizes awards based on a combination of service, rates and Routing Guides details. Basically, lanes in a Routing Guide are prioritized by carriers that can meet service requirements and then by rates from lowest to highest. Because each carrier is pre-approved and able to meet service standards, loads are tendered to the carrier with the lowest price. Naturally, some loads will be rejected, and the “waterfall” begins as the shipper re-awards loads to the carrier with the next lowest price. This process continues until a load is accepted. If all carriers reject a given load, then the shipper will likely go out to the spot market.
The positive aspect of using the waterfall method is that it first filters lane-specific carriers by service and then prioritizes those carriers based on rate, from low to high. Based on a detailed Routing Guide, the shipper is in a solid position to balance rates with service. On the other hand, if the shipper finds themselves constantly resorting to a waterfall, it is not only time-consuming, but the fact that so many loads are being rejected reveals flaws in the bid process that need to be fixed.
The good news about carrier award types is that the decision-making process doesn’t have to be an “either/or” type of situation — you don’t have to choose one method over another. Actually, it is a good idea to create a mix of these methods in volatile FTL markets, taking the best elements from each. For example, no rule says a shipper and carrier can’t agree upon a model that includes seasonal flexibility and features a weekly/daily cap on capacity.
Regardless of the carrier awarding types currently being used, shippers should be aware of the various awarding methods available. Understanding the pros and cons of each method will help shippers guide their RFP process, helping save time and boost efficiency during the execution phase.
Ready to streamline your RFP process? Request a demo to see how Emerge can help run your RFP events more efficiently: https://get.emergemarket.com/request-access/