Although the term “paper rates” has been used in the U.S. Full Truckload market for years, the supply chain madness experienced in 2020 and 2021 has made it especially popular. Unique to the shipping industry, paper rates exist when carriers and shippers enter into a formal agreement for volumes, rates and service levels, but due to ever-changing market conditions, either one or both parties end up not honoring its commitment.
Paper rates can be viewed in a few different ways. On one side, “the rates look good on paper,” however, from the more negative view, they can be seen as “not worth the paper they are written on.” Either way, they don’t offer a lot of confidence for those involved and can damage the sometimes delicate relationships between shippers, carriers and brokers. In the end, like the title of the 1994 Quentin Tarantino classic represents, paper rates amount to “Pulp Fiction” — produced by imagination and not by fact.
Let’s take a deeper look at what paper rates are and how to avoid them as a shipper:
Why Do Paper Rates Exist in the First Place?
Paper rates shouldn’t be viewed as the core problem — they’re a symptom of a larger issue. Unreliable pricing exists for a reason, and in order to reduce the chances of taking future hits, shippers need to zero in on what causes the problem in the first place. Here are some things that can cause paper rates to come into play:
Contracts between FTL carriers and shippers don’t have any real teeth.
Typically, there aren’t penalties if a shipper doesn’t meet the volume commitments stated in their contract. Carriers also don’t face consequences for rejecting tenders or attempting to renegotiate the contract prices previously set.
When shippers, carriers and brokers know that there will be no blowback for ignoring what should be viewed as a contractual agreement, they’re going to do whatever works best for themselves.
An “either-or” choice between contract and spot rates doesn’t help much.
Another factor that encourages the existence of paper rates is that shippers have historically had to choose between “contract” or “spot” rates. With limited options, shippers try to avoid unknown future spot prices by opting for contracts with full knowledge that the rates will be mere “Pulp Fiction” when push comes to shove.
Because there’s no middle ground between long-term contracts and daily spot pricing, paper rates will continue to be a reality for FTL shippers.
Long contract periods easily crumble into paper rates.
Normally, an FTL contract is for one year, and needless to say, it’s very difficult for anyone to know what market conditions will be nine or ten months from the signing date. Because of this longer the contract period, the greater the market unpredictability, which in turn means a never-ending rerun of “Pulp Fiction.”
In addition to a lack of pricing options, the length of a contract period virtually guarantees that paper rates will continue to plague the FTL market.
How can a shipper go from “Pulp Fiction” to concrete pricing?
Given the volatile nature of FTL pricing over the last couple of years, it’s not likely that paper rates can be eliminated entirely. However, there are a number of tactics that shippers can consider when trying to minimize their impact. Here are few approaches to consider:
Shorten the contract period.
One of the biggest reasons that paper rates are still around is that the traditional FTL contract period of one year is just too long. Basically, the longer the contract period, the more difficult it is to predict rates further into the future. So, one logical way to reduce the impact of unreliable pricing is to shorten the contract period.
A legitimate response to the above suggestion is that one RFP per year can take months to execute, so how is a shipper supposed to carry out multiple bid cycles? Certainly, a fair point to make, but the answer is utilizing technology. Tech solutions allow shippers the flexibility to run more frequent RFPs that can be completed in weeks rather than months.
Use the Emerge Dynamic RFP platform.
One of the key features of the Emerge Dynamic RFP is the ability for shippers to conduct RFPs faster, allowing them to complete them more frequently. Be it for one lane, multiple lanes or an entire FTL program, shippers have the power to shorten a bid period to what best suits their needs, and complete RFPs as many times in a year as they see fit.
The ability to shorten contract periods means that pricing becomes more sensitive to market changes and, in the process, reduces the likelihood of paper rates.
Negotiate contracts with shortfall penalties and load rejection fees.
There’s no rule that says shippers, carriers and brokers can’t enter into contracts that stipulate mutual performance. For example, how about a dollar-denominated penalty for carriers that reject loads beyond a certain “grace amount”? In the spirit of fairness, how about a similar fee for shippers that don’t tender the lane-specific amounts they commit to?
When there are consequences for non-performance, both shipper and carrier behavior is likely to be more predictable.
Combine “premium” contract pricing with load rejection fees.
The last thing a carrier wants is to commit to pricing in January and then realize that the market has rapidly shifted by March. In recognition of this possibility, shippers might consider committing to premium pricing ranges during the negotiation phase in exchange for a zero-tolerance load rejection fee.
That way, carriers get premium prices when market costs rise, which serves as a hedge against market increases, while shippers have fewer load rejections. Also, if market rates do go up dramatically, the premium rates that a shipper signs for are likely to be less than the spot rate.
Conversely, if rates go down, there should also be an agreed-upon reduction based on market conditions, tied to an index, within the specified range.
Given the craziness that’s gone on in the market over the last few years, it’s not likely that paper rates will ever go away. That said, shippers shouldn’t have to sit by idly and accept their fate just because, “it’s always been that way.” On the contrary, the techniques suggested here, particularly the use of the Emerge Dynamic RFP tool, open the door for substantial reductions in paper rates.
What is indisputable is that paper rates put a lot of strain on the health of relationships between shippers, carriers and brokers. What is also obvious is that the longer the contract period, the greater the likelihood of shippers signing up for rates that might look good on paper, but that will never get used.
So, what’s a shipper to do? Now that Dynamic RFP is in play, shippers can customize contract lengths to their needs, all while managing the entire Procure-to-Ship-to-Pay process on the Emerge Digital Freight Marketplace.