The end of 'set it and forget it' pricing? Opportunities for market-based freight contracts

TL;DR

This paper investigates how fixed-price long-term freight contracts become less effective due to market fluctuations and carrier behavior, proposing market-based strategies to improve load acceptance and reduce costs.

Contribution

It develops behavioral models of carrier load acceptance under varying market conditions and provides insights for shifting from fixed contracts to market-based pricing strategies.

Findings

Carriers' likelihood to accept loads increases with better alternative options.

Market fluctuations significantly impact contract price stickiness.

Insights help shippers improve load acceptance through market-based pricing.

Abstract

In the for-hire truckload market, firms often experience unexpected transportation cost increases due to contracted transportation service provider (carrier) load rejections. The dominant procurement strategy results in long-term, fixed-price contracts that become obsolete as transportation providers' networks change and freight markets fluctuate between times of over and under supply. We build behavioral models of the contracted carrier's load acceptance decision under two distinct freight market conditions based on empirical load transaction data. With the results, we quantify carriers' likelihood of sticking to the contract as their best known alternative priced load options increase and become more attractive; in other words, carriers' contract price stickiness. Finally, we explore carriers' contract price stickiness for different lane, freight, and carrier segments and offer insights for shippers to identify where they can expect to see substantial improvement in contracted carrier load acceptance as they consider alternative, market-based pricing strategies.