Annual Transportation Contracts: An Obsolete Concept?

Posted On 26th January 2017

Many Traffic Managers and Logistics Directors, especially at the largest shippers, feel they are too busy to go out and shop the spot market for the best price on every single load and therefore use annual contracts to make their life easier.

It is an open question if such annual contracts serve their Company’s bottom line interests and these shippers often pay a premium over the spot market from our audits of client records.

Consider these drawbacks of the Annual Transportation Contract:

  • Who assumes the costs in the face of fuel price increases or the savings of fuel price decreases? There has never been a year in the last decade in which a dynamic, hands-on traffic manager could not negotiate around carrier attempts to foist fuel increases into the rates. 3PL contracts are all “plus fuel surcharge” and this is a huge area of profitability for 3PLs as they negotiate to pay the carriers dramatically less than they charge shippers. Plus when the fuel prices go down, the prices somehow “stay sticky” and the fuel surcharge is very slow to go down. With Annual Transportation Contracts, the shippers are not in a position to benefit as much from declining fuel surcharges. Heads or Tails the shipper loses.
  • Signing an Annual Transportation Contract eliminates the Shipper’s right and ability to limit detention charges if extenuating circumstances are present for a load. For instance, perhaps a trucker had you wait 3 hours past normal closing time on a critical load, you load him late and he makes the delivery appointment but then it is a five-hour unload and you are charged, per the Annual Transportation Contract, 3 hours of detention. Shouldn’t there be full or at least some consideration for your overtime at the pickup location? This is true not just for detention but for many of the other very significant surcharges which carriers are increasingly being extremely aggressive in charging. These charges can be a significant portion of any active shipper's logistics expenditures.
  • Annual Transportation Contracts eliminate the possibility of booking super-low rates in the Spot Market when those opportunities appear. Because a Traffic Manager is no longer negotiating hard and daily in the spot market he/she cannot consistently rack up the savings that the Spot Truckload Market usually presents. Of course, nothing stops an opportunistic Logistics Director from shopping the spot market while also aggressively locking in prices ahead of time from many different trucking companies and freight brokers. All freight shipping options should be preserved that are non-exclusive. However, having your Company sign an Annual Transportation Contract with a 3PL or trucker eliminates the possibility, for all practical purposes, of the Traffic Manager acting in an opportunistic fashion to reduce your Company’s overall costs. Traffic Managers tell carrier and broker representatives every day “Sorry, we signed an Annual Contract, but you can call back in a year.” The end result is that such companies pay a heavy price for their closed doors.

The various metric reports your provider shows you at the end of every year invariably demonstrate to CFOs, CEOs and Logistics Directors how much money they are saving you and how wise you were to choose them.

We’ve reviewed many such reports and seen many of them do not even include the fees of the 3PLs! Also they usually benchmark their savings from a previous year which might or might not be the correct basis of comparison.

We encourage the CFOs, CEOs, and LDs to look at the numbers more critically. Have you developed a way to compare what you are paying to the Spot Market rates? Do you really trust that the provider can do it ALL better than you can?

In most cases, using a combination of aggressive negotiation with both carriers and brokers, your Company will reduce its annual transportation spend if it eliminates Annual Transportation Contracts and utilizes a combination of fixed pricing and Spot Market/Quotes.

A shrewd shipper can leverage the latest online and cloud technology, available for almost free now online to opportunistically switch from spot market pricing to locked-in, but not exclusive, carrier/broker pricing that can also be both flat price and price + fuel surcharge.