Uberization Effects on Freight Procurement

Abstract

According to a report by A. T. Kearney, in 2016 the US business spent $1,392.64B on logistics costs. 90% of transportation spending is procured in the form of Long Term Contracts. A Long Term Contract drives long procurement cycles that can last over 6 months, which results in significant financial risk for both shippers and carriers. It is estimated that 10% of freight under Long Term Contracts fall out and ends up in the spot market due to low tender acceptance and market volatility. The spot market, on the other hand, can be highly dynamic. Typically, shipper pays 20% more for freight in spot market compared to what would be agreed upon in a Long Term Contract. Regardless of the freight procurement method, shippers are constantly faced with market volatility and are left scrambling to find a new carrier capacity when carrier fall off occurs. Assuming a shipper could book a truck instantly, how would their procurement strategy and supply chain network change? We hypothesized that there is a financial benefit to all parties from faster, more liquid transportation transactions, through lower labor costs spent on freight procurement transaction and shorter planning cycles in transportation procurement. Digital freight matching via an on-demand app, facilitates long arduous transactions in a real- time low-cost manner. Using System Dynamics models, this project developed a behaviorally based conceptual model to analyze effects of a digital freight matching app on shippers’ freight procurement. Our analysis shows the shipper will choose a more efficient, low-cost alternative to the spot market, provided that the shipper’s total spending is lower than what would be agreed upon in a Long-Term Contract. Digital freight matching benefits shippers by providing needed freight capacity at lower cost. Individual changes in market volatility, shipper volatility, app efficiencies, or carrier and shipper adoption rates would potentially add more than 10% variability in freight rate paid by shipper and more than 50% digital freight matching app adoption rate for both shippers and carriers.