A Shift in Air Freight Procurement Strategy

April 18, 2022

author:
David Siedt

Global supply chains have been affected in countless ways since the outbreak of Covid-19, but air freight procurement has been particularly impacted.  

In 2020 we started to see dramatic drops in air cargo capacity, coupled with contracted rates previously negotiated with airlines through annual RFPs being discarded. Compounding the challenge was the reduction of flight connections beyond major hubs, which increases the need to source ground transportation. As a result, many buyers were left to rely on spot bidding with carriers to meet demand. 

Seeing Spots

A key problem with spot bidding is that it tends to be a very inefficient exercise to do at scale and emphasizes a quick award decision to reduce risk to supply flow and the business. It’s also not uncommon that these bids are negotiated “offline,” outside of a formal e-sourcing tool process, and that even when data is collected, it’s purely rate focused. At scale, this becomes time-consuming for the buyers and it’s not good for managing and tracking spend.

While reactive spot bidding has long been part of freight procurement’s mix – even in a “normal” year, unpredictable or mis-forecasted supply chain disruptions or demand changes inevitably arise – buyers were finding themselves in the position of spot bidding more routinely than ever before, requiring a new approach to the way they secure movement of their goods globally. 

One of the reasons teams historically did not conduct sourcing events with greater frequency and with smaller, more focused spend, is because of a concern for how this would impact the buying team’s workload and priorities -- not to mention the suppliers and carriers seeking an efficient way to bid on the business. Leveraging volume to negotiate for the best deal has been the status quo. 

Meanwhile, the trend among carriers has been to push for more flexibility on rates throughout the year vs. being locked into an annual contracted rate.  

A plane ready for take off

Bring on the Bots

The good news is sourcing technology solutions do exist to help. Such challenges present a clear opportunity for AI-powered automation, which makes it easier to handle an increased quantity and pace of bidding events without placing an additional burden on the workforce and taking them off of higher-value projects that are better suited for human reasoning and strategic evaluation. 

Keelvar’s intelligent Air Freight Sourcing Bots can do many detailed tasks associated with sourcing events, including: 

  • Determining invited carriers
  • Collecting and validating bid data from carriers
  • Conducting rate card, zonal rate and alternative airport lookups
  • Sending reminder messages
  • Optimizing and evaluating scenarios that weigh cost and non-cost objectives
  • Generating award recommendations
  • Updating rate cards
  • Notifying winning and losing bidders
  • and more…

The results? 

  • Efficiency and Productivity: More efficiently execute a greater number of smaller-scale and urgent air transport bidding events by offloading up to 90% of the detailed event tasks to Keelvar’s automation.
  • Competition and Savings: The automation features improve the potential for savings by collecting and analyzing bids beyond just fixed-rate data (such as scaling rates, CO2 emissions for more sustainable sourcing, equipment/vessel type, penalties, etc.) and also by allowing more carriers to be invited to bid, thus increasing competition without increasing the buyer’s workload.
  • Decision Quality and Responsiveness: The buyers arrive at quality award decisions faster, shortening the time to react and satisfactorily support business operations.
  • Traceability: All of the negotiations and spends are tracked and recorded, supporting traceability and future forecasting with a more complete picture of spend under management.

A plane coming in to land

The “New Normal”

A shift in air freight sourcing strategy is now underway as capacity eases. While the spot bid market is still hot today, many shippers are wisely augmenting their strategy when securing air freight procurement capacity. For the past couple of years, it was very difficult to secure longer-term contracts with carriers; however, with air freight pricing down 30% in Q1 2022, that is starting to change.  

Several Keelvar customers are currently conducting large air freight bid events in excess of $100 million in spend with at least 1-year price commitments.  Many of them also supplement their off-cycle spot bids using our sourcing bots or mini bids.  

The combination of an annual bid event coupled with intelligent automation is an effective strategy if the annual bid event is using technology that contains some key components:

1. Ease of use: Carriers will not participate in bids utilizing old cumbersome bid tools; this cannot be underemphasized.

2. Weight break pricing: The ability to collect weight break pricing and apply the rates to applicable historical/projected shipments for an apples-to-apples comparison.  Keelvar has a bot for this too!

3. Systematic feedback:  Real-time systematically generated traffic light and text popup feedback is a win-win feature for both shippers and carriers.  This capability drives price compression and service level improvements.

4. Carrier performance factoring:  Ability to factor in carrier performance metrics at the lane level.  For example- only award carriers volume on a lane if they have an on-time delivery % greater than 95%.

5. Invite more carriers: Systematically there is no more work involved with inviting 300 carriers vs. 30 when using modern sourcing optimizer tools that can scale.  More carriers coupled with traffic light feedback can help drive substantial price compression. 

6. Optimization: Point & click scenario modeling allows shippers to find the right mix of price and non-price scenario rules.  Examples include carrier preferences on certain lanes, ensuring backup carriers, carrier capacity, carrier performance, CO2 emissions, and incumbency ratios.  A rich set of visualizations and reports reveals many insights.

7.    Repeatability: The ability to quickly copy and update old projects, or even adjust and add on to existing projects makes managing today’s challenging market conditions much simpler. Purchasers need a way to adjust quickly and alter their strategy around pricing and contract length. Modern tools should make this a breeze so users can deftly switch between annual, quarterly, spot, and more as supply and demand change regularly.

 Summary: A Shift in Air Freight Sourcing Strategy

 Keelvar’s Sourcing Automation gives real-world proof that yes, given the current volatile market conditions, the esourcing software solutions do indeed exist to help global shippers overcome the obstacles and efficiently keep their freight moving. Those combined benefits of air freight sourcing automation are real and compelling -- and need not be limited to just reactive spot bidding events. 

As we all echo the phrase “the new normal,” time will tell if these new sourcing practices backed by the right procurement automation technology will lead to a transformation of air freight sourcing practices for the long haul. At Keelvar, we believe it’s the next leg in the journey.

Contact our team about a custom demo of Keelvar's solutions for freight sourcing.

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