How to Fix the Current System of Long Supply Chain Contracts

04/10/2022

The current supply chain crisis is upping the cost of shipping. In October 2021, the median price of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586. There is also an exploitation problem, where small businesses and consumers are feeling the brunt of rising freight costs. 

 

The system of long supply chain contracting needs a complete overhaul. Because the transportation industry is changing, current financial contracts are antiquated. Let’s explore why the supply chain’s current economic engagement system needs an update.


COVID-19 and the Supply Chain Crisis

Covid-19 only exacerbated the supply chain crisis by creating thousands of minor interruptions as demand boomed. Examples include raw-material shortages, factory closures, lack of truck drivers, port congestion, high demand for ocean and air shipping, and inadequate infrastructure. 

 

The pandemic has also exposed investment shortfalls at critical ports, controversial railroad industry labor cuts, and a chronic failure by key players to collaborate. Transit companies like Union Pacific have reduced the number of stockpiled containers to combat these pitfalls. Managers at freight companies have also compiled pandemic lessons into a crisis manual known as “the playbook” as they hire new workers during COVID. 


Outdated Use of Static Prices 

Annual contracts that use static pricing are currently the primary method used in supply chain operations. Since the pandemic, this has no longer become a safe business bet, as the market continues to be volatile. Statically priced contracts do not correlate with the current instability of the supply chain.

 

An example of static prices losing relevancy is in long-time contracts embedded with fixed prices, which ultimately result in rejection from carriers in a high-demand era. This leads to dramatic drops in prices, and ultimately forces shippers to sign multiple contracts a year. 

 

The current system of using static pricing is very rigid and places the risk of price increases solely on the carrier. Furthermore, the service level is unpredictable for shippers, who are forced to take the chance that their freight may not be delivered. This creates an unbalanced equation where money is only being taken out of the pocket of the carriers while credibility is unreliable for both parties. 

 

Dynamic pricing may be the future of supply chain contracts due to their flexibility. An example of dynamic pricing in action is Amazon revising prices every 10 minutes based on supply and demand. 


Solutions for the Future

Transportation logistics are vital but are currently in peril. There are too many risks on every level of operations from lack of drivers to the unpredictability of freight capacity. 

 

To alleviate these problems, a more flexible and efficient system of freight transportation pricing is needed. In the current systems, brokers act like contract facilitators, but these contracts can often fall through. By cutting out the middle-man, high-tech startups—who provide a digital interface catering to all parties—can start to generate a long-term answer for pricing in the supply chain.

 

Apps can be used to implement dynamic pricing models as well as connect shippers and carriers directly. This gives both parties a precise and transparent shipping price proposal. And by creating an extensive network of truckers that can bid instantly, the demand is then directly connected to the suppliers. Artificial intelligence will then calculate dynamic pricing, ensuring all parties of accurate information. 

 

Lastly, digital apps can offer an open forum platform for the last mile of the supply chain. They can provide up-to-date methods of delivery that invigorate Just-in-Time (JIT) shipping, which is something the transportation industry desperately needs right now. 

 

With trucks just one click away at a fair market price, on-demand freight shipping marketplaces will commence a revolution for the future of trucking. 

 

Dmitri Fedorchenko, CEO and co-founder of Doft, an online shipping marketplace & technology company with a mission to create a positive global impact in logistics optimization. 

Source: DC Velocity