Why the Current System of Long Supply Chain Contracts is Broken

02/10/2022
Although the transportation industry is upping its game in the last leg sector, its means of financial contracts are antiquated and broken.

Over $11 billion has been invested globally in last-mile logistics over the past decade, showing the growing importance of the last leg of a shipment’s journey. This reality is especially prevalent with E-commerce exploding—up 33% to $792 billion in 2021 alone.

Although the transportation industry is upping its game in the last leg sector, its means of financial contracts are antiquated and broken. Let’s explore why the supply chain’s current financial engagement system needs an update.

Static Prices Are No Longer Relevant

The primary method of operations employed in the supply chain, especially within trucking, is in the format of annual contracts with static prices. In times when the market is volatile as a result of crisis or instability, statically priced contracts do not correlate, creating big problems in the supply chain.

With this rigid system, carriers take on all of the pricing risks when freight prices spike. Alternatively, service-level is unpredictable for shippers, taking the chance that their freight might 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.

Covid-19 only exacerbated this phenomenon. Long-time contracts are embedded with static prices, ultimately resulting in rejection from carriers in a high-demand era. This has resulted in prices dropping dramatically, and shippers turning to “mini-bids” where contracts are signed multiple times throughout the year—stepping away from the traditional annual process. Static prices only work in a market with highly stable, if not guaranteed, prices—but since the onslaught of the pandemic, the transportation network is nothing of the sort.

Broken Touch Points Along the Supply Chain

Logistics is vital in transportation today, but it is currently exposed to too many risks on every level throughout operations—with everything from lack of drivers to freight capacity unpredictability.

A more flexible and efficient system of freight transportation pricing needs to be procured to try and steady some of the variables. With the current system of brokers acting as contract facilitators, dozens of annual contracts that may—but mostly may not—work out are created. This leads to an ambiguous network where the left hand doesn’t know what the right hand is doing. By cutting out the middle-man, high-tech startups who provide a digital interface that caters to all parties can start to generate a long-term answer for pricing in the supply chain.

“Applications can implement a dynamic pricing model and connect shippers and carriers directly, giving both parties a precise and transparent price resulting in a win-win pricing proposal,” says Dmitri Fedorchenko, a founder and CEO of Doft.

Creating a large network of truckers that can bid instantly, the demand is then directly connected to the suppliers. A great example of the feasibility of this design is how Uber connected all taxis into one single network via their platform, reducing rates and making it fast and convenient to book.

“Infused with the power of AI, apps can share what is feasible in real-time, with little risk of rejection because rates are accurate up to the very minute of booking,” adds Sergey Zaturanov, CTO and co-founder of Doft.

On-demand shipping applications help shippers source trucks when they need them, and at a price they are willing to pay. Dynamic pricing is calculated by artificial intelligence that has a finger on the pulse at all times, ensuring all parties of accurate information. Some examples of apps currently blazing trails in freight partnership are ConvoyUber Freight, and Doft.

Digital apps can offer an open forum platform for the last mile of the supply chain. This helps to provide a more up-to-date method of delivery and stimulates Just-in-Time (JIT) shipping—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.

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

Source: Global Trade Magazine