Freight Bidding Process - How to Represent Strategic Bidding Behavior in Logistics with Dynamic Pricing Models

Freight Bidding Process - How to Represent Strategic Bidding Behavior in Logistics with Dynamic Pricing Models

Dorota Owczarek - August 30, 2022

The freight bidding process is a critical element in logistics operations management and can significantly impact a company’s profitability. As the freight bidding process becomes increasingly automated, carriers and freight forwarders are looking for ways to represent their strategic bidding behavior in the form of dynamic pricing models to leverage market conditions and opportunities for logistics network optimization.

In this article, we will discuss how to create a dynamic pricing model that accurately reflects your company’s bidding strategy.

How Do Freight Brokers and Carriers Bid on Loads?

Freight bidding is a process that enables businesses to fulfill their shipping requirements. It allows them to find a shipment offer that matches their needs in terms of prices (freight spend) and delivery time. This process may adopt different forms depending on the carrier’s and shipper’s needs and specifics. Companies can sign short-term/long-term contracts with the carriers or bid on the spot market without the existing contracts. While the first approach might be a safer way to secure the spots, the other is usually necessary as the market conditions fluctuate and shipping needs do not rely solely on constant lanes and timelines.

Now that the demand for shipping is strongly fluctuating and the business operational costs are getting higher, operating on long-term contracts with fixed prices equals higher costs. The COVID pandemic played a significant role in the shift towards dynamic pricing as the brokers struggled to find capacity at the previously established rates.

The traditional approach usually involves annual contracts containing estimations of the total freight volume throughout the year and the agreed-upon rate. It is worth underlying here that the breach of contract may bring some implications. Mainly, shippers lose access to more favorable deals by limiting themselves to the traditional approach. They also have to take into account that the carrier might back out from the contract during a period of increased demand. In such cases, they may reach out for mini-bids to cover routes their contractor refused to handle with agreed-upon rates. Mini-bids are short-term modifications to current shipping contracts. These bids are shorter (they can last a couple of months, a month, or even a week-long).

Freight forwarder responsibilities in traditional freight bidding process

Freight forwarder responsibilities and his role to evaluate market rate, place bids and contact carriers to organize shipment

To solicit the bid, the shippers issue a request for proposal (RFP). It calls the multiple carriers from the specified group to address the company’s shipping requirements. RFP is a fundamental tool in transport and logistics that allows companies to plan their budget and capacities ahead while finding the best offers on the market. It outlines the company’s shipment needs, including freight demand, destinations, and duration of the transport. The carriers respond to the requests with proposals containing suggested rates that the shippers can agree on.

Many shippers prefer to take things into their own hands and bid on loads by themselves. Such a solution is cheaper but more time-consuming, considering that shipping needs change daily so as the carrier’s capacity. Alternatively, they can use the services of the procurement companies (3PL - third-party logistic companies) that act as an intermediary between the shippers and carriers.

Freight brokers (freight forwarders) are a bridge between these two parties that find a middle ground between the needs of both parties (often contradictory). They actively search for the best deals and bid on them to ensure the shipper has the spots secured and the carrier gets the highest freight. Each successful bid generates a commission for the freight broker. Usually, it is calculated based on the total freight value.

Traditional Load to Carrier Matching

Traditional load to carrier matching as a manual process run by freight forwarders

What Is Dynamic Bidding for Spot and Contract Auctions?

Automation allows the carriers to streamline bidding, particularly now that mini-bids for contracts and spot bids are gaining popularity. They can respond to numerous requests for proposals automatically, reducing their engagement in this time-consuming and repetitive process without

When it comes to automating the freight bidding process, there are two main approaches: rule-based and optimization-based. Rule-based systems rely on predefined rules to determine the price of each shipment based on origin and destination, loading and unloading times, types of freight, weight, size, etc. On the other hand, optimization-based systems use machine learning optimization techniques and central control with a 360-degree market view to find the best possible price for each shipment.

Features of AI-Based Digital Freight Transport Markets

Features of AI-Based Digital Freight Transport Markets: automated freight bidding strategies, carrier matching solutions, network capacity managenent, dynamic pricing, predicting traffic on specific lanes, and freight transport sourcing automation

Dynamic pricing models are a type of optimization-based system. Dynamic pricing models are heavily applied in logistics and shipping. They have been gaining increasing popularity among the incumbent carriers as it provides them with the capability to respond to market changes in an instant. The benefits for the shippers may seem less obvious, but, in fact, dynamic pricing can also positively impact their finances. With fixed rates, they cannot count on savings resulting from, for example, sudden demand drops.

Dynamic bidding systems estimate the probability of spot purchase or contract signing and adjust the rate to it in order to maximize the carrier’s chances of succeeding. Every proposal - whether accepted or rejected - provides input data to the machine learning model that extracts patterns from it, optimizing future and current estimations in real time.

Full automation of digital freight matching with dynamic pricing to provide current market rates based on available capacity, opportunities for network optimization and transport capacity predictions

Full automation of digital freight matching with dynamic pricing to provide current market rates based on available capacity, opportunities for network optimization and transport capacity predictions

Improving Digital Freight Marketplaces With Automated Freight Bidding

Automated freight bidding enables the carriers to adjust the proposed rates to the changing market conditions, but that’s not the end of the possibilities. All the users of the digital freight marketplaces - shippers, carriers, freight brokers, co-loaders, and other third parties that participate in the bidding process - can benefit from it. Modern digital freight marketplaces work both ways, recommending the most appropriate rates to both sellers and buyers. Such a two-sided dynamic pricing mechanism facilitates maintaining equilibrium and fair rules for all the involved parties and secures an attractive profit margin for digital freight marketplace owners. Let’s take a look at the impact it has on the participants of the supply chain.

Expected behavior of synchronized two-sided dynamic pricing solution for freight bidding to shippers and carriers allike

Expected behavior of synchronized two-sided dynamic pricing solution for freight bidding to shippers and carriers allike

Smart Freight to Carrier Matching

Digital freight matching is a revolutionary concept in logistics that allows both the carriers and the shippers to carry out their duties faster. Instead of searching for contractors manually, the shippers can automatically find their match based on the established criteria.

The system connects them to the most fitting carriers without wasting time on manual RFP processing. It extracts the load-related information provided by the carrier and searches through the dynamically-priced bids to find the best match.

This simplified process makes it much easier for the carriers to sell the empty miles last minute. On the other hand, shippers get easier access to competitive offers and a clearer idea of the current market landscape. You can read more about it in our recent article focusing on how to build an AI-based system that supports load to carrier matching.

Related case study: Delivering a dedicated IT system to manage and sell freight deals and plan transportation

A major logistics company approached us to create a dedicated IT system to handle their core business process – managing and selling logistics deals.

Our challenge? The key challenge in the freight forwarding sector is cutting the time of concluding deals to an absolute minimum. The tool has to be very responsive and help in the smart matching of carriers and freight, fleet management, and other logistics operations. The platform helps shipping agents minimize fuel consumption, maximize operational efficiency, and optimize fleet performance by matching multiple loadings on a similar route with a single carrier.
Read more about this case study.

Dynamic Pricing for Spot Auctions

Instead of managing bids manually, both carriers and shippers can engage the automated bots to save themselves some time and energy. Spot auctions are the most time-consuming of all the bidding approaches as they don’t involve predefined contracts. In this case, the shippers hunt for the best one-time shipping spots, either in search of the best bargains or trying to fulfill special customer requirements.

Spot auctions are a perfect solution if, for instance, the order has a top priority and cannot wait for a larger shipment or when the contract carriers cannot provide the shipper with enough capacity on a particular lane. It also works well for those whose annual shipment volume is low. The carriers, on the other hand, can use them to avoid empty runs by searching for shipments matching their unloading destination. If they have any spot available, they can automatically bid it and quickly get a matching shipper. The bot evaluates the bid on the spot and accepts or rejects it right away.

Dynamic Pricing for Contract Lanes

Similar to managing the spot auctions, the bots can also handle the contracts. Most shippers tend to secure their spots in both ways, combining contracts with spot auctions for maximum safety. In the case of the routes on which they often ship in high quantities, contracting lanes is usually a more efficient solution than searching for spots.

The bots can automatically process the contract bids for the shippers, evaluating suggested rates and conditions. The AI model can either make a decision based on established rules or pick the most favorable offer based on the patterns identified in the learning process. For the carriers, it can dynamically calculate the price based on the real-time factors and the specifics of the particular shipment - its time requirements, type, size, weight, etc.

Freight Sourcing and Reverse Bidding Strategies for Carriers

Freight sourcing plays a fundamental role in the regulation of the logistics chain. Machine learning-powered self organizing logistics systems can streamline the work of the freight sourcing teams, combining all the carriers-related information at their disposal in order to make the most informed decisions in an automated way.

Dynamic pricing allows the carriers to optimize their reverse bidding strategies. In the case of reverse auctions, it is not the buyers competing to win the offer but the sellers competing to win the buyer’s business. Anytime the price is the key factor for the buying party, engaging the reverse bidding may be a win-win. Instead of going up, the price goes down in the reverse auctions. AI models can streamline the price estimation, establishing the most suitable rates based on such variables as:

  1. the number of participants in the auction
  2. the predicted timeframes of the auction
  3. the demand for the spot or contract
  4. particular lane specifications and past prices
  5. freight details

Logistics Network Optimization and Constant Monitoring of Market Conditions

The era of stability is over, and annual fixed rates are no longer a solution as they do not take the fluctuations in prices and demand into account. Modern digital freight marketplaces provide freight forwarders and other buyers involved in a supply chain with tools allowing them to benchmark the dynamically changing rates. This way, they can ensure they are paying a fair price compared to the competition.

An automated system gathers and processes real-time data on the market rates and variables behind them so that the buyers and sellers do not have to monitor the market conditions constantly. All the variables like oil prices, demand on particular routes, weather conditions, geopolitical conditions, etc., are automatically included by the model in the estimations.

Why Should You Automate Freight Bidding?

Freight bidding is a labor-intensive and time-consuming ongoing process that every party involved in the logistics chain has to participate in, either on a daily basis or from time to time. Without automation, shippers may find it hard to adjust to a changing logistics landscape already dominated by dynamic pricing models.

The climate crisis has a particular impact on the shipping industry, and automated freight bidding helps shipping companies to cope with it. With the fluctuations in fossil fuel prices and the increasing frequency of extreme weather conditions, the carriers may need even more flexibility in adjusting their rates based on these variables, and the buyers should take that possibility into account. Two-sided dynamic pricing prepares them for it.

Automation helps all parties involved in the supply chain to find the best deals quickly and effortlessly and process the bids without any manual engagement. That, of course, generates considerate savings and provides the companies with a competitive edge. It helps the carriers secure the maximum freight volume at the lowest costs and reduce the empty miles.

Make Data-Informed Decisions for Your Bids and Win the Most Attractive Loads

Are you a freight forwarder, a carrier, or run a business that orders shipments regularly? We would love to hear more about the specifics of your business to suggest you the best solutions for dynamic bidding adoption. Drop us a line so that we can talk!

About the author

Dorota Owczarek

Dorota Owczarek

AI Product Lead & Design Thinking Facilitator

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With over ten years of professional experience in designing and developing software, Dorota is quick to recognize the best ways to serve users and stakeholders by shaping strategies and ensuring their execution by working closely with engineering and design teams.
She acts as a Product Leader, covering the ongoing AI agile development processes and operationalizing AI throughout the business.

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This article is a part of

AI in Logistics
20 articles

AI in Logistics

Artificial Intelligence is becoming an essential element of Logistics and Supply Chain Management, where it offers many benefits to companies willing to adopt emerging technologies. AI can change how companies operate by providing applications that streamline planning, procurement, manufacturing, warehousing, distribution, transportation, and sales.

Follow our article series to find out the applications of AI in logistics and how this tech benefits the whole supply chain operations.

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