The First 100 Days: How Logistics Teams Are Preparing For Tariffs

Edmund Zagorin is Founder and Chief Strategy Officer of Arkestro, a leading Predictive Procurement Orchestration platform.

As enterprises prepare for the new administration’s tariffs on U.S. trading partners, transportation and supply chain teams are on the front lines of managing price changes for freight and logistics. So, how are they preparing to do battle?

In this short piece, I'll outline several tariff readiness tactics that we’re seeing Arkestro customers put into practice for transportation and supply chain, as well as the "leaky bucket" framework for managing your team's expectations around price volatility for freight rates. Many of these tactics may be helpful for dealing with price volatility and disruption events more generally, even beyond the scope of tariffs.

Why Your Annual Bid Process Creates A Leaky Bucket For The Utilization Of Contracted Capacity

At many enterprises, transportation teams are launching or getting ready to launch their annual logistics bid to collect rates from carriers across their large portfolio of lanes. The annual logistics bid has long been a core AI use case for Arkestro customers. Transportation procurement teams use our AI engine to simulate the entire bid process before it begins, then generate suggested offers that anchor quoted rates for each relevant lane and give feedback for each carrier.

It's worth pointing out that this predictive approach to rate management can be done manually in Excel using regression analysis, functions and pivot tables. But one challenge doing it manually has to do with the underlying combinatorial complexity involved in freight bids.

For example, imagine you are bidding out 1 freight lane with 25 carriers. There are 25 potential award outcomes. Seems pretty manageable, right? But what if you now have 25 lanes instead of just 1? If there are 25 lanes and 25 carriers, then the number of potential award scenarios jumps to 25!—or 15,511,210,043,330,985,984,000,000, which is more than fifteen and a half septillion.

For context, most annual freight bids run by large enterprises have much more than 1,000-plus lanes and 100 carriers, and 5,000-plus lanes and 500-plus carriers is not uncommon. You can do the math here. No wonder that even experienced transportation teams often take weeks or months to run an annual bid process using manual software or Excel (and aren't particularly eager to run the process more frequently). Unfortunately, the annual cycle is part of the problem.

Since the beginning of Covid-19, transportation teams have had a challenging time attaining desirable contract utilization from freight carriers due to spiky volatility in freight rates. The problem was that carriers locked into lower-priced contracts could turn around and sell their capacity for significantly more per load on the spot market. And many carriers did exactly that. Twice the profit for hauling the exact same load on the exact same lane? Those economics were often too strong to pass up.

Thus, from 2020 through 2022, enterprise transportation teams discovered that their contracted carriers suddenly did not have capacity to haul loads on key lanes. And this capacity then needed to be replaced urgently at the last minute, often at sky-high prices and with carriers whose on-time, in-full (OTIF) performance was suboptimal. This is what we call the "leaky bucket" problem of contract utilization.

The "leaky bucket" problem is a useful way to understand price volatility for freight: When spot rates for hauling the same load on the same lane are much higher than your annual contracted rate, you can expect the capacity of your carriers on this lane to decline. The greater the price divergence, the more the bucket leaks. And the more the bucket leaks, the more last-minute carriers you have to find, quote and manage. Over time, the leaky bucket creates more work for supply chain teams while also eroding value.

Why Fixing Leaks In Your Bucket Is The Best Way To Prepare Your Team for Tariffs

As a result of this leaky bucket problem, most large enterprises have made peace with the fact that some percentage of their logistics spend will end up in the spot market no matter what. As a result, many transportation teams now commit a percentage of their capacity to the spot market as part of planning, thereby anticipating less-than-full utilization of their contracted capacity created by the leaky bucket.

The good news is that with a few process changes, your transportation team can fix leaks in the bucket at the lane level before they start by moving to shorter contracts and more frequent quoting cycles for some subset of your lanes. By moving to quarterly contracts for a subset of lanes with high volatility (e.g., high propensity for leakage), you can achieve higher utilization of your contracted capacity than you can with an annual cycle.

Here are the three steps your team can use to implement this approach:

1. Run a regression analysis of the past 12 months of rates across your lanes. Identify a subset of lanes with extreme price variance, high carrier count and known historical capacity issues.

2. Create a market basket with this subset of lanes for a quarterly rate update event. These are lanes for which the length of the contract will be optionally 90 days rather than 12 months. This will give you the option to requote the rate more frequently than an annual 12-month bid process.

3. Communicate to both preferred carriers and carriers that performed on your subset of lanes that you intend to collect contracted rates for these lanes quarterly as well as annually.

This process change can help you better align your contracted rates with changes in the market, including changes created by tariffs or the threat of tariffs. Shorter quarterly contracts and more frequent cycles will help your team discover and manage the impact of tariffs on contract utilization early and often, rather than dealing with the leaky bucket only after the leak has already sprung.

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