Instafreight & Kearney.

Three building blocks for overcoming the value chain trilemma.

Whitepaper Sep, 2023

Maximizing procurement impact in the European road freight market

As the market volatility seen from 2020 to 2022 recedes and major supply chain disruptions are now more the exception than the rule, shippers need to seize the opportunity, take advantage of lessons learned, and upgrade their value chains to balance resilience, sustainability, and commercial objectives.

Why shippers must address the value chain trilemma
Europe’s transport sector continues to face multiple operational and cost challenges in 2023. Several of the usual suspects remain: cost pressures from a driver shortage as an aging workforce retires, rising fuel prices amid the transition to cleaner fuels, and weak freight demand due to rising interest rates and inflation. Add to this higher costs from government actions such as major road toll increases in several EU member countries, and impacts from the EU Mobility Package 1 rules affecting driver operating hours, international licensing, and time allowed outside the country-of-origin will affect both operating costs and driver availability.

As the concurrent wild market swings in supply and demand and capacity of the past three years gradually subside, shippers at last have a moment of calm to address longer-term strategic objectives. Top of mind among many, whether in manufacturing, retail, or wholesale distribution, will be to balance the trade-offs among traditional business targets, planned redundance and agility to maintain resilience, and an increasing focus on sustainability, including compliance—what we call the value chain trilemma.

Shippers in the past typically awarded freight transportation based largely on price, with larger shippers leveraging their volumes and smaller ones benchmarking against the negotiated outcomes. Carriers squeezed cost out of their operations to remain profitable, often by using fewer drivers on longer trips with longer hours per shift. Building a more resilient, sustainable network was seen as nice to have but often cost-prohibitive.

The COVID-19 pandemic and Russia’s invasion of Ukraine have dramatically revealed the shortcomings of this overall approach, with significant losses incurred from broken supply chains, factory closures, and delayed shipments. A fixation with transport costs alone entails its own distinct risks; capital cost of inventory matters again.

Properly addressing the trilemma requires an end-to-end approach across a firm’s customer interfaces, operations and supply chain, and digital operating model. Freight procurement excellence plays a vital part in the equation by building resilience in the supply network as well as more sustainable operations through mutual investment by shippers and carriers.

None of the discussion to this point is intended to suggest that commercial objectives are less a priority than other considerations, or than they had been in the past. More importantly, it is worth noting that the peak in freight rates in 2022 from surging diesel fuel prices that shaped last year’s negotiations has now subsided as inflationary pressures have slowed demand, in turn easing tight freight capacity. A review of 35,000 rate quotes posted between Q3 2022 and Q3 2023 on InstaFreight’s transport sourcing platform shows that spot rates fell by an average 9 percent across Europe and contract rates decreased by an average 7 percent.

In this more favorable rate environment, shippers can begin to refocus their attention and energies to optimizing their road freight category management to align supply chain financials, resilience, and sustainability. The key is to use analytics and the data generated by clients’ own supply chain to create new, more intelligent deal structures.

Next-level road freight category management
Road freight category managers relying on external carriers to transport their companies’ raw materials and finished goods typically secure capacity for forecasted demand with predetermined company requirements. A limited willingness to change carriers restricts procurement from being the key lever it should be to encourage competition in a highly fragmented road freight market.

A traditional annual tender places the forecast demand on the market and awards transport lanes via dedicated contracts, with a first call to the loads and some more or less formally guaranteed base load or remuneration for the carrier. The model has its shortcomings: contracted carriers may not be able to cover unexpected or seasonal fluctuations in demand, for example, resulting in lost revenue or reimbursement claims; locked and agreed contracts may not allow for securing cheaper rates should the market turn.

How, then, should future category management be structured to reclaim control of freight negotiations, and then go beyond price to optimize for all the trilemma’s target dimensions? We see three building blocks as crucial to increase the value-add of the road freight category procurement; these are illustrated in figure 1.

Figure 1: Three building blocks are crucial to increase the value-add of the road freight category procurement

Advanced sourcing automation, enabled by artificial intelligence (AI) and machine learning (ML), is an automated process for gathering quotes to expand the list of potential bidders as well as to gather new rates and benchmark currently contracted ones. Advanced tenders using standardized bid sheets, reports, and negotiation documents should be conducted at regular intervals to ensure that procurement teams stay up to date with the latest market trends and pricing. This is especially relevant in the fragmented European road freight market where, according to the European Commission, more than 600,000 carriers operate, with 94 percent of them managing fewer than 10 trucks.

By using sourcing tools from established vendors such as Coupa, Jaggaer, or Keelvar, or from innovative start-ups such as Archlet, procurement teams can manage submissions from thousands of bidders and dozens per lane. They can also gather alternative quotes for different order lead times or for alternative equipment, allowing them to build “what-if” scenarios for alignment sessions with business stakeholders.

In our experience with clients, we have found that underlining the commercial benefits, such as achieving an incremental 3 percent cost reduction compared to as-is specifications, can help achieve mutual agreement on the final carriers and specifications to be awarded.

Market sensing focuses on using external signals for internal decision-making. Here an AI model is trained to collect and interpret historical data from various sources. Via web scraping or API interfacing, for example, latest sentiments on carrier performance can be gauged. Lean partnering with platform providers such as Timocom or InstaFreight that have vast transport traffic running over their systems can help gather or gauge key data points on available carrier capacity, geographic coverage, or financial development. Broader economic development and forecasting data that influence demand can be collected from publicly available sources.

Statistical algorithms then assess and define the relationships between demand and available supply against a current baseline and historic patterns to predict future freight costs. Figure 2 provides an illustration of how a sensed dip in market rates can be used to contract additional volume for a limited time. Predicted price peaks, on the other hand, would trigger recommendations not to renew contracts at elevated levels but instead cover increased volumes temporarily on a spot basis.

Figure 2: A sensed dip in market rates can be used to contract additional volume for a limited one

It should be emphasized that no one person or algorithm could have predicted the black swan events of the COVID-19 pandemic or the Russian invasion in Ukraine and its implications. As with any AI-based approach, human judgment is required to augment the results during unforeseen circumstances. Where AI can help is in applying its knowledge of the supply chain network’s business rules, operations, and capabilities in real time to recommend and respond to exceptions created by sudden disruption.

Analytics-based category management is at the heart of sustainable procurement and logistics, integrating business needs, procurement data, and market sentiments for a more comprehensive decision-making process. By combining revised demand and utilization forecasts, carrier feedback, contract durations, benchmark rates, and sustainability data on fleet, vehicle, and driver performance related to sustainability, procurement teams can optimize carrier allocation at minimum cost while meeting resilience and sustainability targets. End-to-end integration of enterprise resource planning (ERP), transportation management systems (TMS), and e-sourcing platforms, plus the deployment of an optimization application (typically built on top of platforms such as Kearney’s Optano engine) is key to enabling this approach.

As supply chains become more complex and competitive, they become increasingly reliant on the use of data-driven insights to drive performance and manage transportation demand across business units. That in turn makes analytics-based category management increasingly crucial to getting the supply chain trilemma right.

Bringing it on the road
A close and targeted effort within the organization is required to maximize procurement impact. In the first phase, typically lasting 10 to 16 weeks, an advanced sourcing automation pilot builds transparency and creates a baseline. This phase also serves as a quick win to demonstrate the benefits of the approach and gain credibility within the organization. At the same time digital tools deploy a market sensing solution that includes setup of infrastructure such as web crawlers and API interfaces. The first simple model is trained for a selected use case, such as shipments to and from sites in the United Kingdom. Although the displayed results may not be fully optimized, the steering cockpit provides the organization with a glimpse of how it would look in the future.

In the second phase, the results are operationalized. Sourcing activities are automated to repeat on a regular basis—for example, quarterly. The cross-link to the market sensing platform allows for the integration of the latest rate levels into the AI model to further sharpen its predictive accuracy. Category managers are coached to deploy the solution, and final customizations are made before transitioning it into the productive setting of analytics-based category management.

In the following, we describe how InstaFreight and Kearney have successfully deployed these three building blocks to address clients’ pain points and enable them on their trajectory to maximize procurement impact. Each case provides a different lens on how to address the value chain trilemma.

Financial: advanced sourcing automation for a courier, express, and parcel service provider
InstaFreight partnered with a leading courier, express, and parcel service provider to address challenges in sourcing its spot rate spend of more than €30 million. The client faced issues extending its carrier base and an inflexible, centralized procurement structure covering more than 90 German depots. A streamlined managed transportation solution was introduced to reduce inefficiencies and to tap into a larger carrier pool.

The project’s core hypothesis stated that accessing a broader carrier base leverages competition and results in cost savings. To do so, a multichannel approach was deployed involving InstaFreight’s own network of 25,000 vetted carriers as well as external load boards for a diverse carrier pool. An algorithm was developed to match specific requirements of each shipment with carrier information on capacity availability, geographic proximity, and actual freight cost to calculate and recommend a “fit score.” The spot sourcing approach was defined to be cost-neutral without overhead charges for the client. InstaFreight would also streamline the settlement process by taking responsibility for carrier payments, alleviating commercial and administrative burdens for shippers.

By focusing on optimized operations, strengthened carrier partnerships, and improved efficiency, the project resulted in significant transformations in the client’s “ways of working.” One notable change is the shift from a “first come, first serve” spot procurement approach to a competitive bidding system using game-theoretical elements. In pilot depots, 5 to 7 percent cost savings on total spot expenditures were generated with only one dispatcher required to manage operations. The bidder base grew fivefold, reaching nearly 100 in regularly competing carriers. Going forward the concept will be rolled out to all of the client’s German depots.

Three learnings emerged from the project. First, starting with a pilot is crucial to build trust through a clearly defined scope and measurable goals. Second, staying flexible is vital. Responsiveness to client feedback and rapid prototyping allows “hacking” of solutions that provide quick wins and valuable insights. Third, scaling the solution comes only after securing senior leadership buy-in.

Resilience: market sensing in the utilities industry
Albeit stemming from a different category, this case serves as another tangible example of how market sensing can be deployed beyond road freight procurement. The client, a leading European energy provider, was facing significant challenges in procuring capacity for underground engineering services. Renewal and extension of cables and pipes was the backbone of their energy distribution network. The demographic change, similar to truck drivers, restricted available capacity of workers while in parallel demand for capital projects surged, resulting in an unfavorable sellers’ market with obvious price hikes.

To address this shortcoming, we developed an AI-based market model to forecast both supply and demand of required underground engineering workforce on a regional, state level. Supply was modeled based on the demographic development. A minimum to maximum range allowed consideration of external stimuli such as potential simplified worker immigration laws or more apprentices through higher salaries. Demand was modeled on an array of variables such as building permits, broadband expansion plans, and public infrastructure development grants. We tuned and validated the model based on historic data, reaching a significant forecast accuracy (R2 0.86), allowing projection on monthly intervals on state level within Germany as well as neighboring countries.

The model’s outputs, embedded in an interactive dashboard, allowed category managers to identify periods with expected cost peaks and valleys. Integrated in their ERP systems, procurement could automatically analyze investment plans on its expected construction cost and pre- or postpone timelines with the business based on the sensed market development. In addition, the tool served as a powerful lever to assess and challenge suppliers’ quotes based on the should-costing functionality.

Sustainability: analytics-based category management for a chemicals manufacturer
We assisted a specialty chemicals player that faced pressure from the European Green Deal as well as its customers. The client sought an analytics-backed solution to measure its supply chain’s greenhouse gas emissions and to derive actions for subsequent decarbonization while also considering commercial impact and potential benefits.

We built an emissions baseline and formulated goals—for example, side constraints, such as required equipment types for transportation—that needed to be considered. Using our Optano platform, we developed a customizable simulation model that drew from various data sources, such as the ERP and TMS systems, and collated a 360° operations and sustainability effort. Upon fine-tuning the optimization algorithm, the model provided a granular view on greenhouse gas emissions in real time—across the client’s complete value chain and the product portfolio.

The solution allowed the client to assess the impact of actions—for example, optimizing transport routing or converting road freight onto rail—on reduced carbon footprint through “what-if” analyses. As a side benefit, the optimization also provided a perspective on commercial performance and issues that can be addressed, independently from a sustainability lens. Having the analytical foundation laid out, data can be collected from various systems and cleansed in a manner of seconds. With this single source of truth across the company, the sustainability becomes the key target dimension to optimize besides cost. For road freight managers, it became their working space when both loading latest rate cards and carrier information into the platform while also using recommendations around sustainability optimizations in their upcoming sourcing events.

In summary, next-generation category management is crucial for the transport industry to achieve financial optimization, sustainability, and resilience. The three cases provide striking examples for next-level road freight category management. Advanced sourcing automation through InstaFreight’s access to 25,000 carriers and external load boards and automated market interaction increase commercial returns and alleviate administrative burdens. Market sensing complements this with a mid-term forecast that informs actions beyond spot procurement and serves as another toolkit to gather stakeholder buy-in through its innovative approach. Through a gradually extended rollout, as seen with our clients, systems will be end-to-end integrated ensuring a sustainable and analytics-based road freight category management.

Authors: Sven Rutkowsky (Partner, Kearney), Henning Wachtendorf (Vice President, Kearney), Michael Koelbl (Consultant, Kearney), Philipp Ortwein (Co-Founder and Managing Director, Instafreight).

Über InstaFreight

InstaFreight ist ein führendes digitales Logistikunternehmen für Landverkehr in Europa. Das 2016 gegründete Unternehmen beschäftigt mehr als 200 Mitarbeiter und führt wöchentlich mehrere Tausend Transporte durch. InstaFreight vereint in einer digitalen Plattform den Laderaum von mehr als 25.000 Frachtunternehmen und ermöglicht Verladern den Zugriff auf diese Kapazitäten. Dank digitaler Innovationen schafft das Logistikunternehmen mit Hauptsitz in Berlin Transparenz und Effizienz im Transportprozess.

Für Verlader wickelt InstaFreight Transporte zuverlässig und unkompliziert ab. Durch die Digitalisierung des Transportprozesses profitieren Verlader von effizienten Prozessen, die Zeit und Kosten sparen, und einer stets einsehbaren Supply Chain. Frachtführer können mit InstaFreight die digitalen Bedürfnisse der Verlader erfüllen, ihre Auslastung optimieren und werden bei attraktiven Frachtraten schneller bezahlt. Weitere Informationen finden Sie unter