Effective logistics management involves a delicate balance between spot and contract freight use and rates. Various misconceptions surround the use of spot and contract rates, and failure to operate with only one shipping option will contribute to higher freight spend. Moreover, shippers may misunderstand when spot versus contract rates should apply and how a balanced approach yields better results.
Are Spot Rates Always the Most Expensive?
Shippers do have a misconception about spot rates. Over recent years, the ongoing truck driver shortage, capacity crunch, new HOS regulations, and countless other factors have drilled the uncertainty of the market into shippers’ heads. As a result, shippers have an innate belief that capacity is always tight and always at risk. Thus, they avoid spot rate shipping like the plague. Reality tells another story. Spot rates are not always the most expensive shipping option. Depending on the specific terms within contracts and discounted prices, spot rates could be significantly lower than contracted rates. Of course, knowing whether to ship one or the other goes back to understanding more about current supply chain processes within specific companies.
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Balance Between Spot and Contract Rates Benefits Supply Chains.
Finding a way to assess freight for shipping through spot freight or contracted freight rates means knowing how to review the current market, expectations for change within the next days, if not hours, and considering all carrier contracts. While this may be a simple process for supply chains with one or two carriers, imagine the nightmare caused when hundreds of carriers work across thousands of suppliers. The entire process becomes so cumbersome and intrusive that it can leave supply chain leaders dumbfounded.
The only way to survive lies in finding a balance between the two, knowing when each is the most beneficial for a shipment.
While larger carriers can often receive contracts for their trucks during low spot market times, the smaller carriers who depend on the spot market struggle. When the market stabilizes, the spot market lowers — it generates higher rates when the market is volatile.
One of the difficult things about using spot rates is that for shippers, 3PLs, and carriers, it is difficult to manage finances and plan budgets. The variability of the rates coming in won’t allow businesses to create optimal budgets, but only get them close to what they aim for.
How to Stabilize Use of Spot and Contract Rates
Achieving a balance between the use of spot and contract rates will never truly optimize supply chain processes. Still, like all aspects of supply chain and freight management, technology is rapidly evolving and coming to the rescue of supply chain leaders. Through advanced technologies, it is possible to gain a sense of clairvoyance, knowing whether the current operation is genuinely optimized to use spot or contract rates. Now, the distinction between the types of rates comes with a caveat. Shippers must meet their contractual obligations, so even when spot rates are appropriate, forgoing the use of contracted rates could result in fines and financial repercussions from a carrier. With that in mind, shippers should follow these steps to stabilize the use of spot and contract rates:
- Keep tabs on current market spot rates.
- Take advantage of contract rates for freight that would have a higher spot rate.
- Know when to allocate freight to spot rates.
- Increase the availability of negotiated rates by expanding your carrier network.
- Use a TMS to track spot versus contract freight volumes and cost.
Understand How Both Spot and Contract Freight Rates Drive Supply Chain Efficiency
There will always be periods when shippers want to use more spot rates or contracted rates. However, it is impractical to assume only using contracted rates or spot rates exclusively will lead to lower freight shipping rates. Remember, the market may change and affect spot rates multiple times within a single day, and shippers lacking a balanced use of spot and contract rates will see higher spend and miss opportunities to save.