Effective logistics solutions involve a delicate balance between contract and spot 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 freight rates. Over recent years, the ongoing truck driver shortage, , 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 freight like the plague. Reality tells another story. Spot shipping rates are not always the most expensive option.
Depending on the specific terms within contracts and discounted prices, trucking 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.
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 is 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 shipping freight 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 both freight shipping rates will never truly optimize supply chain processes. Still, like all aspects of supply chain and , 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 freightL. Now, the distinction between the types of rates comes with a caveat. Shippers must meet their contractual obligations, so even when spot shipments 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 contract and spot freight rates:
- Keep tabs on current spot market.
- Take advantage of contract freight rates that would have a higher spot quote.
- Know when to allocate freight to spot shipping 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 trucking spot rates or contracted rates. However, it is impractical to assume only using one option exclusively will lead to lower freight shipping rates. Remember, the market may change and affect spot shipping rates multiple times within a single day, and shippers lacking a balanced use of both will see higher spend and miss opportunities to save.
GlobalTranz can help you manage your freight shipping!
As a shipper, you have access to an enormous number of solutions and services to help you face today’s shipping challenges. And you don’t have to do it alone. GlobalTranz offers a quality carrier network, a leading transportation management system delivering data-driven insights, and a team of industry experts available around the clock for support. Connect with one of our experts today to improve your shipping practices so that your company can save money and increase efficiency!