A company’s profit dramatically depends on its annual outgoings on logistics and supply chains. This is an area where a great deal of money can get lost if transportation costs are poorly distributed or contracted shippers fail to meet demands on time.
At times it may be necessary to supplement contracted rates with spot market freight rates to make a deadline or accommodate an influx in demand at the additional cost.
This begs the question which model better suits your supply needs and whether spot market rates could be lighter on your company’s wallet.
In this article, we have supplied a guide to spot market freight rates and contract rates and looked into the pros and cons of both.
What are Contract Rates?
Contract rates in freight shipping apply when a company signs a deal to have their products shipped at a fixed term and fixed capacity, usually covering a year.
These contract shipments cover a specific lane and specific product, meeting routine demands.
As companies commit to a contract, the rates are likely cheaper than spot rates in the long term. They don’t increase prices when a month turns out to be busier than the last but also don’t provide cheaper services when demand lowers.
When Do Companies Benefit from Contract Rates?
Here are just a few instances where a business may benefit from using contract rates:
- They sell a set number of products that rarely change
- They can predict their profits and demand with relative reliability
- They ship to the same locations and using the same delivery lanes regularly
- They are a stable, established company that can afford to commit to the financial investment of a fixed-term contract
You get the idea!
Why Would a Business Not Exclusively Use Contract Rates?
Here a few scenarios where a company might not want to use contract rates:
- Contract rates lack the flexibility to clear a warehouse fast when needed or meet the demands of an unexpectedly large shipment
- Contract prices remain the same even when profits fall lower than expected, or the market trends for freight shipments fall
- The financial investment of a fixed-term contract is not viable
- Loads are irregular and might not require the same capacity each month.
Just to name a few!
What’s Spot Rates in Freight Shipping?
A spot rate is a price a shipper quotes a company to move a product from one location to another.
The spot market fluctuates with the basic economic principle of supply and demand.
There are several situations where Spot Freight Shipping is necessary:
- If a product needs to be moved to clear a warehouse fast
- To supplement existing contract shipments in times of high demand
- When a new product is shipped and isn’t covered by the contract
- When orders for purchases might be irregular
- When fast, same-day deliveries are needed.
This often makes the spot market a suitable model for smaller companies. These kinds of businesses are less likely to make enough profit from irregular shipments to meet the higher (but more standardized costs) of contract freight shipping.
It’s also useful when you’re looking at expedited shipments on occasional orders.
Spot rates can change by the hour, so it is worthwhile watching the prices and collecting several quotes to get a good deal on a shipment. Because of this, some companies have argued that the spot market is a cheaper model altogether.
Here are some of the things that could influence spot rates:
- Fuel prices
- Demand and supply
- Traffic limitations, in case of floods or road closures
The list goes on.
The Drawbacks of Using the Spot Market
In the long term, spot rates might cost a company more than relying on contract rates.
There is less accountability and security with spot shippers as they will not have a regulated or well-negotiated relationship with the company and hit unknown lanes and docks.
The relationship between shipper and company might be less trusting than those established by long term contracts.
It can be challenging to plan budgets using spot rates, as these can fluctuate and change with capacities at any point.
There’s a constant need to meet capacity and negotiate a new shipment, without the long term regulated security a contract offers.
Regardless of Your Situation Be Aware of Spot Market Trends
Even if your company handles most shipments via contracts, it is worth your while to be aware of trends in the spot market.
Spot rates can be a good indicator of how contract rates are changing, as they reflect the market’s condition. If spot rates are dropping, it might be a good time to get quotes for new contracts and lock these in for a fixed term.
Companies can use a variety of tools to stay up to date on the market trends and observe where the rates are going.
These sources also provide paid services for disclosing individual spot rates for current and historic lanes, the top intermodal spot rates and more information on industry trends.
Are You Going to Use the Spot Market?
Neither contract shipments nor the spot market may meet a business’ needs exclusively.
To ensure you secure enough capacity, and meet demands in a timely fashion, stay aware of spot market trends. That way, you can utilize spot rates when prices are favorable.
At the same time, it is cheaper long term to cover your regular shipments with fixed contracts and establish a trusting relationship with the freight shippers you employ.
For more helpful insights into shipping trends, reach out and contact us today to get your quote!