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Spot Freight Is a Double-Edged Sword

by Christopher Cada  10/06/2016

Trying to decide between the spot market or contracted rates can be challenging. Fuel prices, weather, forced idle time, and even truck manufacturers’ production lines can impact rates. Consider 2016 so far.

The past nine months

The spot market in the past nine months has been volatile with fuel prices at their lowest in the beginning of 2016. Despite driver shortages, there were opportunities for company leaders to explore spot capacity and open bidding processes for core business to get the lowest rates possible. This created a shift to a buyer’s market, allowing organization decision-makers to pay lower rates — regardless of whether they were using contract or spot-based freight.

The last three months of 2016

In these last few months of 2016, carriers are trying to make up the difference by reinstating contracts and raising spot rates. The market isn’t showing a shift toward more orders, but capacity is tight and carriers are artificially creating this shift through idling some capacity to increase demand. Fuel prices are rising and shipments increasing, but rates are higher than expected.

Contract or bid: Things to think about

Consider the fact that both the spot and contract prices you find on information sites and load boards are not in real time. Spot rates can be a full quarter behind, but contract rates can lag longer — which is what is occurring in the marketplace right now. By the time you get the real information, the opportunity to save money could've already passed.

Do not use the snapshots you see regarding pricing information in a silo to make your decisions. Use them as guidelines. Consider the importance of service consistency — especially if you have annual vendor contracts to fill — high capacity in a lane, or a customer who requires a high level of service.

Using the spot market to save money is a bit like gambling. However, if you have the personnel to stay on top of the market based on real-time knowledge, technology to access real-time information, bandwidth to engage in the bidding process, and some flexibility, you can save money when shifts in the market occur over contracted rates.

One aspect of the decision that is typically overlooked is carrier loyalty and relationships. Online, self-serve brokerage with the big brokerage firms puts relationships last and can have negative impacts on the market, leading to carriers accepting sub-optimized or poorly rated lanes to move their trucks, which can be risky for shippers. Reminders of this loom large when carrier operations suddenly close their doors, which is what happened in Chicago with a 400-truck operation. A deep carrier relationship pays off when the market is tight and you still receive consistent and reliable service.

So what should you do: contract or spot freight?

In order to help protect your transportation plans and annual budget targets, the experts at Next Generation Logistics recommend a hybrid strategy. With the combination of an educated staff utilizing leading Transportation Management Software technology with real-time visibility into the market, you can have a competitive edge in the freight market and make a positive impact on your bottom line. However, without the staff or technology in place, building strong relationships with supply chain firm personnel who specialize in freight management may be an optimal solution.

Whichever path organization leaders make, it's always best to keep an open mind and explore your options to find the optimal situation for your market. To learn more about Next Generation Logistics supply chain software FreightMaster TMS®, Dynamics TMS®, and our additional services, contact us at +1 847-963-0007, online, or email us.