Dealing with impromptu or occasional shipments can be a logistical challenge, making it impractical to commit to long-term contracts with carriers. This is where spot freight or spot buy freight becomes a crucial component of shipping operations. In the freight ecosystem, spot freight accounts for approximately 15 to 20% of total freight operations .
In this article, we will explore spot freight to understand the factors that influence it, how to manage it, and the difference between the spot and contract freight rates.
What is Spot Freight? Spot freight is a transportation solution that allows freight forwarders or shippers to leverage temporary or one-time shipping solutions to move their goods. This is different from entering into a long-term contract with carriers to move goods throughout the year or for an extended period. Spot freight empowers businesses and supply chains with a degree of flexibility, allowing them to adapt to the ever-evolving demands of the average consumer or business.
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When is Spot Freight A Good Option The spot market is the go-to option for shipping freight that requires speed and flexibility. Supply chains or businesses may need these attributes for various reasons to ensure their shipments reach their destinations promptly. As a freight forwarder, it is essential to understand these sorts of scenarios and why they come up. It is a good option under the following scenarios.
1. Unexpected Demand Surges Sometimes, a business may experience sudden spikes in demand beyond what was anticipated during the forecasting and planning process. The challenge with sudden demand spikes is that businesses and supply chains must go beyond their regular operations to meet these orders.
If they expect a shipment of raw materials bi-weekly, they would need a stopgap to cater to the prevailing demands. In this case, spot freight can be extremely useful.
2. Time-Sensitive Shipments Tight deadlines mean the freight forwarder must find freight capacity scheduled to leave at the earliest possible notice. Contractual freight primarily runs on fixed schedules, which could be detrimental to the goal of the time-sensitive shipments. Spot freight can be critical in this case as it allows for direct negotiations with carriers to secure faster transportation.
3. Irregular or Low-Volume Shipments Working with long-term shipping contracts may not be ideal when a shipper or a freight forwarder works with irregular, volatile, or low-volume shipments. With spot freight, the freight forwarder or shipper can pay for shipping only when necessary. This could be a money saver for operations.
4. Trying Out New Lanes or Carriers New lanes or carriers have one thing in common. There is a lack of trust, peppered with an element of unsureness. Spot freight allows freight forwarders and shippers to explore new options without committing to long-term contracts. This way, they can opt-out if the solution is not favorable.
5. When Contract Freight Rates Are Unfavorable The cyclical nature of the freight market is that prices are constantly fluctuating, making it favorable in parts for the spot and the contract freight. This depends on shipping volumes, market conditions, and demand. Freight forwarders and shippers sometimes monitor the market to leverage the best solution at every point.
What are Spot Rates? The spot rate is the price or acceptable value asked for to ship goods in a freight move. Unlike the contract rate, the spot rates are not locked in and fluctuate based on certain factors and prevailing market conditions.
Spot freight rates are prevalent across all freight modes, whether trucking, maritime, air, or rail. All of them operate in a volatile market system, which could impact the value of the spot rates at any time. Knowing the spot rates allows for effective decision-making and proper planning. In many cases, it can be an effective cost-saving strategy, as highlighted above.
What Factors Influence Spot Freight Rates? Because the freight market is quite volatile, spot rates can be subject to internal and external influences that cause price fluctuations. The spot rates may vary from carrier to carrier but are typically determined using any of the following factors.
1. Demand and Supply Dynamics The demand and supply dynamics are among the most powerful factors influencing spot rates in the freight market. Low demand will ultimately mean lower prices, and higher or surging demand will eventually mean higher spot rates.
2. Fuel Cost While fuel is a major operational cost for carriers, it is one of the most dynamic commodities in the market. The higher the fuel price, the higher the spot rates and freight cost. Shippers and supply chains can expect lower spot rates with lower fuel prices.
3. Distance and Difficulty of The Freight Longer routes will generally require more resources, which naturally impacts spot rates. The reverse is the case for shorter distances. More challenging routes, whether due to insecurity, remote locations, or special infrastructure requirements, will ultimately mean higher spot rates.
4. Seasonality and Economic Conditions Peak periods, such as the holiday season, will ultimately mean more demand for capacity, leading to higher spot rates. Economic conditions also determine spot rates because a booming economy generally indicates strong consumer spending, resulting in higher demand for freight capacity. On the other hand, an economic downturn would result in the consumer base only being willing to spend on necessities. This would mean lower spot rates because of the lack of demand and excessively available capacity.
How to Manage Spot Freight Rate Better There are several factors that freight forwarders need to consider when looking to buy some spot freight. The following pointers will help:
Market Awareness Regularly monitoring the freight market, including market conditions or influencing factors, allows the freight forwarder to stay on top of the spot freight market. Doing this effectively would require adopting technology that provides them visibility to the market. Leveraging digital freight platforms like Freightify will help freight forwarders get real-time spot rates and source capacity accordingly. Reading and monitoring industry publications also helps a great deal.
Flexible and Strategic Shipping Operations Planning, strategizing, and scheduling shipments will help freight forwarders and shippers leverage the spot market when rates are low. Demand planning and forecasting solutions anticipate spot freight and schedule freight moves around periods of typically lower prices. Flexibility and market visibility allow freight forwarders and shippers to explore alternative routes that could attract lower spot rates.
Effective Negotiations Freight forwarders cannot negotiate with carriers without having a pulse on the current market trends and conditions. This can include fuel prices, seasons, and current economic conditions. This way, they have some leverage and can generate better rates.
It also pays to emphasize aspects of the shipments that could be attractive to the carrier. It could be the freight volume, the distance of the move, or a route where the carrier has significant available capacity. Strategic relationships with carriers also make lower pricing and priority services much easier.
Leverage Technology Freight technology solutions like Freightify streamline the process of finding carriers. It also allows freight forwarders to easily compare rates and negotiate more effectively. These solutions also help streamline freight operations by providing data analytics to help identify potential areas of improvement and carrier performance.
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The Difference Between Spot and Contract Freight Rates Agreement and Period Spot Rates : It is done on a per-shipment basis.Contract Rates : It is pre-negotiated and locked in, usually for a couple of years, typically one or two.
Pricing Stability Spot Rates : Unstable; it fluctuates based on market conditions and factors that influence pricing.Contract Rates : Stable and fixed throughout the contract duration; it cannot be changed except during critical market conditions.
Flexibility and Adaptability Spot Rates : High flexibility.Contract Rates : Lower flexibility. Although price stability exists, it will not adapt to current market conditions.
Suitability Spot Rates : Ideal for impromptu or occasional shipments.Contract Rates : Best for routine cargo shipments.
Challenges in Managing Spot Freight Manually Manually managing spot freight can be challenging and stressful for freight forwarders and freight forwarding operations. Managing options manually in a modern logistics landscape that prioritizes speed and efficiency can derail the entire freight process.
Time-Consuming Processes Manual spot freight negotiations can be time-consuming due to the complicated processes involved. This includes finding carriers, obtaining quotations, comparing the rates, relating them to the clients and consumers, and then managing feedback to get the desired solution. Handling this will take time and effort.
Limited Visibility and Control Manually accessing spot rate data limits freight forwarders' ability to effectively manage and analyze real-time data. This makes it challenging to gauge current market conditions, understand carrier capacity, and track shipments. Managing and mitigating delays becomes almost impossible because of insufficient transparency.
High Cost of Operations and Increased Risks Manually managing and entering shipment details can be slow and expose the freight operation to inefficiencies, inconsistency, and errors. This contributes to higher operating costs and exposes the freight forwarding operation to more risks that can disrupt the entire process.
Automate Spot Quoting Process With Freightify In a world where streamlined freight operations guarantee a competitive advantage among supply chains, Freightify allows freight forwarders to automate the entire process, from rate procurement to rate management. With Freightify, freight forwarders have access to spot rates from over 150+ carriers. They can analyze and manage all these rates on the platform, making it possible to provide customers with quotations within minutes. Connect with Freightify today.
