Contract freight rates vs. spot rates: a tech-driven guide

Adam RobinsonFreight Market Blog

https://sonar.freightwaves.com/freight-market-blog/tender-rejections-white-paper

Finding a balance between spot freight and contract freight remains a top priority for freight managers, shippers, brokers and carriers alike. Each of these companies wants to maximize profitability. 

For a carrier or broker, that amounts to getting the best rate per load – whether spot or contract. And for shippers, that amounts to keeping costs under control and minimizing the rates. While spot rates are generally more indicative of market conditions right now, they are not necessarily the best way to move the most freight. More importantly, failure to plan for deviations in the trucking market can have a disastrous impact on both shippers and carriers. It hinges on how a company’s employees can understand and act on real-time freight data. Freight management parties need to know a few things about using logistics data to make the best decisions.

Why a contract versus freight view misses the bigger picture

The blend of spot and contract rates can help shippers maintain cost control, but it also can help carriers maximize profitability per load. Yes, digital load matching is helping to streamline the decisions, acccording to Deborah Lockridge of TruckingInfo, “There are indeed a fast-growing number of automated load-matching technologies. But other technology solutions take a wide range of approaches to better connect carriers, shippers, and freight brokers, to make logistics and supply chains run more efficiently, and to drive more profits for users.” 

Unfortunately, a failure to consider both sides of the equation – the real market rate – will lead to lost and missed opportunities. After all, there are different types of trucking carriers to consider, different nuances affecting individual lanes and the ever-growing pressure of e-commerce. Clearly, missing any part of the view will lead to greater problems in allocating trucking assets, accepting or rejecting loads, moving freight efficiently and much more.

Tech-driven processes enable proactive, tactical decision-making

When making split-second decisions whether to tender a load in an existing contract or tap the spot freight market, it comes down to what the real-time data says. Even when demand is high and rejections are soaring, shippers still need to know when to kickstart trucking RFP processes. The same applies to carriers. Knowing when to rebid carrier services across the shipper base is critical to avoiding losses and effectively pushing your drivers out the door. It’s a delicate situation. 

The only way to overcome the obstacles is to use effective technology. Tech-driven processes empower carriers to recognize market indicators and become more strategic partners with their shippers and vice versa. And even with that decision in place, it’s also crucial to recognize that market conditions can turn on a dime. Lead time requirements may change, and market volatility could soar in one market, retracting in others simultaneously. That’s why all freight management parties need a clearer picture of what’s happening, why, what’s likely to happen, and what to do about it. In fact, that’s the value proposition of analytics in logistics. Of course, it’s always helpful to break down the crucial spot versus contract freight decisions a little better. 

When to choose one over the other through meaningful, actionable data

The obvious solution is to choose the most lucrative moves based on your position in the market. That means shippers need to think about their profit margins, and carriers need to think about their profitability per load. Here are a few trucking data points and indicators of when to choose spot instead of contract freight:

Spot freight:

  • When indicators show strong backhaul opportunities from the destination.
  • When there is a decreased all-in price per mile.
  • When tender rejections are generally lower for a given market. 
  • When wait times are reasonable.

Contract freight

  • When volumes are declining.
  • When you have ample lead time.
  • When the all-in price per mile is lower.
  • When volumes are declining.

Get the freight analytics data needed to make spot versus contract freight decisions with the best solution

In turn, more strategic decisions are more about knowing when to start new RFP processes, whether through mini-bids or simply looking to renew existing annual contracts. Strategic positioning might not seem like a major need among carriers – especially when demands remain high. However, failure to attain a more strategic role in the market will inevitably lead to losses when the next downturn puts pricing power back in the hands of shippers. And it all begins by gaining access to the right freight forecasting and analytics resources. Get started by requesting a FreightWaves SONAR demo or by clicking the button below.