Shippers have many important decisions to make when coordinating shipments, including whether to use the spot market or sign a contract with a carrier. It can be challenging to determine whether spot or contract freight is best for a particular load, so it is important that shippers understand each method – or partner with experienced logistics experts like Red Kite who do – to help guide their decision.
Spot freight is a one-time rate given to a shipper by a carrier for a single delivery, typically provided near or at the time of the load’s shipment. Spot freight rates are subject to daily change and fluctuation.
By contrast, contract freight is a fixed rate that is negotiated between a carrier and shipper for a specific volume range over a set period of time, typically a year.
Many shippers – especially smaller ones – often default to spot freight, but there are many advantages to contract freight or using a combination of both shipping methods.
How are Spot Rates Calculated?
Spot rates are calculated using the economic principle of supply and demand. In the shipping market, supply and demand is represented by capacity, which is the number of trucks available to carry freight at a given time.
Freight capacity varies between different lanes – a route regularly serviced by a carrier – and trucking services, so rates are typically different across the market. With capacity constantly changing, spot rates can vary from hour to hour as well.
If there are more shippers in need of freight than there are trucks available, capacity will tighten, driving spot rates up. However, if there is an excess of trucks and a lack of shippers in need of freight, spot rates will fall.
Economic and market factors such as GDP growth and manufacturing activity can indicate the future direction of spot rates, but do not always indicate the direction of rates for individual services or lanes.
For example, let’s say that GDP is growing at a rapid rate, but markets that use flatbed trucks – such as lumber or steel and metal materials– are softening. This would increase capacity for flatbed services, causing rates to fall despite a rising GDP.
The opposite can be true as well. Continuing our flatbed truck example from above, if the economy is slowing, but lumber or steel and metal products are in high demand, capacity for flatbeds will likely fall and rates will increase.
How are Contract Rates Calculated?
Unlike spot rates, which can change within a matter of minutes, contract rates are fixed for the entire period of a particular contract. In addition to establishing a set rate, contract freight also sets standards for other factors, including a minimum freight volume the type of freight that is shipped and the lane on which the freight is shipped.
Contract rates are typically higher than spot rates at any given point because they are negotiated to include other variables that factor into freight costs, such as fuel surcharges and additional carrier services. Spot rates do not include these variables, and they are added as a separate freight charge.
Determining Whether to Use Spot or Contract Freight
Now that we discussed how spot and contract rates are calculated, let’s look at which factors should be considered when choosing the best method for your shipment.
The overall trucking market outlook can indicate whether spot or contract freight offers shippers the most cost savings.
If the market outlook points towards capacity being tight over a long period of time, shippers may choose to lock in a contract with set rates before prices on the spot market increase. However, if market outlooks indicate slowing freight demand in the future, shippers may choose to use spot freight and take advantage of lower prices.
The amount of risk a shipper is willing to take with changing rates also plays a role in the choice between spot or contract freight. Larger shippers with a high freight budget, for example, may be more willing to risk spot market volatility in case rates drop. Smaller shippers who do not have the financial means to risk changing freight rates, however, may choose to go with the consistent pricing that contract freight offers.
Shippers should regularly monitor the key market indicators that influence freight rates and capacity to gauge whether spot or contract offers them the most cost savings.
Red Kite publishes a monthly newsletter that highlights trucking outlooks, fuel costs and more to keep shippers informed about trends that could impact capacity and rates.
With only one dedicated carrier handling all loads, contract freight shippers are able build a strong relationship with that carrier. This is important for loads that require extra attention or care from a carrier – such as fragile loads or just-in-time shipments – as partnering with a trusted carrier helps shippers ensure their sensitive loads are delivered safely and on-time.
It is more difficult for shippers to develop strong carrier relationships through spot freight as they may work with different carriers for each load. Working with different carriers also means service and expertise can vary for each delivery, putting sensitive loads at greater risk of damages or missing a delivery deadline.
3PLs like Red Kite, however, can help shippers find experienced, reliable spot freight drivers, since they have experience working with a deep pool of carriers. 3PLs take out the confusion and difficulty shippers are faced with when buying freight services.
Since contract freight requires shippers to ship a minimum freight volume over a set time period, shippers who have consistent freight volume may find contract freight more cost-effective than spot. Shippers with infrequent freight needs, however, may have more difficulty meeting the obligations of contract freight and find more flexibility with spot freight.
Combining Spot and Contract Freight
Even though some shippers may find one shipping method to be better suited to their freight needs, most shippers use a combination of the spot market and contracts in their freight purchasing strategy.
For example, shippers who have a particular load that goes over the volume specified in their contract or an unplanned one-off shipment may turn to the spot market to find a carrier that can transport the extra tonnage.
Conversely, spot freight users may find themselves regularly shipping a consistent volume of freight. They, therefore, might switch to contract freight if it allows them to cut freight costs. Experienced 3PLs, such as Red Kite, can also help shippers evaluate their freight needs and determine whether switching to contract freight from spot freight would be more cost-effective.
Finding Cost-Effective Spot or Contract Rates for Your Load
Whether a shipper uses the spot market or a contract for arranging freight, it can be challenging for shipping coordinators to find cost-effective solutions, especially when the process of finding a carrier takes them away from other essential tasks. By partnering with a trusted 3PL, however, shippers can utilize a team of logistics experts to find cost-effective, trustworthy carriers for both their contract and spot freight needs.
Red Kite specializes in finding both contract freight and spot freight for its customers. With a trusted carrier network, Red Kite can partner shippers with a reliable carrier who ensures their loads arrive at their destination safely and on-time.