The freight market has experienced unprecedented volatility in recent years. A combination of factors, including seasonality, supply chain shifts, geopolitical and economic changes, has caused turbulence in the logistics sector. As a result, in 2022, contract freight rates skyrocketed. The situation has placed a significant strain on transportation budgets. Consequently, shippers now seek more cost-effective options like spot freights.
Traditionally, companies have been favouring contract freight for stability and cost predictability. On the other hand, they only utilise spot freight for ad-hoc shipments. Yet, due to current market conditions, spot freights present a unique opportunity. Unlike fixed-contract rates, the spot rate market allows shippers to capitalise on fluctuations. This often leads to lower shipping costs.
Nonetheless, before selecting the most cost-effective shipping method, it is crucial to carefully consider how each option aligns with your specific business needs. In this article, we compare spot freight vs. contract freight, enabling you to decide the most suitable option for your business.
What is Spot Freight?
Spot freight is a transportation solution in which a shipper pays for deliveries on a per-load basis. Since the spot market is highly volatile, the rates tend to fluctuate. Therefore, carriers determine the price of a shipment before each delivery.
Before selecting a transportation provider, shippers typically gather quotes from multiple services. It helps to determine which option offers the best cost, service quality, delivery time, and transit time.
There are several advantages that businesses can derive from spot freight. The biggest merit it holds over its counterpart, contract freight, is flexibility. Shippers not bound by long-term agreements can cover last-minute or one-time shipping needs. This flexibility allows them to adapt to sudden increases in demand. Additionally, spot freight helps to mitigate delays and avoid volume restrictions.
Although spot freights can be a useful option, they may only be suitable for some businesses. For instance, fluctuating freight market conditions can cause prices to increase. This can be particularly problematic for companies that ship large volumes.
Shippers may also struggle to find the best spot rates. Gathering and comparing many quotes can be a tedious and resource-intense process.
However, shippers can mitigate the issue with a digital freight forwarding platform, Spotos. Spoto’s algorithm informs shippers of the current market price for spot freights. It also helps to gather a list of carriers that meet the pricing, capacity, and other requirements.
What is Contract Freight?
Contract freight is an agreement-based shipping solution with outlined terms and conditions. Shippers and carriers negotiate contract rates based on freight and shipment requirements. As a result, the contract has a predetermined duration and estimated volumes on a specific truckload freight shipping lane.
Contract freights are still prevalent in comparison to spot freights. Companies are keen on choosing this shipping method due to its rate predictability. A fixed contract helps them avoid peak-season surcharges and improves supply chain management. Additionally, contract freight minimises shipping management resources. It also fosters a consistent shipping experience.
However, committing to a lengthy contract can serve to a shipper’s disadvantage. Normally, a fixed rate can help avoid the volatility of the spot market. But it will also prevent the possibility of getting below-benchmark prices.
The contract can also become a burden to small and medium businesses with inconsistent shipping volumes. Not being able to fulfil the contracted volume of shipments can result in higher costs over time.
What is the difference between spot and contract freights?
The main difference between spot and contract freight is the payment method. Shippers pay for pot freights on a one-time basis. In contrast, pricing for contract freight is negotiated between shippers and carriers.
When deciding between contract and spot rates, it’s essential to consider shipping requirements. This includes the type of goods being shipped, distance, and route. The shipment’s urgency, volume, and budget are also vital criteria. By carefully evaluating these elements, you can make an informed decision on which option to choose.
When to choose spot freights?
Spot freights, like contract freights, are beneficial in certain situations. Knowing when to use it helps to meet unpredictable demand and optimise costs. Additionally, strategic spot freight usage is necessary for guaranteed capacity on short notice.
Spot freight is best utilised in these cases:
Irregular and low-volume shipments. Spot freight benefits companies with infrequent or irregular shipping demand and varying volumes. Arranging cargo deliveries on a per-shipment basis allows adjusting capacity as needed. This way, the shipper will save resources on lower than typical shipment volumes.
Limited advance notice. By forgoing the contract arrangement, spot freights result in a much faster shipment process. This shipping method is well-suited for shippers who need to send their goods on short notice. The whole process can be arranged in a matter of days or even faster.
Supplementing the contract freight. It’s common for companies to use both spot and contract freights. Spot freight can help mitigate changes in the supply chain even when a predetermined contract rate is favourable. Combining both shipping methods is useful during peak periods without renegotiating existing contracts.
Low market demand periods. The fluctuating nature of the spot market allows for short-term cost savings. Even though spot rates are higher during the peak season, off-season periods offer much lower costs. Shippers can optimise their costs with spot freights by choosing the right time.
Testing new carriers. When companies seek to evaluate the performance and reliability of new carriers, they can opt for spot freight. Ad-hoc shipments help to assess service quality before entering into a long-term contract.
When to choose contract freights?
Contract freight is the most common shipping method. When used strategically, it can optimise costs and ensure the timely delivery of goods.
Contract freight is typically preferred in the following scenarios:
Consistent shipment needs. Contract freight ensures dedicated capacity availability if a shipper has regular and predictable shipping volumes. This way, a shipper receives reliable transportation without frequently needing to reassess their supply chain strategy.
Large volume shipments. Providers are often willing to negotiate a better rate with clients who ship large quantities or have a high shipping volume. As such, shippers can potentially save costs over time by choosing contract freight.
Focus on operational efficiency. Contract freight is ideal for businesses seeking to engage in strategic planning. This type of freight ensures that you have dedicated capacity reserved in advance. By establishing an ongoing relationship with a carrier, you can improve the quality of service and streamline your supply chain management.
Long-term cost predictability. Contract freight offers pricing stability and predictability. This is because the shipper and carrier negotiate a fixed price for a specific period of time. It is a great way to avoid spot market pricing fluctuations. Yet committing to a contract will prevent taking advantage of lower prices during low-demand seasons.
How to find Spot Freights?
Securing cost-effective spot freight is vital for businesses of all sizes, yet the process is challenging. Due to a lack of visibility and spot market fragmentation, finding and comparing spot rates requires insider knowledge and time.
Here is where shipping managers typically look for spot freight:
Freight brokers and forwarders. These intermediaries have access to a wide network of carriers. While they can help match shippers with available spot freight options, their services come with additional costs.
Load board. An online platform, called a load board, connects shippers with available spot freights. These platforms are used both by providers and shippers to find spot freight opportunities. A typical load board offers numerous freight options to choose from. However, it still takes a lot of time to find the right one.
Freight marketplaces. Specialised marketplaces are another way to connect with multiple carriers. These platforms often offer competitive quotes.
Networking and referrals. Establishing connections within the industry can provide lucrative spot freight chances and help gather information about particular providers. However, networking may not yield results quickly enough in the constantly evolving shipping sector.
Contacting carriers or logistics departments. Shippers can contact companies or their logistics departments directly to inquire about available spot freight options.
Many shippers rely on freight brokers and load boards to find transportation for their goods, but these methods are often inefficient. They can be time-consuming and result in missed pricing deals.
Fortunately, Spotos, a digital freight forwarding platform, is an efficient alternative to manual spot freight sourcing. With Spotos, shippers can get the best spot rate based on current market fluctuations.
The platform connects them with the best carriers based on their specific requirements. This saves time and eliminates the need for negotiations, as Spotos automatically generates the necessary documents.
By leveraging advanced technology and data-driven algorithms, Spotos removes the traditional complexities of finding spot rates, empowering shippers to secure optimal pricing without a hassle. Plus, there’s no subscription fee: the platform is free to use, and the only price is a 4% margin (down from 7% for a limited time).
How to find Contract Freights?
If you want to find contract freights, you need to follow a systematic process that involves conducting research, communicating effectively, and negotiating well.
Here are some methods to start with:
Digital freight matching tools.
Dispatching service network.
How does contract freight work?
Contract freight works on the basis of a long-term agreement. The agreement is made between the shipper and carrier after they agree on the specific terms and conditions. This includes pricing, freight volume commitments, duration, lane specifics, and other additional terms.
The negotiation process occurs through Requests for Proposals (RFP). Shippers send RFPs to transportation providers, who then provide freight rates in response.
How do pricing and rates compare between spot freight and contract freight?
Typically, contract freight is cheaper than spot freight. However, the market for these transportation modes is highly volatile. Spot freight rates are negotiated on a per-shipment basis. As a result, they change periodically due to demand and supply changes, fuel prices, and other variables.
In turn, contract rates are more stable and predictable as they are typically set for one year. However, contract freight rates are also dependent on the spot market. Thus, shippers must follow the changes in the market to ensure they’ve negotiated the best possible contract price.
What impact does seasonality have on spot freight and contract freight rates?
Data shows that seasonality in freight rates is most common during February, September, and December. Holidays, industry-specific events, and other occasions lead to fluctuations in demand and supply.
This can drastically increase spot freight rates. The reason is that shippers experience a surge in shipping volumes, often reaching full capacity. As a result, shippers should leverage data-driven solutions, such as Spotos, to find the lowest rates.
While shippers often rely solely on contract freight during peak season, their rates also increase. This can result in an unfavourable rate for businesses.
Which is better for shippers, Spot Freight or Contract Freight?
Which is better depends on specific cargo requirements. Thus, it’s important to consider the shipment volume, frequency, budget, and service expectations.
Companies that need fast execution and immediate capacity access may benefit the most from spot rates. However, pricing-wise, this option is prone to fluctuations.
Contract freight, on the other hand, provides stability and capacity assurance over a certain period of time. It is most beneficial for companies with a large freight volume and a consistent frequency of shipments.
Which is better for carriers, Spot Freight or Contract Freight?
Both modes of shipping offer advantages to carriers. Contract-based shipments guarantee a predictable flow of income over a set period of time. It also provides more efficient driver scheduling options and strategic capacity utilisation.
On the other hand, spot freight allows carriers to capitalise on immediate opportunities. This shipping method can also yield higher rates than contracted freight, especially during peak season. Also, spot freight opens opportunities to explore new markets and establish relationships with new shippers.
What are some tips for shipping Spot Freight?
Planning is crucial for a successful spot freight operation. Even if it’s a last-minute task, strategic planning can help avoid wasting resources. This involves assessing shipment needs, setting a timeframe, and researching transportation providers while comparing quotes.
To save time, it’s best to use data-based platforms like Spotos. It can help lower spot rates and guarantee connections with trustworthy providers.
Why are trucking spot rates so low?
There are several reasons why trucking spots are so low. The common contributing factors are seasonal fluctuations and decreasing fuel prices. There is also an oversupply of trucks on the market and decreased demand for transportation services.
Inflation has left its mark on truckload freight shipping as well. As a result of consumers buying fewer non-essential products, the movement of goods has slowed. This has led to increased competition between carriers, who, in turn, are more willing to accept lower rates.