Similar to most industries, the freight industry is heavily impacted by economics, climate, and most of all – technology.
Similar to most industries, the freight industry is heavily impacted by economics, climate, and most of all – technology. Most people don’t realize this ancient industry has been ‘disrupted’ like so many others over the past few decades. Specifically, it’s been the growth and availability of spot-buy freight or spot freight.
It’s now easier than ever to coordinate a last-minute shipment with a phone call or email. Understanding exactly how this works has become must-know information for shippers, freight brokers, and all industry professionals.
Whether you’re unfamiliar with the term or an expert, here’s a look at all things spot freight.
Spot-buy freight, also known as spot freight, is an exercise where a company that needs to ship goods collects multiple quotes from logistic service providers (LSP) as a solution for transporting goods from point A to B.
This shipping method is being used globally by shippers, big and small, across all industries and for all types of transportation services. It’s a simple concept to grasp, but there’s much to understand about spot-buy freight, such as the rate variations, benefits, challenges, and usage.
Despite the term, “spot-buy,” these logistic decisions are often not made on the spot and don’t always involve urgent deadlines or dates. After all, the spot freight industry has expanded to all types of freight. For instance, an ocean freight container that needs to be picked up in a month or an urgent parcel that needs to be picked up in an hour. Both instances could be best suited for a spot freight program. It depends on the nature and requirements of the business.
Unlike currency and commodity trading, payment is not immediately required following a spot-buy transaction. Payment terms or applicable credit terms are negotiated and can vary from 2 weeks to 90 days.
Often, a shipper will invite multiple LSPs to provide a quote on a particular service. The goal is not only to compare prices, service level quality, transit time, and delivery time.
Domestic road freight services are essentially commoditized, however, that is not the case for international freight services where multiple services are often combined into one package for a single rate. For example, a spot-buy air freight quote for pick up in the Los Angeles area and delivery in the Tokyo area will include a pick-up, air freight, customs clearance, and delivery service, and could include additional services such as packaging, insurance, fumigation, etc.
Therefore, it’s important to review the details of different logistic contracts to identify the right solution for the best price.
There are certain cases where spot freight might be the best solution based on rate and situation, for instance:
There are more, one-off cases where a spot-buy is required. Quality execution, partners, and price are crucial when it does happen.
The rates for spot-buy freight are meant to be the best available price of the moment, as they can go up and down quickly.
Spot-buy rates are influenced by the available space on an aircraft, ship or the availability and location of a semi-truck. You can compare spot-buy rate fluctuation to buying an airplane ticket, usually the farther you book in advance, the cheaper it gets. And if an airline hasn’t sold enough tickets, they will lower prices before the departure date.
Additionally, supply chain logistics are impacted by economics. The cost of goods, gas prices, inflation, and currency fluctuations all impact the rate transportation brokers provide. To put it simply, consider the law of supply and demand. Supply increases will lower prices if there’s no increase in demand, while demand increases will raise prices if there’s no increase in supply. With today’s technology, these factors can be analyzed on a global scale which contributes to the constantly fluctuating rates.
Many in the freight industry assume spot freight rates are inherently cheaper, as it’s a competitive environment where freight brokers compete with each other to achieve the lower price. However, this isn’t always the case. According to data from InTek Freight and Logistics, spot rates increased 60 percent over a twelve-month period. This type of increase would devastate any business using primarily spot freight and is much higher than standard market fluctuations.
There are other factors that drive down the price of spot freight rates, some of which can be risky for shippers. For instance, an international shipment done through a spot-buy will require 3-5 separate carriers to complete the shipment. These carriers all require different agreements, coordination and are essentially short-term relationships opposed to the long-term relationship established through traditional procurement contracts. This along with other discrepancies such as inconsistent insurance regulations and service levels can result in a lower price that might not be worth it when every factor is considered.
We’ve established what spot buy freight is and when it’s necessary, but how does it actually work?
Well, it begins with freight brokers, which is an industry that has grown exponentially in the past few years due to the advances in technology and general demand growth for goods. Once a freight broker is contacted by the potential client, they will source all the different options for completing the shipment i.e. available trucks, vehicles, loading services, etc. They return to the client with the best available deal based on all the available data and information.
As mentioned before, spot buy needs derive from certain situations that fall outside a company’s usual shipping processes. These often include shipments that don’t fill the entire truck, referred to as LTL (less than truckload). Freight brokers make their money from LTL and volume LTL logistics by creating a network of terminals and relay points that aim to fill trucks to capacity while maintaining timely deliveries.
Spot freight brokers work with many other variables to be able to serve all types of customers.
Spot-freight is not the only option for moving freight shipments. For small businesses, it’s often a sensible solution as these companies are able to send an email or pick up the phone and obtain quotes for their monthly shipments. However, that’s not always feasible or logistically possible. For large enterprises that move large volumes of freight at a consistent frequency, any type of ad-hoc solution will quickly become overwhelming.
Large corporations will create strategic procurement plans for most of their freight requirements, also known as pre-procured freight. Freight rates that are pre-procured freight rates are established through a tender process that usually involves an invitation to tender (ITT), and request for quotation (RFQ) documents along with substantial negotiations. These contacts are often fixed for a period of one to two years.
The exercise of organizing a freight tender as part of strategic sourcing is time-consuming and cumbersome but can pay off in a big way. Logistics service providers will offer discounts if they can secure freight volumes for a longer period of time.
It often starts when the company requesting the freight service provides their “rate card” which refers to a large spreadsheet of all the rates and relevant cost elements for the requested freight service. Some rate cards contain over 90 columns of different cost elements, which cover all the odd cases and potential services that could be applied.
The LSP who partakes in the tender is often required to use the spreadsheet format created by the shipper, which can create a lot of extra work and stress since there is no industry standard for rate cards.
The exercise of a tender is usually done for a specific freight mode at the time and either at a regional or lane level (predetermined transportation route). Every organization has its own preferences on they want to break down their procurement procedures. Typically the shipper will invite 3-5 LSPs to provide their quote and service details. Whoever provides the most enticing deal will be awarded that particular region or lane for an established time period. The benefit of strategic-procured freight is that you could lock in a good discounted rate for a longer period of time, but the risk is that if the market price drops – you’re stuck with paying an above market rate.
In a perfect world, shipments will get picked up at the specified day and time by a logistics service provider who will get paid the pre-agreed rate. However, we don’t live in a perfect world. Even for the larger, established corporations, there’s usually 1-2% of freight volume that falls outside of their rate cards for several different reasons.
A 2018 report from the American Trucking Association identified the size of the trucking industry which represents a portion of all freight. Some highlights include:
Data has always been a crucial part of the freight industry. One of the industry leaders, Dial-A-Truck replaced handwritten processes when they created the first load board monitor in 1978. Dial-A-Truck is now DAT services and offers a plethora of data points for shippers and brokers alike.
The DAT data dashboard essentially tracks the supply and demand of trucks and shipment loads for spot freight and the three primary types of trucks, reefer, van and flatbed. The data for spot freight loads is telling, and has been reported on extensively. Over the past year, spot market capacity has increased 35.9% while the spot market loads have decreased 42.9%. The other types of loads are also down at a less significant rate. Experts contribute this to the extreme weather patterns seen in 2018, with weather terms like ‘bomb cyclones’ and ‘polar vortexes’ hitting the USA. This obviously had an impact on freight, and even more so on spot freight as on-demand connections couldn’t be made with the adverse weather.
A more long term trend has been identified by FTR transportation economist Noel Perry. He analyzed freight data beginning at the end of the 2008 recession. During that period, contract procurement prices have risen an average of 1% quarter over quarter, while spot freight prices have gone up an average of 2% over the same time period. This small difference makes a huge impact when billions of dollars are involved. The industry as a whole is expected to experience modest growth for 2019, but slightly less than the past two years.
With spot freight volume continuing to rise, the industry will watch if this trend continues or if regulatory changes come into play.
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