Spot buying vs strategic sourcing: which is the best for you?

Are you torn between these two important procurement methods? Let us delve into the intricacies to help you determine which strategy aligns best with your business needs.

The procurement process of acquiring goods or services from external partners and agreeing to terms to make sure things go smoothly, is a big part of the bottom line for every business. Logistics service providers (LSPs) and everyone in the freight industry deal with procurement processes on a daily basis. Two most common means of freight procurement is none other than spot buying and strategic sourcing.

What is strategic sourcing?

In freight procurement, strategic sourcing refers to a process that involves strategic planning, supplier development, contract negotiation, supply chain infrastructure, and outsourcing models. It’s often an approach that emphasizes long-term relationship building with trusted carriers, prioritizing quality and consistent performance via a long-term contract over short-term price fluctuations.

Forged partnerships as such tend to translate to smoother logistics, minimized delays, and predictable transportation costs, which allows companies to focus better on their core business activities.

Strategic sourcing also involves more than evaluating the best contract rates. Organizations today are able to analyze the total impact of every transaction, which involves itemized spend analysis, market research, and thorough supplier evaluation.

What is spot buying?

Essentially, spot buying is the opposite approach to strategic sourcing, at least in freight procurement terms. This approach prioritizes immediate availability and competitive pricing over long-term commitments.

The spot buying process usually involves scanning the spot market for short term deals, freight rate negotiations with individual carriers for specific shipments. There’s a lot of room for companies to exercise flexibility which enables them to reach swiftly to changing market conditions or address urgent transportation needs without the constraints of pre-existing contracts.

Fun Fact
Pro Tip Icon

According to ACT Research, spot market rates can act as a leading indicator of contract rates. For every 2% change in spot rates, the contract rates will change by 1%.

Cargobase Logo

When is strategic sourcing better as a freight procurement strategy?

Imagine your supply chain as a finely tuned engine. Strategic sourcing plays the role of the high-grade fuel, optimizing performance and ensuring smooth operation for the long haul. Here are some scenarios where strategic sourcing takes the wheel:

  1. High volume shipments: Does your company deal with a consistent flow of large shipments? Strategic sourcing leverages your shipping volume to negotiate competitive rates and dedicated capacity from trusted carriers or freight forwarders. This translates to predictable costs and a reliable transportation network that minimizes disruptions and delays.

  2. Complex supply chains: Companies with a huge volume of shipments tend to go through intricate global routes and diverse modes of transport. This requires expert guidance and forging strategic partnerships with established carriers or freight forwarders will provide support by offering global reach, specialized expertise, and multimodal solutions. This simplifies logistics, improves visibility, and reduces the risk of unforeseen complications.

  3. Risk mitigation and sustainability: Building long-term relationships with carriers fostered through strategic sourcing enables greater transparency and risk mitigation. Regular performance reviews and shared goals ensure consistent service and adherence to ethical and sustainability standards. This translates to a reputable supply chain that aligns with your company's values and protects your brand.

When is spot buying better as a freight procurement strategy?

While strategic sourcing provides stability, spot buying acts as your nimble jetski, navigating sudden surges or unexpected logistical twists. Think of it as seizing opportunistic bargains in a bustling mall, prioritizing immediacy and flexibility over established partnerships. Here's when spot buying truly excels:

  1. Common unprecedented demand spikes: If your needs fluctuate drastically, with frequent bursts of high demand, spot buying tends to offer more cost-effective freight solutions. You can tap into a wider pool of carriers for individual shipments, capitalizing on temporary price dips or securing capacity during congested periods, without getting tied down by procurement via the ironclad terms of freight contracts.

  2. Frequent last-minute shipments: When unexpected situations arise, time is of the essence. Spot buying facilitates quick responses to urgent needs or sudden shipment changes. You can secure immediate options at potentially competitive rates, ensuring your critical goods reach their destination without jeopardizing deadlines.

  3. Testing new routes or carriers: Spot buying opens a window to experimentation. You can explore alternate routes, test the services of new carriers, and compare pricing options before committing to long-term partnerships. This allows you to refine your overall freight strategy and identify hidden efficiency gains.

  4. Capitalizing on market fluctuations: If your business operates in a dynamic market with volatile fuel prices or seasonal demand changes, spot buying can offer strategic advantages. You can capitalize on sudden price drops or negotiate favorable deals during periods of low demand, potentially lowering your overall transportation costs.

  5. Maintaining operational flexibility: If operational flexibility is a priority, adopting spot buying tactics can help keep your options open, allowing you to adapt quickly to changing market conditions or adjust your shipping needs without penalty. This agility can be crucial for businesses operating in uncertain environments.

  6. Building Competitive Advantage: A reliable and cost-effective supply chain acts as a secret weapon. Strategic sourcing enables you to optimize transportation costs, improve delivery times, and enhance customer satisfaction. This translates to a competitive edge and a stronger position in the marketplace.

The future of spot buy and strategic sourcing

The future of procurement paints a more vibrant picture, where these approaches are further enhanced with cutting-edge technology and collaborative supply chain models, creating a symphony of dynamic, data-driven procurement strategies.

With the rise in demand for advanced transportation management systems (TMS) to handle increasingly complicated supply chains, companies will be sourcing out for features that will enable them to procure in an efficient and cost-effective manner.

Real-time visibility features will be key in fostering transparency between carriers and shippers as it sets the base for effective communications, collaboration and risk mitigation.

Software that can establish a centralized platform to manage invoices and negotiate freight rates will also be vital in helping companies to properly manage freight procurement in times of uncertainty.

Built-in freight analytics will constantly be enhanced to provide an ever-evolving range of data that can prove valuable for any businesses to make wiser logistical and even environmentally-friendly decisions.

Clunky transportation management systems will drastically drop in demand as supply chain management gets more complex. Only systems with an interface and software developed through a user-first approach will reign supreme by establishing a user-friendly foundation. Last but not least, ease of integration is going to be an increasingly important aspect for shippers to consider as it is a key factor in determining how well a software will perform when it comes to working with existing software or external software used by partners.

Adopting a nuanced freight procurement strategy

At the end of the day, navigating the freight procurement landscape shouldn’t be a binary choice between freight contracts and fleeting spot buys. The true path to success lies in embracing a nuanced approach, seamlessly blending the strengths of strategic sourcing and spot buying to create a dynamic, adaptable procurement strategy.

Every supply chain is volatile and clinging to one strategy will hinder a company’s potential to navigate through the landscape in the best possible way. Instead, adopting a nuanced approach will unlock agility in managing freight procurement with ease in any situation. For example, when an unprecedented event happens, spot buying will be the better option to secure the best carrier at the best rates to deliver your goods on time. When stability beckons, securing contracts through strategic sourcing will provide you with the most predictable costs for the long term.

Even when it comes to volume, strategic sourcing might help secure the best shipment deal with trusted partners but spot buying could help lock in the best quotes whenever there’s a one-off shipment.

The bottom line is to adopt these two strategies to foster a resilient transportation network and supply chain. Thankfully, Cargobase is the perfect user-first TMS platform that can enable you to achieve that with cutting edge transportation management technology.

Contact us to find out more on how we can help.

Related blog posts