Enterprises leverage every available resource to ensure the products they manufacture surpass their customers’ expectations. They invest massive sums of money toward these efforts, purchasing the best raw materials and establishing streamlined workflow processes in their factories and warehouses. Production, however, is only half of the battle. Getting those products to the companies that sell them and — more importantly — to the people who buy them, whether they are across the border or half a world away, is the other essential piece of the puzzle.
How much you wind up spending on these distribution efforts can have a major influence on your production budget – not to mention your organization’s profitability – and one of the major influences on these costs is the spot market. If logistics management is a new corporate priority, or you are simply looking to lower your freight costs, this article can help you find better spot rates. But before we get into the specifics, let’s dig into the basics:
What are spot rates?
Otherwise known as spot-buy rates, spot rates are the price points established by the logistics companies that are responsible for transporting freight. Much like your organization, logistics entities have costs of their own, including things like fuel, overhead, labor, maintenance, packaging, and a lot more. To keep providing these shipping services, they have to be able to pay their suppliers and employees. Thus, a spot rate is a real-time quoted price from a freight services provider. It is essentially what they charge to do what they do.
How does a spot rate differ from a contract rate?
Spot rates and contract rates are similar, in that they are both representative of what organizations charge in pricing to move freight, whether it is completed by truck, plane, train, or ocean vessel. Beyond that, though, they differ. As its name suggests, a contract rate is fixed; the quoted price remains the same for a specific period, usually 12 months. The contract rate may also be tied to a particular volume or freight volume that a product-based company commits to. Organizations that have consistent freight shipping needs throughout the year often like contract rate options because it enables them to lock in a price quote from a logistics provider. They do not have to guess what they will be spending on transportation from one shipment to the next.
Spot rates, on the other hand, represent a brief moment in time. Because capacity is a constantly moving target, how much freight costs to move today may be different 24 hours from now. Due to this fact, a spot rate is a one-time price offer. Spot rates quite literally change from moment to moment based on supply and demand (i.e., capacity). In this way, the spot market is much like the stock market. The spot market is a collection of spot rates charged from one shipper to another.
Neither contract rates nor shipping rates are worse or better than the other. Which is preferable all depends on businesses’ needs and the nature of their supply chain.
How are spot rates determined?
As previously noted, spot rates are primarily affected by supply and demand, or in industry speak load-to-vehicle ratio. When truck capacity is limited with a motor carrier, you can expect pricing to be higher than if space were plentiful. This dynamic is not the only influence on spot rates for logistics. Other factors that can influence a spot quote and spot freight rates include:
- Freight weight
- The route traveled to get from Point A to Point B
- How quickly the freight needs to arrive at its destination
- Customs clearance
- Load volume
- Consolidation
- Fuel prices
Additionally, the type of vehicle that is used to transport freight can also influence what rate logistics service providers charge. Generally speaking, shipping by air costs more than shipping by road. This may explain why the vast majority of freight transportation within the United States — roughly 72%, according to the trade group American Trucking Association — is carried out by commercial vehicles.
Since there are so many options when picking a freight provider and rate type, it may not always be clear where to find the most affordable rate, but there are a few best practices you can utilize to keep your costs down, including:
Provide accurate shipment information: Carriers can provide you with the best quote possible based on the specificity of your shipping needs. Essential details to have at the ready include pickup date, commodity type, product weight, destination city or zip code, and shipment origin.
If possible, give advanced notice: The earlier you make a logistics provider aware of your shipping needs, the lower a price quote tends to be.
Request shipping during the workweek: Weekends are busy for LSPs, so ideally ship any day that falls in the typical workweek (i.e., Monday through Friday afternoon).
Ship by truck or dry van: If your products are being shipped inside the continental U.S., shipping by dry van or truck is typically the most affordable option.
Utilizing Spot Rates in OTM
When it comes to maximizing spot market rates, the flexibility of Oracle Transportation Management (OTM) is unparalleled. It allows users to leverage spot rates as well as contract rates, maximizing opportunities for on-time shipping and cost savings throughout the entire supply chain.
OTM simplifies the process of doing business with your service providers (the freight companies that move your shipments) by giving you the option of automatically sending spot bid tenders to all of them or just a select group. You can decide on a case-by-case basis. OTM also makes life easier for everyone by associating each service provider with a specific location to ensure maximum planning flexibility and by allowing each service provider to use the system’s booking, tendering, and logistics functions. During every step of the shipping journey, OTM makes it easy to take full advantage of spot market opportunities. OTM provides the capability to integrate multiple digital freight brokers to offer real-time pricing through the API rating engine. This in turn increases the service provider options exponentially. OTM allows the user to request a quote from digital freight brokers and/or directly connect during the freight optimization process.
Logistics management is a massive undertaking that can take you away from the main focus of your business. But when you have Oracle Transportation Management, you can get back to what you do best. OTM Cloud is a comprehensive solution that provides you with all the tools you need to run your transportation efforts efficiently and seamlessly. Inspirage can set it all up for you. Contact us today.
