Every company relies majorly upon its logistics network and supply chain to ensure optimal functionality and production efficiency. These reasons to outsource transportation is strong enough to decide the success of the business in the competitive market. However, among all the major attributes, business leaders often find themselves questioning leveraging from the spot market freight rates or deal with the contract pricing for the freight.
Freight Spot Rate definition
It is the price offered by the freight service provider to the shipper right on the spot or at a particular point of time, to ship the products from one place to another.
Freight Contract Rate definition
It is the rate offered by the freight service providers, logistics service provider, and freight brokers to shippers for a fixed set of lanes and a set period of time.
While both types of accord offer a different and unique value proposition to business, not every enterprise could suffice with both options. The spot rates are a leading driver of the contract rates direction, but might not be enough to determine the current contract rate.
They differ in their needs and requirement and are mostly chosen based on situational needs. Thus the only work to be done by the shippers and business leaders is to select from the right type of contract to ship a consignment. The basic understanding of spot price rates and contract rates can better paint the picture.
Basics of Freight Spot Rates
The logistics network is well connected with several tie-ups and partnerships across various economic and transportation models. The spot rates mark up to be the key indicators of directing the economic standards in the logistics industry. However, spot rates for freight are market-driven and depend mainly on the state of competition in the market, route of transit, and the location of delivery.
The factor majorly influencing the spot rates is the fluctuation in the market that demands a rise in the value of certain products that there along with results in increased cost. Consequently, as the product value rises, the price rate for logistics and transportation also increases.
Another way of explaining the concept is that in a supply chain, the cost calculation for logistics and transportation depends directly on the price and demand of the commodity. That means at times when supply chain takes a hit onto lower prices without being accompanied by increasing demand, the balance between an increased supply also gets disrupted.
Relation of supply chain equilibrium with transportation rates and prices
Spot rates are defined with the price that is set on an immediate settlement on any consignment. They are best suited for freight that is sudden, less in amount and is sent over a limited location. It is based on the value of the asset or commodity that is to be shipped. That being said, as every product varies in its value at certain times, it only increases the diversity in shipment types. This diversity results in the volatility of the spot rates or the price that is settled on the spot for shipment.
Limitations of Spot rates
It must be clear by now that shippers choosing over spot market freight rates are bound by situational needs and are no way putting their foot for a long term contract. This carries its limitations for shippers.
- Small and medium scale businesses might end up transporting commodities under spot rates for weeks. On the contrary, the overall investment to the transit over weeks can turn out to be more expensive than signing a contract for the same period of time.
- The shipper is abided by small quantities without having the assurance for a long term business relationship.
- Eliminating of Inherent risk to several unknown factors are not well associated with agreeing upon spot rates.
Basics of Contract rates
Having a long term business relationship does bring in some perks to both the organizations. Contract Rates for freight is the most optimal and cost-effective way for a company’s logistics and shipment operations. Binding through a contract with the logistics or transportation providers brings a guarantee of long term service and loyalty based upon terms agreed by both parties to the best of their interest. The overall cost of transportation comes down significantly in comparison to spot rate settlements.
The commitment put in by the shipper and the transportation provider rips the limitations and risks of loyalty or optimal service during the transit further strengthening the position of the company over the competitive market. This concept provides better stability and a clear vision of a transportation network that is easy to comprehend and manage.
Optimizing Spot Market Freight Rates and Contract freight rates
Every consignment shipped overseas or to the local market are subject to various fluctuations in the market, weather conditions, time and even to the acceptance of the receiver. The rates fixed on the spot or agreed upon on an accord are all inclined towards a good negotiation that can bring the best rates for a company.
Thus, the best way of dealing with the situation is understanding the value of the product and its capabilities to hold its current value for a sufficient period of time upon which a contract can be drawn. According to many economists, a major focus should lie on target for a long term business contract to get a stable and a known rate of transit. However, based on situational demands, market freight rates can be the best choice to get over a haul.