If you want to ship goods regionally, across a country or around the world, it’s important to understand how much you’ll pay. The prices you’re charged by a logistics business for services beyond your standard contract are often based on a concept called “Spot Markets” or “Spot Rates.” We’ll explain what they are, how they work and the influence they have on the price you pay for shipping.
The Basics of Spot Markets, Rates and Pricing
Spot rates, also known as spot-buy rates are used to set pricing for shipping freight, and the overall collection of those rates is known as the spot market. These are the rates that a logistics service provider (LSP) quotes to get your shipment from one place to another, if you don’t already have an agreement in place.
These spot rates typically require commitment from the customer to make the shipment within a specific period of time, normally several days. Spot pricing can go up and down depending on multiple factors — so this can mean that businesses don’t have a lot of control over the spot market rate they’re quoted.
Spot-buy freight prices are meant to represent the very best rates that you can get at that moment in time, although plenty of factors play into how much you might be quoted. In fact, studies have shown that spot rates are not always the best rates that you can get.
The Factors that Determine Spot Rates
There are several factors which determine the spot rate you’ll be quoted:
- The existing pricing arrangements that you have with a logistics provider that may set a range or benchmark for spot pricing
- The type of shipping that you’re using to transport freight
- The route that an LSP is using
- Gas prices and currency fluctuations
- The existing load-to-vehicle ratio, based on capacity — if a vehicle is already close to capacity, then the spot rate will be higher, if it’s empty or underused, the rate will be lower — and basic supply and demand
- The logistics services that are included in the spot rate — whether it’s purely for transport or if other areas are included like customs clearance or consolidation
- The urgency and speed required in transporting the shipment
- Other special requirements from the customer
When Businesses Need to Use Spot Rates
Typically, you’ll use spot rates when you don’t have a separate, better-priced agreement in place with an LSP. In many cases, you’ll already have a contract that spells out how much you expect to pay for shipping, and although there may be some variation built in, this makes it easier to predict how much you’ll pay. You will typically use spot rates when you’re using services outside your contracted ones, for example, additional shipments or those with aggressive timescales for delivery.
Spot Rates Apply to All Types of Logistics
Spot rates are used across the logistics and shipping industry — road, rail, air and ocean freight. The services offered across each type of transportation can vary widely, so it’s important to know exactly what’s included. For example, a spot rate for sending a package by air may automatically include picking up the item, completing necessary customs forms, loading it onto an aircraft, the flight itself, unloading the other end and final delivery to its destination.
That may not be the case for other types of logistics, so it’s important to understand exactly what’s included when you’re comparing prices.
Comparing Prices Over Multiple Logistics Providers
Customers will often request spot rates from multiple LSPs at once. When you’re comparing quotes, it’s important to consider various factors:
- How soon the LSP can transport your shipment
- How long it will take for our shipment to reach its destination
- The range of services included in the spot rate quote
- The cost of additional services that you may require
- The quality of service and any guarantees you receive from the LSP
- Any contractual arrangements that you already have in place
This lets you make a like-for-like comparison, so you can determine the best LSP for your needs. For example, are you willing to pay a little more to take a few hours off of the delivery time?
Spot Rates and Managing Them in the Supply Chain
The variability of spot rates can make a significant difference to how much you pay for shipping, especially internationally or over long distances. Supply chain managers and contract negotiators need to plan for this:
- Understand the total cost of sourcing, manufacturing, producing, storing, marketing and selling products so you can figure out your total profitability
- Take account of the spot rates you may need to pay and build them into your cost model, as they may have an impact on the final, retail price
- Get firm contracts in place for regular logistics services, so that they’re not subject to spot rates
- Negotiate contracts with LSPs that limit the spot rate variability you may need to pay, so you can keep closer track of your budget
- Get contracts in place with multiple LSPs so you can compare and contract rates if one seems very high
- Establish Service Level Agreements (SLAs) with your logistics providers that allow you to set terms and penalties if those terms are not met
Spot Freight vs. Logistics Procurement Contracts
If you have infrequent or unpredictable logistics needs, then spot pricing is probably the best solution for you. If you’re a larger business that’s regularly making freight shipments, then it’s often a better idea to get long-term, pre-procured freight contracts in place. These will often allow you to set pricing in advance and means you can avoid the hassle of spot pricing.
Pre-procured freight contracts also introduce much more predictability into your pricing, making it easier to calculate the costs in your supply chain and profit margins.
There are benefits to both approaches — spot pricing gives you flexibility and allows you to purchase ad hoc logistics services when you need them. Pre-procured freight contracts make it easier to manage shipping needs but will often require you to commit to transportation minimums.
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