Most freight agreements involve a long-term contract to move the same cargo on a set schedule for 12 to 24 months. However, with spot freight, a shipper gathers several quotes and then picks the best one to transport a single shipment.
Shippers might strike this agreement a few weeks or even months before the shipment needs to be moved and shippers rarely agree to pay the freight company upon receipt of transportation.
So why do shippers contract for these one-time shipments? Here’s what you need to know about spot shipping.
And when you’re finished reading, check out the other articles in our “Spot freight” series:
- What is spot freight?
- How to get the best spot freight rates
- Navigating the 2023-2024 freight spot market
How does spot freight work?
Spot freight is when a shipping company collects rates from various freight carriers for a single transportation job. The goods might travel locally or internationally and the freight shipper might be an enormous company or a startup. No industry or type of freight is immune to these one-off agreements.
When done well, spot freight offers a solution to various challenges, such as getting shipments back on time after weather delays or overbooking. But making a habit of avoiding contract pricing can also make for challenges in budgeting and pricing products appropriately.
Spot buys are not always about last-minute or urgent freight needs, though shipments could be urgent or have expedited needs. And shippers use this type of transportation purchasing for everything from transporting goods via ocean freight to local deliveries in the same state.
Although spot shipments are one-time agreements, the shipper and carrier can also negotiate payment terms, which can be up to 90 days. So this is not always an opportunity for a carrier to get a fast infusion of cash.
What determines spot freight rates?
Spot freight rates are determined based on the current market pricing and demand. For example, if a carrier only has a small amount of space left in a truck, that space might cost more than a carrier who has ample space remaining.
The speed at which the goods need to be transported will also impact the final rate. For example, a shipment going out tomorrow will generally cost far more than one going out next month.
Expenses throughout the supply chain will also impact prices. Fluctuations in gas prices and inflation will impact total shipping expenses.
How do you calculate the spot price?
Calculating a spot price requires sending out requests for quotes from a variety of carriers. There is no other way to know current market prices for transporting goods because you can’t base it on historic pricing since a spot price is in essence a market price.
Which is better spot rate or the forward rate?
Spot rates and forward rates are different strategies with different use cases. A spot rate helps companies execute an agreement quickly, though the service being agreed upon could take place a month from now. Forward rates are contracted prices for transactions that will be completed in the future.
Example of spot freight
A shipping company whose contracted freight rates are expiring with their current carrier might use spot freight to test out other carriers before negotiating a 12- or 24-month contract. The company requests bids from various freight companies for the shipment to find the best rate.
Then the shipper agrees to the lowest and best spot freight quote for getting its goods from Point A to Point B. That shipment might be the foundation for a long-term contract, or it might simply help bridge the gap between one set of contract pricing with a carrier and the shipper’s new contract pricing with another carrier.
How companies use spot freight
Companies might consider a spot load for various reasons. Those situations can include the following among other things!
New customers
Freight companies sometimes offer a spot buy to get to know a new customer and see if the transportation agreement is a good fit. The trial period might be one or two shipments.
Additionally, the rate might be lower than that of the contract to attract the new customer and entice them into testing out a working relationship. In this case, spot freight is a sort of marketing tactic.
Expedited shipping
Some shipments require transportation as soon as possible, which subsequently requires there to be a special agreement outside of a shipper’s regular contracts. In expedited shipping scenarios, shippers generally care more about the delivery date than they do the price of transporting the goods. That shift in priority makes the shipment ideal for spot freight.
Project shipping
Some freight has a short timeframe regarding how long or how many times the shipper will encounter that specific transportation need. This allows companies to shop around for the best rate for short-term projects long before the service is required. An example might be a company that supplies parts for the foundation of a construction project.
Overcoming delays
Transportation is a volatile industry because a singular large storm or vehicle breakdown can greatly impact freight shipping timelines. To overcome those challenges, companies might use spot freight to get things back on schedule or combat overbooking.
Advantages of spot freight
Spot freight offers many outstanding benefits that you won’t find with contract pricing.
- Transport goods outside of traditional shipping lanes
- Take advantage of cost savings when industry prices are lower
- Complete shipments during various times for the best rates
- Scale business up or down without contract volume limits
Disadvantages of spot freight
While spot freight can have many great benefits in the right scenario, there are some drawbacks you should be aware of when opting for spot freight:
- Potential to lose a contract with a frequent carrier
- Unpredictable shipping costs
- Difficulty with budgeting due to inconsistency
- Lack of consistent reliability across carriers
- Reliance of companies on broker’s carrier relationships
- No emphasis on the creation of valuable long-term relationships with a single carrier
Spot freight vs contract pricing
Spot freight pricing is less predictable than contract pricing, though you can sometimes get a lower price than what you would be paying when you are signed to a contract. That’s because you’ll be receiving the going rate at that moment in time, and the carrier might be using spot buying to fill a gap in their schedule.
But while spot freight can be less expensive than other methods, it’s also less predictable and requires shippers to devote time as well as resources to collecting and reviewing quotes. Contract pricing allows shippers to budget expenses in the long run and avoid price fluctuations that could make product pricing challenging.
When demand for freight goes up, spot prices also increase. Contract prices are beneficial to shippers at that point in time because they won’t experience recent price hikes until the contract ends and both parties renegotiate.
One-time shipment pricing without contract negotiations
Negotiating a long-term contract for the transportation of goods can take a great deal of back and forth. That said, spot freight allows for faster, one-time agreements that make it easier to quickly transport cargo where it needs to go.
Although spot buys are not any sort of long-term solution, they do help shippers get goods back on track after delays or serve as an opportunity to test out a new carrier before agreeing to a long-term relationship. When used appropriately, spot freight can be a valuable part of a transportation strategy to secure the best pricing and agreements around!
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