Shipping Rates - Spot or Contract?

Most of us remember when people thought we would seen the shipping rates peak in October last year. They could not have been more wrong! Rates have gone through the roof and they are still very high. This is still a carrier market and consequently businesses have been hit by exorbitant costs impossible to sustain.

We often come across companies that are looking for advice to help find better ways to manage their rates and operational efficiency across their inbound operations.

The main question raised is: is it better using contract rates or spot rates?

Let’s consider what are the pros and cons for both ways:

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Advantages

Contract rates

> Provide more stable pricing and better service level expectations.

> Help logistics providers to reserve space capacity across all the contractual lanes. This is particularly useful when capacity is tight.

> By working with the same carriers, personal relationships develop that will likely improve the overall service.

> Although spot rates may be cheaper in the short term, over the long-term a shipper will pay a much higher spot rate than if they had chosen contract rates. Suppliers have the potential to negotiate the variable charges which are generally fixed on spot rates.

>Contract Rates help companies to budget and forecast better as an organization.

Spot Rates

>Inconsistent volumes, irregular space shipment times and inconsistent routes would be less suitable for contract agreements.


Disadvantages

Contract rates

In a short period a shipper could pay more

Spot Rates

> One of the biggest risks is for suppliers to generate potential substantial losses when capacity is high, and demand is low.

> Less accountability and security: it’s difficult to set up service level expectations because every carrier may have different agreements.

> Lack of stability:  spot rates are highly volatile and subject to the current market trend.

> The shipper is constantly tied to capacity decisions driven by the lack of a long-term service agreement.

> Over the long-term a shipper will pay a much higher spot rate than if they had chosen contract rates. 


So, should a Shipper pick Contracted Rates or Spot Rates?

The ideal scenario is to be able to harness the benefits of both plans.  It’s easier said then done! 

Each shipper is different with his own unique requirements.  In an ideal world, shippers need to be able to predict more accurately their annual shipping volumes, trade lanes and timings to help determine the right strategy that can use both contractual and spot rates to one’s optimal advantage.

It’s important to know that neither contract nor spot rates may meet a business’s needs exclusively. If your company handles most shipments via spot rates, it’s worthwhile to take a look at trends in the contract market and vice versa.

If you do not have regular shipments and consistent trade lanes, you can still partner with a carrier contractually. This will give you a centralised solution and have all your terms and conditions and service level expectation spelled out before they start to work with you.

It’s important to use approved carriers if you intend to use spot rates for every container load.

Before you make any decision, decide what is important for you:

Is it the price? Is the service to your customers? Is the overall customer service support?

Do you need to be able to budget and forecast better?  Is it reliability?

With all this in mind, suppliers need to be able to partner with carriers eager to get new business. They will need negotiate service contracts that meet their expectations and lock them into accountable contracts with superior service levels at fixed price.

To learn more about the same, give us a call and we’ll be happy to discuss anything you need help with!