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July 27, 2023
Spot the difference: freight rates explained
You have a lot of decisions to make when it comes to moving your freight, and one of the most important is determining when to engage in long-term contracts and when to utilize the spot market. Both options play an essential role in the overall freight market, and finding the right mix can help you maximize your freight spend while ensuring you have the service levels and flexibility you need.

Spot and contracts 101
A spot rate is a one-time, on-demand, transactional price for a specific move. Spot rates are based on the cost of freight transportation at a given moment in the market and vary day-to-day and week-to-week. They can shift often because they are based on current supply and demand.

Contracts establish an agreed-upon rate for a specific time period for certain lanes. The contract specifies predetermined rates, terms, and conditions for a fixed duration, ranging from three months to one year. Contract rates typically lag spot rates by about six months, so the spot market can be an early indicator of future costs.

In general, spot rates offer flexibility and potential cost savings in certain situations. Because spot rates are instantaneous based on market demand, they can provide significant savings when capacity weakens. On the flip side, if capacity is tight, spot rates can surge.

Contract rates provide stability, predictability, and opportunities for relationship building. Those relationships can be essential during tight capacity or market disruptions when carriers have their choice of freight. They also typically lead to cost savings as long-term operating synergies are realized.

Finding the fit
Because every shipper is different, there is no one-size-fits-all approach for which rate to choose. Shippers usually use both to help optimize their freight spend while ensuring they have the necessary service levels and space.

With that in mind, here are some key considerations to think about when it comes to your shipping operations:

Consistency of your volumes and routes: Contract rates work well with consistent shipping volumes throughout a predetermined demand horizon. They allow you to secure a fixed rate and capacity, ensuring smoother operations and predictable costs. However, if your volumes vary significantly, you are subject to sporadic or seasonal shipping needs, or your shipping lanes are irregular, spot rates can provide more agility and potential cost savings. The spot market can also work well for smaller freight volumes.

Market conditions: Prevailing market conditions and seasonal patterns in the trucking industry can help you determine when it might be best to lock into a contract versus tapping into spot rates. If you anticipate high demand, capacity shortages, or volatile market conditions, securing contract rates can mitigate the risk of sudden rate increases and ensure capacity during peak periods. Since contracts lock in longer-term rates, they can give you consistency and predictability which aid in budgeting for the year.

Relationships and special services: If you need specialized handling, contracts may be a better option as you can negotiate your needs and enforce your service level requirements through key performance indicators. At the same time, this is where you can build long-term relationships with your freight providers. They can lead to improved service quality and a deeper understanding of your unique requirements.

Speed and responsiveness: Because spot rates let you book capacity based on your immediate needs, they let you move quickly. Have a last-minute load that needs to get out of your warehouse quickly? Check the spot market. To that end, spot rates can also be an important component of your contingency planning if you need to supplement your contracts or if an issue occurs.

Finding your rate
At Amazon Freight, the combination of our tech and network means we can predict pricing 14 days in advance for spot rates and up to 52 weeks for contracts. We are here to help move your shipments safely and reliably and optimize your freight spend. Create an account here to start booking immediately.
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