Will Spot Shipping Eliminate Long-Term Carrier Contracts? (8/5/24)

Promising convenience and an on-demand ethos, the spot shipping market is on the rise. What does this mean for long-term carrier contracts?

When a business in any industry needs shipping and fulfillment services, the process has long been the same: Carriers are vetted, contracts are negotiated, and long-term agreements (typically for a period of 12 months) are signed and revisited as need.

The spot shipping market has upended this, creating an on-demand alternative to traditional long-term contracts and the long-term carrier relationship that comes with them. Thanks to increasing technology throughout the supply chain, spot shipping is driving the industry towards short-term agreements. Technological innovations make digital freight matching possible, creating a landscape where loads can be matched with trucks via automated platforms. Some industry experts wonder: Are long-term freight contracts becoming obsolete? What does this mean for the future of logistics? 

In this article, we will discuss these questions, along with:

• What is spot shipping?

• Pros of spot shipping

• Cons of spot shipping

• Benefits of long-term freight contracts

• Using both long-term freight contracts and spot rate contracts

What is spot shipping?

Spot shipping can go by many names. Sometimes it is referred to as spot freight, spot-buy freight, or spot rate. In any case, it refers to a one-time price and agreement between a freight shipper and a client to move one shipment. It is essentially a one-time deal rather than an ongoing contract agreement a bit like Uber or Lyft for freight — an on-demand service rather than a contracted, ongoing arrangement.

Spot shipping is different from long-term freight contracts, where the business and the carrier have set rates, set expectations, and other ironclad details that apply to a longer period of time. Spot shipping is instead driven by supply and demand, so rates and availability may vary, oftentimes drastically.

Pros of spot shipping

Much like the aforementioned rideshare service comparison, spot shipping thrives on convenience. It allows for flexibility, giving businesses the ability to utilize the shipping method on an as-needed basis, paying for it when they need it. Spot shipping can be helpful to businesses that are currently in a growth stage, as it can scale accordingly. It is ideal for emergency shipping situations and a desirable solution for anyone who does not want to be locked into a shipper. This prevents getting locked into a contract with a carrier that is not the best fit. 

Cons of spot shipping

As is the case with anything built for convenience and emergencies, spot shipping can come at a premium. Rates vary wildly — sometimes even by the hour. As such, this method can be costly, especially when shipping during a period of high demand. Spot rates are typically higher than contract rates. Additionally, some freight companies abhor spot shipping due to the unknown docks that can be involved.

From a budgetary standpoint, spot shipping presents a unique challenge. It is difficult to forecast and commit to an annual budget when using spot shipping as prices fluctuate often. Additionally, due to the multiple carriers involved, it can be hard to measure KPIs. 

Benefits of long-term freight contracts

For those who choose to stick with long-term freight contracts, the reason for doing so often comes down to budget. It is easier to choose and stick with a logistics budget when using long-term freight contracts. 

Long-term freight contracts also allow for an ongoing relationship that isn’t solely determined by supply and demand. With spot rates, the relationship is often driven by emergency, so the instinct to negotiate a fair contract is rarely prioritized. With a long-term freight contract, the contract bid process is longer, more detailed, and often can result in a more beneficial relationship. 

Using both long-term freight contracts and spot rate contracts

Given the advantages and disadvantages to both spot shipping and long-term freight contracts, it is possible to utilize a hybrid of these services. Some businesses find having a locked-in rate and an ongoing relationship via a contracted carrier works well alongside using spot shipping for emergencies.

When comparing the two, it is interesting to note that spot rates and long-term freight contracts may influence each other. The spot rate market fluctuates often and may serve as a predictor for how longer-term contract rates may change.

Resource Logistics Group

Whether your business uses long-term freight contracts, spot rates, or both, your logistics spend is one of the most important aspects of your annual spend. For expert advice on the best carrier contract terms for your needs, Resource Logistics Group can help. To learn more, contact us.