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If you’re responsible for procuring freight forwarding services, you’ll have probably heard the terms ‘spot rates’ and ‘contract rates’ when it comes to freight rates. In this post, we’ll explain what these terms mean and discuss best practice on when each type of freight rate should be used.
The Definition of Spot Rate
A spot rate is a one-off rate obtained for transporting a shipment by sea freight or air freight. Typically valid for one shipment only and often restricted to a specific vessel, aircraft or date range, spot freight rates fluctuate up and down by the day dependent on the market conditions. For example, peak periods, seasonal fluctuations, political landscape, holidays and festivals globally, oil prices and general supply vs demand fundamentals all affect spot pricing and therefore they come with no guarantees. A bit like shopping for a flight ticket for yourself, you’ll find the price changes all the time.
Obviously, there will be times when market conditions cause spot rates to reduce which is excellent news if you’re using spot Rates to ship your goods; however, the flip side is that spot rates also go up, which has the opposite effect, meaning your freight cost will of course also go up.
It’s also important to remember that spot rates come with no guarantees and can be the first to be dropped by carriers depending on market conditions at the time of shipment.
The Definition of Contracted Rate
Contracted rates refer to freight rates negotiated with the carrier for your shipments based on the volumes you require. Typically, the more volume, the more favourable the rates will be. Contracted rates are usually fixed for an agreed period and give more stability cost wise by moving away from the unpredictable spot market.
There are minimum volume commitments needed to qualify for contracted rates, and accurate forecasts are required to allow for space protection and shipment guarantees to be given by carriers.
So which freight rates are best?
It can be difficult for cargo owners to decide between spot rate procurement and contracted rates. In one hand they avoid potential market increases, but on the other, they do not benefit from a softening market when rates are dropping.
Paul Ferguson, Sales Director for John Good Logistics, commented “Often it can depend on individual businesses regarding the way they need to price their product to their end customer. Retailers often have to agree on prices well in advance so having a fixed price works well along with a more structured process built around service and set allocations. The focus then is to find ways to drive efficiency into supply chains with an emphasis on visibility, system integration and close partnerships with selected logistics providers to drive hidden costs down.”
“Others do not have such structured order patterns and can find the spot market works better for them. While some businesses choose the best of both worlds, securing some volume on a contracted basis and then play the spot rate market with the remainder.”
How can a freight forwarder help?
When working with a freight forwarder, cargo owners can expect detailed industry knowledge and professional advice on pricing and rate structures. For example, at John Good Logistics we work closely with our customers to gain an in-depth knowledge of their business and then recommend a strategy that will achieve the best value based on their needs. This includes negotiating directly with carriers on behalf of cargo owners leveraging knowledge and relationships to secure competitive contracted rates that meet the requirements of customers covering both service and availability.
There has been a massive change in the last 4 – 5 years and the landscape from a carrier perspective is almost unrecognisable. The financial plight of many is well documented, and we’ve seen massive consolidation in the marketplace with others exiting the industry altogether, most notably, in 2016 when Hanjin’s bankruptcy shook the industry. Freight Forwarders will have a great handle on this market volatility and can offer support and guidance to ensure the correct carriers are appointed.
Freight Forwarders also hold close working relationships with multiple carriers across multiple trade lanes giving them access to a vast range of services and generally due to volumes being moved collectively, bring increased credibility and buying power from a shipping line’s perspective.
Through extensive global networks, Freight Forwarders also bring value when things go wrong and can react and find solutions when the goal posts move. There are many links involved in shipping cargo around the globe and anything from, mechanical failure with vessels, severe weather, congestion on port terminals or railheads, political unrest, production delays or simple traffic incidents can all cause delay. A credible freight forwarder will leverage their network to find solutions and help minimise the effects felt when things go wrong.
If you need help assessing if you could derive more value from your approach to rate negotiation or spot rate procurement, our team will be happy to help. Contact us today.