Shippers Should Strategically Embrace the Spot Market
Traditionally, “spot market” has been seen as a four-letter word in truckload transportation procurement. Using a broker or posting freight directly to a load board was a sign that your routing guide had failed. Something didn’t go as planned with your contracted carriers.
While contracted rates established by an annual RFP are a necessary part of any transportation procurement strategy, they are by no means sufficient by themselves. Tight capacity and plummeting carrier acceptance rates in 2018 — and again in 2020 and ’21 — showed that an RFP is not a panacea and contract rates are not guaranteed. They also highlighted the value of using spot or dynamic procurement as a complement to contracted transportation in certain situations.
Here are three reasons why shippers should proactively include the spot market as part of the truckload procurement strategy.
1) Stop Wasting Time
Many of the lanes that shippers secure contract rates for will move on the spot market anyway because they have a high risk of failure in the routing guide. The characteristics of these high spot risk (HSR) lanes are well known: The total annual volume is low, and shipments occur sporadically and inconsistently with a very low acceptance rate by a primary carrier.
Instead of wasting time working through the routing guide waterfall and ultimately having tenders on your HSR lanes rejected, a better strategy is to identify these loads and take them to the spot market in the first place in a controlled and managed fashion.
2) Trim Your RFP
This “controlled and managed” approach centers around trimming down the RFP. Most shippers’ truckload networks are characterized as having very few power (high and consistent volume) lanes and very many trivial (low-volume HSR) lanes. Identifying and removing HSR lanes from the RFP greatly reduces the size of the network to be bid and simplifies the process for the shipper and participating carriers.
Analysis of more than 100 shippers in DAT’s Benchmark Analytics consortium found that between 60 and 70 percent of all loads are concentrated on less than 10 percent of a shipper’s lanes. Conversely, between 70 and 80 percent of the lanes within a shipper’s network move one or fewer loads per week. In fact, between 15 and 22 percent of a shipper’s truckload lanes move just one load per year — and obviously, most of these lanes do not repeat the next year.
Removing these low-volume lanes can cut the number of lanes for bid by half — but this might constitute only 10 percent of the total volume.
3) Protect Against Future Rate Increases
Including HSR lanes in an annual RFP can actually lead to higher rates in the future. The forecasted volume on these lanes often never materializes, creating “ghost lanes.” These occur where the shipper bids a lane out and a carrier is awarded, but no volume is tendered. Research at Massachusetts Institute of Technology’s (MIT) FreightLab has shown that an increase in the number of ghost lanes leads to higher rate quotes in the following year’s RFP.
The Challenge of Spot Planning
If adding spot to the procurement strategy is such a great idea, why is it so hard for shippers to do? Again, there are three main reasons.
First, there is a gap between how carriers and shippers define “consistent.” Most carriers will tell you it’s not worth setting up a contract unless there is at least one load per week. Many shippers, on the other hand, will throw every lane that had any volume during the previous year into the bid. Shippers should remember that the carrier’s perspective matters most when they’re identifying HSR lanes. Historical data can help a shipper identify those lanes that typically have low carrier acceptance rates.
Second, the spot market brings variability and uncertainty to truckload procurement, which makes budgeting more difficult. There is a perception among procurement professionals that the routing guide is the budget. However, a contracted rate on a lane does not guarantee that all loads will move on that lane and at that rate. A contracted rate on an HSR lane provides a false sense of budget consistency.
Instead, shippers can examine historical spot- and contract-rate behavior on HSR lanes to create an expected average rate. This could be higher of the two or a weighted average. In any case, it should not simply be the contract rate, as it is highly unlikely to be accepted.
Third, the method by which spot can be integrated into the tendering process is not always clear. However, there has been tremendous experimentation by brokers and carriers. These options include application programming interface (API) connections with guaranteed coverage, in which the rate is determined algorithmically though an established independent rate index. This is an area that deserves more attention and research.
While including the spot market in a transportation procurement strategy is a challenge, the benefits are significant. By planning to use spot, shippers can embrace uncertainty up front — and ultimately develop more consistency when creating the budget and securing capacity.