Benefits of Hedging Freight with the Spot Market
While it is common for companies to contract all their freight the Supply Chain has been anything but common over the last 20 years. Finding the balance between competitive rates, guaranteed capacity and top service in volatile markets is a demanding job. Contracting freight has traditionally been the go-to method for managing transportation needs, providing a predictable and stable way to handle shipments. Some companies do this to stay consistent with the budget. However, maintaining a budget should not keep you from exploring cost-saving initiatives in a hyper competitive marketplace. By keeping a percentage of your freight in the spot market, you introduce a valuable hedge against fluctuating rates, enhancing flexibility, and mitigating risk.
The Case for Not Fully Contracting Freight
Relying solely on contracted freight may seem like a safe choice, but it can leave companies vulnerable to missed cost-saving opportunities and limited flexibility. It’s a natural approach to maintain stability in a volatile market but exploring the spot market with just a small portion of your freight can be a way to explore and hedge the market. Contract rates are typically fixed for a set period, which can be beneficial in a stable market but could lead to overspending if rates dip. The spot market allows you to access real-time pricing, which may be advantageous during periods of lower demand or when capacity loosens. By not committing all freight to long-term contracts, companies can take advantage of market conditions and respond more swiftly to cost-saving opportunities.
The Benefits of Hedging with the Spot Market
- Risk Mitigation through Diversification
- Holding some freight for the spot market helps further diversify your transportation strategy which reduces your dependency on contracted carriers. This is especially helpful during disruptions or peak seasons when contracted rates may rise.
- Diversification also allows you to respond quickly if a contracted carrier faces issues, such as service delays, bankruptcy, or strikes, providing you with alternative options and minimizing potential impacts on your operations while hopefully at the same time reducing cost.
- Leveraging Real-Time Market Trends
- The spot market allows you to respond to real-time price fluctuations and trends. For example, during off-peak seasons, spot rates can fall below contracted rates, enabling you to access lower-cost transportation. This dynamic approach can offer a cost savings initiative to increase net margins and gain a competitive advantage.
- Accessing the spot market also enables you to gather pricing data which can be helpful in future contract negotiations while also staying on top of your market knowledge.
- Increased Negotiation Power
- By maintaining a blend of contracted and spot freight, you hold leverage during rate negotiations. When a portion of your volume is placed in the spot market, you can approach contract negotiations with the knowledge of real-time rates, potentially securing more competitive long-term contracts. Carriers will likely also realize you are well informed on market conditions and be less likely to offer higher rates at the onset of your negotiations.
- Carriers value long-term contracts as they provide predictable volume, but they also understand that shippers have options and having options helps to maintain control. Knowing that a percentage of your freight will always remain in the spot market can encourage carriers to offer more favorable terms.
- Vendor Options
- By keeping a portion of your business in the spot market it will allow you the opportunity to gather data on additional Carriers regarding their capacity, service levels and other
- A spot carrier can also be a good way to find a future contracted carrier
- Monitor Market Trends
- Use data analytics to keep an eye on market conditions, rates, and capacity trends, making it easier to make informed decisions on when to shift volumes into the spot market.
- Work with a Reliable Network of Carriers
- Establish a network of trusted spot market carriers to ensure reliable service quality and on-time performance.
- Utilize Technology and Data
- Leveraging tools like Transportation Management Systems (TMS) can make it easier to blend spot and contracted freight seamlessly, optimizing route and carrier selection based on cost and availability.
- Hedge your own Hedge
- Negotiating a contract which allows you the “option” of putting up to 25% of your business in the spot market is a 2nd hedge from being exposed to a market which might not be favorable (increasing prices) to transitioning your contracted freight for spot
- In doing so make sure to work with your Carriers regarding your forecast in a way that will not have them holding extra capacity for you if there is not a need.
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Thank you !