Freight rates are an indispensable part of the dynamic environment in the trucking industry. However, even experienced shippers may not know the process and/or details of rate forming or spot market rates. Let’s take a look at the nature of spot rates and how do they differ from contract freight rates.
What are spot freight rates?
Spot market freight rates are rates available at a very short period of time, right at the moment of the offer. These rates are mostly offered by freight brokers and are relevant on the spot if you agree to move loads for this price. Spot rates can be a good solution for last minute shipments, or for small shippers who don’t have enough freight volume to arrange contract rates. There are spot rates for both truckload and less-than-truckload modes, including dry van, flatbed, and refrigerated shipping.
Carriers and owner-operators use spot freight rates to fulfill capacity between the contracts, to utilize backhaul trailer space, and some even make the business solely on the spot rates.
What is the difference between spot and contract freight rates?
The main difference between contract and spot market freight rates is that spot rates are offered at a moment. The contract rate is an established price for a certain period of time. Contracts are usually signed for a year, so a shipper is securing the equivalent price in advance to move freight through an arranged lane. Contract rates are usually higher than spot rates, but in the long-term can be more cost-efficient for shippers with high volumes of freight.
What do spot rates depend on?
Freight rates depend on a wide variety of different factors. Since spot rates are extremely fluctuating, it can be difficult to understand which factors impact the price. Mostly, the spot rates are defined by freight-to-truck ratio, and with supply and demand. The higher the demand, the higher the price, and vice versa. Apart from demand, spot rates are affected by other factors like fuel prices and other market conditions.
Spot rates can be a working solution to save costs or find capacity for your last-minute shipments. If you are not shipping a large number of goods on a regular basis, you may benefit from spot freight rates too.
Many industries and the global economy rely on freight shipping to handle business. With the evolvement of commerce, transportation becomes a more and more important branch for businesses. However, in the world of freight shipping, the demand for capacity is higher than capacity itself. This causes frequent fluctuations in shipping costs and directly affects carrier freight rates.
Why are freight rates so low?
Today, companies are under the pressure of providing high-end customer service, fast and affordable shipping, and deliver excellent product quality. While trying to maintain all of these components, businesses also try to stay profitable. For this reason, enterprises constantly seek ways to reduce costs in any possible area. And one of those areas is their logistics and transportation.
Of course, there are numerous ways to reduce shipping costs. But we will touch on the initial one – getting low freight rates. Low transportation quotes are a target for many companies, however, this purpose can easily become a trap for a business. The truth is, the lowest freight rate is not always the best one. Although it is easy to be tempted by cheap shipping, in most cases you will end up paying much more than you expected. So, try not to rush into the first-best deal.
Why are the lowest freight rates not the best ones?
To understand why cheap does not necessarily mean good, you have to understand how the freight rates are formed. Carriers include numerous factors when calculating your quote: fuel price, commodity type, route, shipment dimensions, weather conditions, and others. But carriers also do business, and everyone wants to be profitable. However, in attempts to stay in the competition, some carriers lower the rates to get customers which may result in some sacrifices.
What price you have to pay for cheap shipping?
Low service quality
Logistics experts agree that low freight rates could strongly correlate with a decrease in service quality. “Reducing operating costs through the optimization of capacity often, but not always, manifests itself in the form of a deterioration in the quality of service of our ocean and air providers,” Bolloré Logistics’ president Thierry Ehrenbogen told Lloyd’s, Loading List. It is always a good idea to do your research and see which rates are actually the best before committing to a rate just because it is the lowest.
Low operational quality
Often, low quotes are the direct result of the reduction in driver’s or facility worker’s payment. You get less productivity, inaccurate handling, and lack of efficiency in freight management. Considering that it may lead to freight damage, the lowest possible rate is not always what you will benefit from.
Delays and long transits
Obviously, fast shipping costs more. However, nobody thinks that cheap shipping may be cheap exactly because of the extended transit time. Shippers often don’t know about the common pitfalls of low freight rates, like delays and poor shipment tracking.
What are the best freight rates?
Ultimately, if you want to benefit from your transportation strategy in the long run, try to avoid any suspicious “hot offers.” You still have lots of possibilities for negotiation and freight brokerage services to get the best possible rates.
If you are frequently shipping freight, there’s a good chance know what third party-logistics companies do. In fact, 3PL’s can help your business in many ways, and one of those ways is getting lower freight rates for you.
Why is outsourcing so popular?
Outsourcing logistics to a 3PL provider has become more common among many companies, regardless of their size and expertise. Many businesses have chosen to outsource their logistics because of the growing importance of customer experience. People want faster shipping and cheaper delivery costs.
Inventory, warehousing, and logistics costs are constantly rising. Managing logistics becomes costly and complicated for companies to do themselves, so businesses are seeking efficient solutions to save costs on transportation. One of the best ways to cut transportation costs is getting low freight rates on a regular basis. Outsourcing transportation to a 3PL can help companies in many ways and help get you the best rates for your freight.
How can a 3PL get you better freight rates?
An experienced third-party logistics provider has a wide network of carriers and freight brokers with reliable and trusted relationships. This lets a 3PL negotiate exclusive rates for your company. The negotiating process is usually held through a freight broker, who arranges the final shipping cost for a customer.
What are other ways a 3PL can help save transportation costs?
Apart from better freight rates, here are some other benefits of partnering with a 3PL:
Available carrier capacity
One of the primary advantages of third-party logistics providers is that they let you access a wide range of carrier capacity. Regardless of your freight type and volume, an experienced 3PL will always provide you with the required equipment. You don’t have to interact with multiple people and can instead have a single point of contact for anything.
Supply chain management
Usually, a 3PL provides you with a dedicated person or team of experts to manage your company. Apart from freight brokerage, you can also use a 3PL for managing your supply chain. Professional analysts can define gaps in your current supply chain and can help you outline a new strategy. This eliminates waste operations, and, therefore, reduces unnecessary costs.
While you focus on your business, a 3PL should focus on seeking efficient solutions for you. An experienced logistics provider will learn your businesses characteristics and needs so that they can provide you with useful solutions (for example, freight consolidation or shifting to multimodal transportation). Developing a custom approach to your company helps 3PL’s reduce your transportation costs.
Collaborating with a 3PL can significantly reduce overall transportation spend of your company through competitive freight rates, supply chain management, carrier capacity, and experience in the logistics industry.
Moving freight starts with determining what the fair rate for your shipment is. Obviously, carriers and shippers want to make sure they are getting or paying a decent price for a load. Carriers don’t want to lose money, and customers don’t want to pay more than they should. there are many ins and outs if freight rates you need to know before booking a load.
What are the ins and outs of freight rates?
Before moving a load, it is important to research the market and determine what the fair rate for your load is. There are a lot of variables that go into determining the rate, and it’s important to consider all of them when calculating your target rate.
1. Equipment Type
It’s crucial to keep in mind which equipment you need to move your load. Flatbed and van rates may vary drastically on the exact same lane. If your load is anything out of the ordinary (over-sized loads requiring special equipment), be sure to consider that when calculating the rate as well.
Rates follow a similar pattern every year, and seasonality plays a huge role in determining rates. You will have to pay much more for a load in the peak season in the summer compared to February.
Monitor fuel prices and be aware of any spikes and drops. Changes in fuel prices directly and almost immediately affect rates across the country. Having some insight will help you be fair as well as ensure you are not being taken advantage of.
It’s number 4 on our list, but could very well be number 1. This is the basic factor that determines how much you will have to pay for a load. Certain places may be a tough destination to ship to, causing the rates to be much higher. At the same time, moving a load out of that location will be cheaper. Before determining a rate, always research load to the truck ratio at your origin and destination points.
Once you’ve done all your research and finally have a target rate in mind, there’s one more thing to consider. When it comes to actually move your load, you should evaluate how critical the load is. If you are more or less flexible with pick-up and delivery, you may be able to move it at the market rate. If the load has to go immediately, you may have to work the “premium” into your rate to send it out.
There are many different situations that can cause rates to fluctuate such as hurricanes, new regulations and more. Keep an eye on the news and industry trends to stay on top of the market conditions and navigate through rate fluctuations successfully.
Need help with freight rates? Get a free quote right now!
Anyone connected with transportation is well aware of the latest market trends and conditions. We have been witnessing a steady increase in truckload rates lately. Experts predict this is only the beginning and spot market rates will keep climbing in the foreseeable future. Capacity is tighter than ever and its load to truck ratio in September is breaking the records.
This is not caused by a single factor – a complex of things is contributing to the tightening capacity and continuous rate increases. Let’s look at a few major reasons:
Aftermath of Hurricanes Harvey and Irma
Two devastating hurricanes hit the US within a very short period of time leaving destruction and severe weather conditions behind as they passed. This had a major impact on the truckload capacity. Recovery required emergency supplied and aid which shifted the capacity to the affected areas, leaving other parts of the country with much lighter coverage.
This is a problem which did not show up as suddenly as hurricanes. It has been happening for some time now; it has been actively discussed – and it is not likely to stop anytime soon. Qualified drivers are not easy to come by now, and the industry is definitely feeling the pain caused by driver shortage in the form of continuously tightening capacity.
Probably the most controversial and widely discussed topic in the transportation industry in 2017. The mandate designed to improve safety on the roads and eliminate paperwork component has not been met with excitement by many carriers. The cost and complexity of implementation and achieving compliance caused major pushback from carriers. There have been multiple attempts to stall the process and extend the implementation period for two more years.
As of right now, it seems like the regulation will be fully in effect in December. As a result, we will see a decrease in capacity as some carriers will not be ready by December, some will violate it and face consequences and so on.
All of these factors directly affect truckload capacity and logically, boost the rates. Forecasts suggest that shippers brace themselves for even higher rates in the coming 2018.
The first week of December 2016 had the highest week of volumes on the spot market in the past 2 years. DAT reports that the increase in available loads is because of e-commerce shopping. Denver and Memphis, in particular, saw load availability soar because those markets are distribution hubs for e-commerce.
This year, Black Friday and Cyber Monday sales were bigger than ever. SupplyChainBrain reports that even though in-store sales figures were down 5% on Black Friday, online sales hit a new record of $3.34 billion. Then, Cyber Monday topped that number with $3.45 billion in online activity. Fierce Retail says 73% of respondents plan to shop online this holiday season and 1/3 will shop on mobile.
“Shipper volumes definitely have increased during this peak season,” Richard Stocking of Swift Transportation says. “Volumes have increased throughout the fourth quarter through Thanksgiving and remained strong thus far into December.”
Van Van rates have gone up in December for the past 3 years. Plus, the Midwest and Northeast have been hit with snowy, winter weather, leading to tighter capacity and higher rates. Inbound rates are higher in the Northeast’s popular distribution centers in Allentown, PA. Van rates from Columbus to Allentown averaged $2.96 per mile during the week of November 27 – December 3. Out West, the number of loads tripled on the lane from Denver to Los Angeles.
Reefer In November, the national reefer rate was 6 cents higher than October’s average. After Thanksgiving, more loads were posted, but rate trends varied widely.
Transportation rates are near their lowest point and are expected to rise later this year. New forecasts predict rising contract and spot market rates caused by numerous economic and regulatory factors – which will create tough conditions for shippers to negotiate rates. Shippers who don’t lock down rates now could miss out on a great opportunity.
Pricing Conditions are Great for Shippers – For Now
Larry Gross, a partner at freight transportation consultancy FTR, says, “We are now experiencing the first sustained period of favorable shipping conditions since 2009.”
Right now, and the next couple of months, are the best time for shippers to lock in low transportation rates. FTR’s latest Shippers Conditions Index (SCI) reveals just how good things are for shippers today. The most recent score, 4.7, released in February, shows a favorable environment. When the SCI reports negative numbers, it represents an unfavorable environment. The index reported a 4.3 in January, which was up from 3.0 in December, -0.6 in November, and -3.1 in October.
Gross, after acknowledging the favorable pricing environment, admits that FTR expects a slow degradation of conditions for shippers in 2016 that will gain momentum in 2017. Regulations, the price of oil and economic uncertainty are the driving factors behind price increases.
The Reasons for Rate Increases
The HOS regulation and ELD mandate will greatly affect the trucking industry. As usual, the state of the Hours of Service (HOS) regulation is up in the air. Several studies are being conducted and it could be reinstated at any time. HOS rules would considerably impact carriers’ efficiency and operating costs. The ELD mandate has the potential to eliminate a large portion of available truck capacity in the industry. Smaller carriers and owner-operators will be burdened by the financial investment and adjustment period of ELD implementation and many are expected to exit the industry.
The price of oil, and subsequently diesel, is nearly impossible to predict. Currently, prices are extremely low. This is not sustainable for a long stretch of time and can be harmful to the transportation industry. Historically, the longer the price of oil stays low, the more dramatic and lengthened the rebound in prices will be. The oil and gas supply chain is so complex that nobody can say for sure when prices will rebind, but most economists agree it will happen within three years. When the price of diesel skyrockets, carriers’ operating costs will also skyrocket.
The unusual state of the economy plays a role in projected rate raises, too. Low gas prices are good for consumers but are a symptom of broader industrial level suffering. Loose capacity is great for shippers but caused by generally cautious consumers. This high degree of uncertainty has caused many shippers to start securing long-term contract rates in the past few months – slowly locking up future available capacity. When carriers feel safe with their level of guaranteed capacity, they will start to raise rates, and shippers will compete for what’s left.
At best, transportation rates will be neutral in 2016 and slightly negative through most of 2017. At worst, they could increase to 2008 levels if diesel prices rise, capacity dwindles and regulations cripple efficiency. Either way, it’s safe to say that right now is the best time to lock in contract rates for transportation before it’s too late.
Freight rates and carrier discounts are not the only factors that shape freight costs – there are more components shippers should consider. Factors like market conditions, fuel prices, transportation management, and budget planning all affect the amount you ultimately spend on freight. Many companies are looking for ways to eliminate unnecessary freight spend and save costs on logistics in a proper way.
Reducing freight costs starts with understanding how cargo is moved through a particular supply chain. By getting all parts working efficiently, shippers can mitigate and manage freight costs.
How to reduce freight cost?
Get a Carrier Discount
It is always worth asking about additional discounts from the carrier when processing a freight shipment. Large businesses and frequent freight shippers get discounted prices more easily while finding competitive rates is more challenging for small shippers. When negotiating and comparing discounts from carriers, consider base rates. A small discount from a lower-rate carrier could be more beneficial than a big discount from the higher-rate carrier.
It’s All about Mode
Choosing the appropriate shipping mode can be tricky; each has its own pricing, fees, and liability protection. First, shippers should consider freight classifications: weight, package density, shipment destination, and specific transportation services. Sometimes, it’s more effective to break down a truckload shipment into an LTL shipment. The secret here is to think long-term and to get the best transport available.
Consolidating shipments gives smaller-order shippers the chance to minimize costs with reduced time and handling. Shippers should consider combining their freight with other shipments when possible or trying to send fewer, larger shipments in the first place. Fewer shipments also mean less fuel burned, which is great for the environment, and many shipping and trucking companies are seeing the benefits of going ‘green’. Consolidation can be logistically confusing, but shipment consolidation is not a new idea – it has been practiced for 50 years already and is proved to be a tried-and-true method.
No One Likes Additional Charges
The most common accessorial fees are residential adjustments, weight adjustments, and additional handling accessorials. When a shipper understands how and why these fees apply, it’s more likely to mitigate these costs. A fuel surcharge calculation could also be discouraging, as it varies greatly, but good news: a fuel surcharge is negotiable – so there is a chance the carrier will provide a discount.
What’s the Address, Again?
In the age of address-verification software and ERP, shipping to the wrong address is a common mistake that is paid off with man-hours and additional costs. One of the reasons for this is offensively simple – shippers forget to correct wrong addresses after it has been reported to them. A solution to manual data entry is to automate the process with transportation technology integrated with ERP systems.
The largest parcel carriers and LTL companies are turning to dimensional weight pricing systems. For shippers, proper packaging has never been as important as it is now. If your package is outside stated parameters of weight, height, and width, it will increase in rate by double-digit percentages. If you cannot shrink the standard packaging, the best options are to add more weight to each parcel or create a new, efficient package.
Make an Outstanding RFP
Take a second and imagine how carriers will react to your shipper profile and RFP. Is there enough information about your requirements? Is all data relevant? Spend time to help carriers understand what kind of freight you want to ship and what the details of hauling are. A consistent, outstanding RFP will help create a cost-effective and efficient supply chain.
Reduce your freight cost with PLS
Third-party logistics companies offer knowledge in explaining freight costs and reducing additional costs. They can also provide a full analysis of the company’s shipping history and current expenses to help lessen future charges. With a lack of proper knowledge, tools or expert help on transportation management software, a shipper could leave money on the table. Don’t hesitate to ask for qualified help that will reduce freight cost – contact the experts at PLS Logistics today.
When it comes to moving less-than-truckload shipments from point A to point B, one of the first things to consider is its definition in the trucking industry. In the world of freight shipping, each product definition is its classification. It is important to know how to determine LTL freight class because it affects the final price of your shipment.
The class of freight plays a prominent role in calculating how much the carrier will charge you for transporting it.
How many freight classes are there?
There are 18 different classes LTL freight can ship under: 50, 55, 60, 65, 70, 77.5, 85, 92.5, 100, 110, 125, 150, 175, 200, 250, 300, 400 and 500. The higher the class, the higher the rate for every hundred pounds you ship.
How do you determine LTL freight class?
The many definitions or classes of freight are listed in the National Motor Freight Classification tariff, commonly referred to as the NMFC. The NMFC is a publication for motor carriers containing rules, descriptions, and ratings of all commodities.
There is a publication to classify freight for freight bill rating purposes. Besides defining the classes of shipping commodities, the NMFC also assigns item numbers to each type of commodity. The item number relates not only to the commodity itself, but to its packaging, the material of the commodity, and other considerations.
Item numbers associate with rates as well as commodity classifications. PLS Logistics Services’ LTL department is very familiar with the NMFC classification and can help you determine the proper class of your item.
Which factors affect LTL freight class?
Before a class can be determined, there are some characteristics of the freight that needs to be identified. You need to know how the freight’s density, the stow-ability, how to handle it, and what type of liability it assumes. There are several main factors that determine the LTL freight class, including:
Essentially, dimensions play a large role in estimating the final price of your shipment. Especially, when shipping LTL. Although it goes along with many other factors, length, width, and height are important. It is crucial to provide an exact and correct number since even small discrepancies may result in additional charges.
Weight and Packaging
The next critical measure of your shipment’s cost is the actual weight. Most likely you’ll have to palletize your freight, so the actual weight means the weight including the pallet. Additionally, your shipment’s package will be considered when determining the freight class.
Density and Value
Density guidelines assign classification 50 to freight that weighs 50 pounds per cubic foot. The Commodity Classification Standards Board (CCSB) assigns classifications 70, 92.5, 175 and 400 to freight with densities of 15, 10.5, 5, and 1 pound per cubic foot, respectively. Freight less dense than 1 pound per cubic foot is classified as 500. The density is the space the item occupies in relation to its weight. You calculate density by dividing the weight of the item in pounds by its volume in cubic feet. Your item’s volume in cubic feet is Length x Width x Height/1,728, where all dimensions are measured in inches. The density of your item = Weight/Volume, where Weight is measured in pounds and Volume is measured in cubic feet.
Most freight stows well in trucks, trains, and boats, but some articles fall under the regulation by the government or carrier policies. Some items don’t fit together. You need special conditions to move hazardous materials. Excessive weight, length or protrusions can make freight impossible to load with other freight. The absence of load-bearing surfaces makes freight impossible to stack. A quantifiable stow-ability classification represents the difficulty in loading and carrying these items.
Loading freight with mechanical equipment poses no handling difficulties, but some freight, due to weight, shape, fragility or hazardous properties, requires special attention. You have to mention a classification that represents ease or difficulty of loading and carrying the freight and assigns it to the items.
Liability is the probability of freight theft or damage, or damage to adjacent freight.
Perishable cargo or cargo prone to spontaneous combustion or explosion is classified based on liability and assigned a value per pound, which is a fraction of the carrier’s liability. When the classification is based on liability, density must also be considered.
In conclusion, the class of your freight plays a prominent role in calculating how much the carrier will charge you for transporting it. Knowing the characteristics of freight is very important.
If the product class is inaccurate, you risk paying too much. Also, you violate transportation law which leads to hefty fines if caught trying to pay a cheaper rate.
Looking for easy LTL shipping? Get a free freight quote right now!
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