A shift in accessing spot

The spot market has been – and still predominantly is – a backup option to contracts. Shippers and carriers prefer to rely on contracts, because they help spread out the transaction costs associated with finding capacity (e.g., searching, vetting, negotiating, etc.) over many shipments, making the per-load transaction cost lower than one-off spot shipments.

A shift in accessing spot

The spot market has been – and still predominantly is – a backup option to contracts. Shippers and carriers prefer to rely on contracts, because they help spread out the transaction costs associated with finding capacity (e.g., searching, vetting, negotiating, etc.) over many shipments, making the per-load transaction cost lower than one-off spot shipments.

Technologies such as Trimble Autonomous Procurement help reduce the transaction costs of spot capacity by automating the negotiations. This means shippers and carriers experience faster processes and reduced costs.

Shippers' strategic use of the spot market

Moreover, there has been a slight shift in recent years in the way shippers access the spot market. We measured the percentage of total loads of 20 shippers that were moved under contract by backup carriers in the spot market as a result of routing guide failure (i.e., no carrier in the routing guide accepted the shipment) or total lack of routing guide usage. (see Figure 1).

Figure 1: Percent of shipments moving by procurement category

(Source: Zheng & Oliver, MIT Supply Chain Management Capstone, 2023)

In doing so, we can track shippers’ spot strategies. The data, shown in Figure 1, depicts the rise in spot use as a result of routing guide failures (dark gray) during the tight markets of 2017 and Covid during 2020, as well as the subsequent reduction in routing guide failures during the soft markets of 2019 and 2022. However, there is one distinction. On average, about 5% of shipments go directly to the spot market regardless of the market condition until Covid-19, market, marked at March 2020. It increases to 10% during the tight market, and then, remains at 10% even after the market recovered in 2022, even when routing guide failures and contracted carrier acceptance rates realigned to soft market norms.

Pre-Covid 2019

March 2020

Post Covid 2022

Of shipments go directly to the spot market

Increase during tight market

0%

Decrease even after market recovery

Pre-Covid 2019

Of shipments go directly to the spot market

March 2020

Increase during tight market

Post Covid 2022

0%

Decrease even after market recovery

This suggests a greater willingness from shippers to use the spot market more strategically, particularly for a small portion of shipments that may be best suited for spot. The potential benefits of spot are becoming more apparent and important for these traditionally difficult lanes.

Combining the benefits of both contract and spot

But what if we could do something different? Something that combined the benefits of both contract and spot.

This brought us to dynamic-priced contracts – that is, contracts in which the price moves up or down some amount as market prices change. See, for example, Figure 2, which illustrates an example of how a dynamic-priced contract (gold) rate per mile (RPM) increases as the spot market (dark gray) RPM increases over time to follow the market as compared to a fixed-price contract (blue) RPM. The light gray line illustrates the average backup price RPM a shipper pays for this lane as a result of contract carrier rejections.

Figure 2: Illustration of dynamic-priced contract

In this way, dynamic-priced contracts better represent market conditions, but rate fluctuations as well as providers and service levels are not as volatile or uncertain as a typical spot transaction.