Not all freight is created equal: when is spot the right choice?

Contracts between transportation buyers (shippers) and providers (carriers) are binding in price – say, each load that is moved is done so at a fixed price – but non-binding in the volume tendered by shippers or in capacity made available by carriers. This is because transportation is spatially and temporally uncertain; both sides need operational and tactical flexibility.

Not all freight is created equal: when is spot the right choice?

The Spot Market

Long-Term Contracts

Best for

Uncertain, new, or surging demand; immediate capacity needs

Consistent, predictable, high-volume freight

Flexibility

High flexibility; direct access to carriers

Limited flexibility in volume

Rejection Rates

Lower rejections, avoids "ghost lanes"

Higher rejections, especially for variable/new lanes

Pricing

Fluid, competitive; no future penalties

Fixed, but can rise (7% higher) with "ghost lanes"

Historically, shippers try to avoid the spot market due to its price volatility and uncertain service levels. Long-term contract agreements, typically set for a year, not only lock in rates and service expectations but also foster higher service levels and accountability as carriers become more familiar with shippers’ operations and requirements. On the other hand, the spot market is often used as a backup option when contracted carriers reject shipments. It also offers flexibility and capacity availability when demand surges or unexpected volumes materialize.

Optimizing freight procurement contract strategy

Most freight – from 75% in tight markets like 2017 or the second half of 2020 and 90% in soft markets such as spring 2016 or 2019 – moves under contract. However, not all lanes or shipments are created equal, and should not be procured the same way. A smart spot/contract portfolio strategy requires an understanding of shipment characteristics, market conditions and business priorities. Contract rates are best suited for high-volume, consistent and predictable freight movements. When shippers have steady streams of large shipments along established lanes, contracts provide the stability needed for accurate budgeting, reliable capacity and the opportunity to forge strategic relationships with carriers.

High-variability lanes

Contract rejected

Low volume lanes

Never materialize volume

Volume and spend

Of majority of lanes

However, contracts typically fail (that is, have higher tender rejection rates by contracted carriers) at a higher rate on lanes with high demand variability, infrequent demand and new lanes. Our research shows that shipments on lanes with high levels of demand variability are 82% more likely to be rejected than those on low variability lanes.

In addition, historically low volume lanes and new lanes are highly likely to be contracted but never materialize any shipments. This is what we call ghost lanes. Ghost lanes are a symptom of the problem – an over-reliance on contracts results in lanes being contracted to carriers but never being used. Our research has shown that on average, 70% of lanes are contracted but never materialize volume and are thus ghost lanes.

The cost of ghost lanes

Moreover, there are future price and service repercussions for shippers that have high rates of ghost lanes for the carriers. We followed shipper-carrier pairs year to year and measured the percentage of shippers’ lanes awarded to each carrier that ended up as ghost lanes over the course of the contract year. We found that not only do carriers that receive a high rate of ghost lanes from a shipper end up deprioritizing that shipper’s other tendered volume with higher rejection rates that year, but they also face higher contract prices the following year across all lanes. In fact, on average, these contract prices are 7% higher.

Ghost lanes tend to be new to the shipper’s network or have had historically low volumes. Based on our research, upwards of 70% of lanes account for only about 20% of the volume and spend.

So, why are these lanes procured in the same way as the few, important high-volume lanes? Well, evidence suggests that shippers’ strategies are changing.

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