In the transportation industry, there are two common types of linehaul rates: contract rates and spot rates. Contract rates represent the agreed-upon price established during a sourcing event, while spot rates are more immediate and volatile costs that are negotiated when the shipment is tendered and move with the unpredictable market. Shippers tend to have a mix of both contract and spot rates that make up roughly 60 percent of their transportation spend.
Typically, shippers focus the majority of their time creating procurement plans that diminish costs while ensuring goods make it to their destination on time. The annual RFP is used as a baseline to calculate this budget success based on contract rates, and spot market freight is the widely agreed upon “cost of doing business” in a dynamic market. Although this has long been accepted by both shippers and carriers as the status quo, a shipper’s true rate experience must consider the combination of both fluctuating contract rates and changes in spot rates.
The key to well-managed linehaul rates is to identify lanes with rates that shift often and create strategies to stabilize them. Depending on the lane, both types of rates will ebb and flow regardless of whether they are sourced in an RFP or on a digital load board, so we like to think about these rates a bit differently.
This is where stable rates and variable rates come into play. When working with shippers to navigate changing markets, Breakthrough looks at both stable and variable rates structures to reflect the true experience of shippers and to inform better procurement decisions.
What are Stable and Variable Freight Rates?
It is easy for the realities of your transportation spend to be muddied by news headlines, the newest tech, or the introduction of a new broker into your network. Breakthrough shippers look at their true experience across the entire ecosystem of our data. This rate experience considers a combination of both stable and variable rates.
Because we are currently in a historically high rate environment, the mix of stable vs variable rates becomes more important to understand and monitor to properly manage those costs and make procurement choices.
- Stable rates are representative of the consistent linehaul rates for each lane and carrier partner within each shipper’s network. Stable rates are more representative of contract rate behavior.
- Variable rates represent rates that experience volatility outside normal rate behavior. Variable rates are more representative of spot rate behavior.
Variable rates are not always spot market loads but could be any rate that shows a significant variance from its historic price on a particular lane. The volatility could be due to higher contracted brokerage rates, a shipper’s contracted carriers rejecting loads to take advantage of the inflated spot market, or the shipper choosing to leverage the spot market.
As variable rates surge, contract rates are holding relatively consistent even through heightened rate pressure. Variable rates have increased 26 percent since the beginning of July, while stable rates have moved only 9 percent over the same period. Focusing on creating stable rates across your network to limit the number of variable spot rates is key to avoid increased transportation costs in 2020.
How Much of Your Transport Network is Incurring Excess Cost?
To understand how your rate mix affects your budget, it is important to know how much of your network falls victim to variable rates. The chart above highlights the mix of stable and variable rates across the Breakthrough ecosystem. From July through September variable rate exposure rose quickly, ultimately causing shippers across the Breakthrough Ecosystem to experience significantly higher costs. The mix changed from 80 percent stable and 20 percent variable to roughly 60 percent stable and 40 percent variable in August and September.
If spot market freight is the agreed-upon “band-aid” for lost capacity on a load, why is it suddenly being used for over 40 percent of shipper volume? As the mix includes more variable rates, shippers’ rate experience will become more volatile, more difficult to plan for, and expensive.
The chart above shows there has been an increase in variable-rate shipments. This leads us to believe that excess freight demand made the spot market more appealing to carriers as those variable rate opportunities surged.
This could be influenced by two major activities:
- Carriers rejecting contract loads to haul in the spot market for a premium,
- or increased brokerage use as contracted capacity was dropped.
This behavior is the main contributor to Breakthrough shippers’ historically high rate experience—and we expect it to continue in the coming months.
What Shippers Can Expect Moving Forward
According to the Breakthrough linehaul rate forecast, we expect that freight demand will outweigh capacity availability. As this develops, shippers will continue to experience more variable rates in their network, increasing their overall transportation spend.
High rates will likely extend through October as peak import season wraps up. We believe that seasonal factors will push rates down at the end of the year and to begin 2021 but will remain significantly higher than the start of 2020.
How to Avoid Variable Rates in Your Transportation Network
While we focus much of our time on understanding these price dynamics, Breakthrough is committed to providing solutions that help shippers take an active seat in their strategy to mitigate costs and make data-informed decisions about their network.
Breakthrough is actively finding carriers of best fit that maximize stable rates in our shippers’ networks. Focusing on finding the right partnerships with the optimal carriers will eliminate unnecessary brokerage use, spot market activity, and can save on transportation costs.
With the launch of our FELIX platform, creating more nimble strategies is easier than ever before. We put some of the industry’s most accurate and intuitive data at your fingertips, making action-oriented recommendations that are always in the best interest of shippers.