How to minimize dependence on this expensive freight transportation option
For shippers, at times, there are good reasons for turning to the spot market to secure truck capacity. In general, however, it is advisable to minimize this expensive freight transportation option.
How can shippers avoid this market of last resort, especially during periods of extreme uncertainty when logistics needs often change unexpectedly?
Drawing on deep industry experience and cutting-edge freight management systems, Penske Logistics has developed an array of strategies for reducing over-dependence on spot market capacity.
Navigating Around the Spot Market
A spike in demand or incumbent carriers rejecting loads are among the many reasons why shippers fall back on the spot market to find urgently needed truck space. "The reasons might be out of your control," says LeAnne Coulter, vice president, freight management at Penske Logistics. For instance, no one foresaw the blocking of the Suez Canal by a giant container ship in March 2021 and the subsequent disruptions to global supply chains. Changes that steer shippers toward the spot market can be positive, such as an increase in orders from a new customer or "you develop a new shipping lane faster than anticipated," says Coulter.
Still, having no other recourse than to pay costly spot rates often reflects inefficiencies in a freight transportation procurement system. There are various ways to avoid this contingency. Here are some examples.
- Keep a close eye on rejections. An uptick in load rejections by carriers in the routing guide should raise red flags. For example, have you ceased to be a preferred shipper or have core carrier freight networks moved out of alignment with your own? "We help shippers monitor what happens in their acceptance rates," says Coulter, and take remedial action if necessary before too many load rejections forces the shipper to dip into the spot market.
- Study load rejection time scales. "We look at time horizons to understand at what point between when a shipment is tendered and scheduled to be picked up it is turned down by a carrier," Coulter says. The insights gained can help shippers reduce the likelihood of rejections, and better understand the mechanisms that underpin this behavior. A key insight is how much planning horizon shippers have when managing such failures. "The sweet spot is 48 to 72 hours," Coulter says.
- Analyze broader patterns. Penske uses predictive analytics to map where load rejections tend to happen by region, lane and carrier connection point, and where they are likely to occur in the future. Armed with this information, shippers can better optimize their distribution systems to improve carrier acceptance rates and reduce the freight network's reliance on the spot market.
- Have the data and visibility required to manage exceptions. Robust, clean data is essential to the effective management of a freight network. "Without the right data it is very challenging to understand what [network] adjustments have to be made," Coulter says. Excellent supply chain visibility plays a similar role. For example, good visibility into freight movements and inventory positions can empower a shipper to avoid high spot market rates by deploying inventory to manage a shortfall in truck capacity, Coulter explains.
- Review capacity sourcing strategy. Penske works with shippers to review carrier sourcing strategies as freight transportation requirements and the trucking market change. For example, in highly unpredictable markets "it may be necessary to incorporate lanes into mini-bids," Coulter says. These short, more frequent bids "give you the opportunity to refresh sourcing plans and pull freight back if necessary." Keeping a freight network attuned to current market conditions reduces its exposure to spot market carriers.
- Collaborate with customers. "Spot market capacity may not be needed if the customer agrees to delivery delays," points out Coulter. Penske supports shippers in these conversations with logistics information and advice. For example, "We provide predictive ETAs that show whether delays will work for the customer," she explains. "We are always sensitive to the relationships shippers have with their customers."
Freight Market Volatility Continues
The volatility currently buffeting businesses — and increasing their reliance on stopgap over-the-road capacity from the spot market — is expected to persist in 2021 and normalize in 2022. "That does not necessarily mean freight rates will drop in 2022, but hopefully inventory will regain balance," Coulter says.
If that happens, at least the logistics community will have learned some important lessons about managing their involvement in the spot market. "This period of instability provides an opportunity for shippers to reassess their supplier commitments, contingency plans, and the ability of their distribution footprints to meet demand," she says.