Chart of the week: Spot to contract rate differential (excluding estimated spot fuel costs greater than $1.20/gal) SONAR: RATES12.USA
The difference between spot and contract rates suggests that the last few months may have been one of the toughest periods for non-asset-based logistics companies in recent history. The rapid change in market conditions after long periods of stability may be the most difficult to navigate from a procurement perspective, although that doesn’t mean it’s all doom and gloom for 3PLs.
Transport brokerages are the intermediaries par excellence in the freight transport market. They act as transportation management departments for many companies across the United States, while bridging the gap between carriers and an extremely fragmented and opaque carrier environment on the transactional side. These two functions come and go in importance with the market, with transactional (or spot market) functions becoming more prevalent during periods of adjustment.
During periods of relative stability, when spot rates are low and stable relative to the contract (as was the case during the three years prior to the recent market shift), 3PLs add value by managing carriers’ transportation networks and negotiating on their behalf with carriers. This feature is widely known as managed transportation.
While a carrier may see a single rate for one lane over a 12-month cycle, the 3PL can leverage its vast network of carriers to find the best option and cost. These rates tend to align more closely with spot rates because they are based on a much larger set of carrier options, particularly smaller fleets with lower overheads.
The weakness of this model is exposed when the market becomes volatile or spot rates expand rapidly. Carriers who were receiving $2.30 per mile suddenly receive multiple calls to drive the same lane for $2.70. In that scenario, there is little chance of covering the lane with a carrier that has no prior relationship or familiarity with it.
Brokers often struggle and many end up covering loads at a loss, especially when changing market conditions catch them off guard. Rapid change like that seen in recent months is the most difficult to manage, given the short period of time for discovery and adaptation.
However, there is a positive side. As the market tightens, asset carrier networks become strained, leading them to reject client loads in the form of tender rejections. Many of those rejected loads flow into the spot market, where brokers can find carriers to fill them at rates that were not previously set. This tends to lead to higher revenues, although not necessarily higher margins in the short term.