The Spot Market – And How Not to Use It
Many shippers don’t realize that they are sabotaging themselves in the spot freight market. It is standard rationale that competitive bidding achieves a lower price. However, our application of that principle distorts Adam Smith’s law of supply and demand by creating a false demand “bubble” that results in higher prices and less profit for shippers.
Many shippers broadcast a list of loads to multiple brokers looking for the lowest bid. But, what actually happens is that multiple iterations of the same shipment go out to the spot market, creating an artificial demand. As demand increases, the truckers naturally will hold out for the highest price.
A new price threshold for a given shipping lane is being breached every day; in part due to capacity stripped from the market by new hours of service requirements. As those thresholds breach, higher rates become the new normal, and it’s going to be hard to drive those rates back down. Let’s also not forget the once inexhaustible supply of new driver entrants into the market, which is exhausting itself due to increased regulation and driver age.
As these price thresholds breach, shippers naturally will retreat from the spot market, and who could blame them? The problem of driver efficiency still lies within the market, whether it be a spot market or a bid lane from an established carrier. The spot market, once unattractive to many major carriers, actually pays more per mile than most major carrier bid lanes. It won’t be long before these established carriers shift more capacity to spot market prices.
My advice for shippers is to use the spot market in a different way. Don’t put your daily or weekly loads out to multiple brokers, creating an overstated and unintended consequence of artificial demand. Instead, sequence to a single competent broker, and use the spot market as an example of accurate supply and demand.
If you have core carriers who have bid all of your lanes, and they can commit to only 80 percent of this week’s shipping, let the spot market take the other 20 percent. Go against common thinking and apply a new norm.
The new normal would be to have the spot market take what it wants, rather than try to force the spot market to take leftovers. Why is this the case?
In the real world, the spot market wants loads they know get them back to a home base or a point where they have known shipping at a good price. This spot market is impacted, and will not go to points where the certainty of getting out at a reasonable rate does not exist. Trying to force your will is like shoveling sand against an ocean - the natural principles of economics will serve us better than unnatural manipulations.
There are many advantages to using the spot market. For example, using the spot market correctly can ideally reduce backlogs of shipping and keep costs under control.
We must remember that economic principles, once properly understood and applied, will always serve the public and the logistics industry better than what we think is “slick” maneuvering.