Entering into rate contracts to insulate year-round costs.
April 22, 2019
Finding the best rate for your freight can be a challenge, and any strain on capacity can cause prices to rise steeply. Rate contracts are a viable solution to both of these issues. A contract will help you avoid these fluctuations that occur whenever the market shifts.
At Freightquote by C.H. Robinson we believe that anticipating these fluctuations is the best way to avoid them. That’s where rate contracts come into play. Contracts can help you secure capacity while also lowering rates. Let’s explain what a rate contract is and when it will provide you the most value.
What are rate contracts?
A rate contract is an agreement between a business and a freight service provider that outlines expectations for three things:
1. An agreed-upon rate for shipping freight.
2. A set duration of time for the contract.
3. A committed amount of volume that will be handled during the contract.
The best time to enter into a contract is either after a spike or a few months before the next one. By doing so, you can lock up capacity at a set given rate for a time frame. If a seasonal shift does occur, you will be protected from it.
Contracts don’t have to be an annual agreement. They can be quarterly, last six-months, or a specific window of time that is more fitting for your business. However, an extended contract gives the provider an opportunity to give you a better rate for the entire year, rather than just the peak season, if applicable. These agreements aren’t always signed contracts. Often times, they are handshake agreements between two parties that don’t include any paperwork.
The benefits of rate contracts.
A rate contract will help you maintain visibility into your freight, establish expectations for your business and the freight service provider you’re working with all while helping to control your budget. Entering into a contract has plenty of benefits for your business, including:
- Having the ability to forecast your freight spend.
- Improving predictability to help set expectations for you and your provider.
- Insulating yourself from any unexpected pricing fluctuations.
Seasonal fluctuations are a reality of the industry. Let’s explore how you can prepare for them.
Dealing with seasonal fluctuations in the shipping industry.
Why do some customers experience seasonal fluctuations in shipping rates? Simply put, freight shipping rates aren’t static. That’s why committing business contractually can be so beneficial.
Most customers are going to experience seasonal fluctuations, but that’s due to the free market in which we operate. Rates will change as the market transforms, whether it’s due to fuel prices, seasonal shifts in capacity, or changing seasons in the network.
To help explain, we have highlighted three of the most common drivers of rate fluctuations.
The retail season becomes a consideration as summer wraps up and the holidays approach. Anticipating consumer spending can help put you in a position to avoid the disparity of supply and demand that retail season leads to. There is going to be an influx of shipments coming into ports from overseas. When that occurs there is a high amount of freight, but the same amount of supply. That imbalance can impact rates.
We usually experience produce season from April – June. These summer months are where things are being grown in the southern region and the demand for carriers far outweighs the supply.
This imbalance of supply and demand extends beyond just the southern regions. Produce season pushes trucks to the south so that they can help fill the gap in supply. As a result, the imbalance grows in other regions, and capacity can come at a premium.
Other regulatory factors.
The industry will also face regulatory factors on a yearly basis that present new problems and they require new solutions. The ELD mandate is one recent example of the industry facing changes that are spurred by regulatory changes. Changes in ‘Hours of Service’ and other government enforcement that change the laws of trucking are things that you need to consider when building your strategy, especially if your goal is to avoid rate fluctuations.
Why should you consider a contract with a freight service provider?
The most significant value proposition that contracts provide is insulation against increasing prices. Freightquote has a vast network of contract carriers, which means we don’t need to put all of our eggs in one basket. We will pair up with you to keep your best interests in mind as we work together to identify the best scenarios possible.
Shipping freight can be a costly business, but we are here to help limit your spend and improve your efficiency. If you are interested in taking that next step, learn how Freightquote’s technology and experience with the world’s largest shippers can help revamp your strategy.
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