Video: How a Rate Contract can Beat Seasonality
Considering a rate contract? Entering into a rate contract can help a business when searching for capacity and lower rates during times of fluctuation whenever the market shifts. In particular, rate contracts may be able to help you overcome challenges associated with:
- Retail season
- Produce season
- Other regulatory factors
In this video, you'll learn about the benefits of a rate contract and find out how they can be advantageous when dealing with seasonal concerns.
"My name is Mat Leo. I am a solutions manager here at Freightquote, and that entails truckload pricing for both transactional and contractual business. Today, we're going to talk about contracts and how entering a contract can help a business search for capacity and also lower rates during times of seasonal fluctuations whenever the market shifts.
[Onscreen Text: What exactly is a rate contract?]
A contract is typically an agreement between the business and a provider that when entered into, has a set expectation of rate going into that time period, a set duration of that time period, and a set given amount of volume that's going to be handed between the provider and the business. Each customer will have a certain type of KPIs or key performance indicators that need to be met by each provider. These performance indicators could be an on-time pickup or an on-time delivery, or a certain amount of freight that needs to be hauled in a certain timeframe. There is no set duration that needs to occur during a contract. Typically they are annual, however, they can also be on a quarterly basis or a six month basis, or any specific timeframe that meets the customer's specific needs.
Contractual business doesn't always have to be a signed, written contract. A lot of times it's just a handshake agreement for that given timeframe where no paperwork is actually handed out between two parties.
[Onscreen Text: Why do some customers experience seasonal fluctuations in shipping rates?]
So rates aren't always static. Since we're in a free market in the trucking industry, rates can fluctuate due to market changes. Those rates can fluctuate due to fuel or due to seasonal shifts in capacity, or just due to different seasons throughout the network.
In the trucking industry, we have what we call retail season, and what this is, is whenever we have a lead into consumer spending on buying all the goods and presents for (the) holiday season, there is an influx of shipments coming into the port from overseas. Whenever that occurs, we have a high amount of loads in the port and we have the same amount of supply. So that shift in supply and demand can impact rates.
Seasonal spikes can also occur during different seasons throughout the year. One of the main seasons that we have is produce season. This is during summer months, whenever things get warmer, and there (are) a lot of fruit and vegetables that are being grown, primarily in the southern regions. Whenever this occurs we have an imbalance of supply and demand. Also, in other parts of the country whenever there is produce season going on in the south, there (are) still trucks that are leaving those markets to go to the south to chase that higher priced freight. So this can create an imbalance of supply and demand in other markets that aren't even affected by produce season.
A lot of times these rates, whenever they're gone, will increase because there (are) fewer trucks in the area, so those trucks are going to come at a premium.
[Onscreen Text: What factors can make seasonal spikes even worse?]
Some things that can also compound on top of seasonal spikes to increase rates are other types of regulatory factors. Those include things like the ELD mandate, hours of service changes and other kind of government enforcements that go into the laws in trucking.
[Onscreen Text: How can rate contracts overcome seasonality?]
One great way to combat seasonal spikes and shifts in capacity is to enter into a contract. By doing so, you're able to lock up a certain amount of capacity at a set given rate throughout that timeframe. So if a seasonal shift does occur, you're going to be protected from that.
[Onscreen Text: When is the best time to negotiate rate contracts?]
The best time to enter into a contract is either going to be after the seasonal spike or a couple months before this is going to occur. That way, you give the provider a chance to get used to the business and understand the needs for that freight specifically before the seasonal impact occurs.
Take for example, out by Miami during produce season. During this timeframe, there are going to be higher costs that are going to be incurred due to the seasonal shifts. Carriers and providers are going to be able to take advantage of this transactional market and make more money during that time with these other loads. However, if you're able to enter into a contract that lasts outside of that timeframe as well, you can help insulate your costs by providing more timeframe outside of just that peak season. That way, the provider is able to give you a better rate for the entire year as opposed to just a rate for that specific peak season.
[Onscreen Text: Are there other benefits to rate contracts?]
There are also some additional benefits in entering into a contract. It'll give you the ability to forecast your freight spend throughout that timeframe with that known rate. Also, it'll allow for some predictability between not only you but also your provider and knowing what that expectation is going to be, that way you can set service level expectations accordingly.
Furthermore, entering into a contract will help insulate you from pricing fluctuations. You can enter into a contract on a line haul only basis and allow for fluctuations in fuel, or you can enter into a contract on an all-inclusive level, which will have fuel and line haul both locked-in at that same rate.
[Onscreen Text: Why should you consider a rate contract with a freight service provider?]
There are several reasons why it makes sense for you to enter into a contract with a freight service provider like us. (The) main reason is, we're going to be able to insulate you from pricing increases that other carriers directly may not be able to do. This is because we have a very vast network of carriers that are out there. We don't have to put all of our eggs in one basket if we don't feel that it's necessary.
We have the experience entering into these contracts and we make sure to keep your best interest in mind. Se we make sure we identify all the best scenarios, what's perfect for your, and how that's going to fit into our network.