The spot market is a small portion of the overall freight market. However, the actual size of the spot market is incredibly difficult to pin down. Some estimate it as small as 10%, while others take a more generous estimate of one-third of the total market. The reason it is so hard to estimate is that the definition of spot is often left to the interpreter.
While most freight is tendered within a few days of when its pickup is needed, most rates are determined months in advance. When rates are determined at the same time as the tender (or within a day or so) one could suggest this is a spot rate. When a rate is generated without regard to a specific tender, often months in advance, the load is considered to be a contract rate.
The term contract rate is misleading. To an outsider, the word contract rate suggests that it is a binding contract, a situation in which if the rate is not honored, you could sue the other party. This is not the way it works. Often contract rates are quoted with the best intentions of the two parties. But either party has the right to take that rate, reject it, or rebid it. There is nothing fixed in any of this, outside of the dedicated contract market.
Regardless, most rates are fixed for some period of time. Even if the cheapest carrier rejects a load and it goes to the next carrier in line, the rate paid by the shipper for freight has likely increased, but the shipper is said to still operate in the contract market, so long as the rate it is paying the second carrier was agreed to far in advance.
This is why tender rejection indices are so important. A tender rejection occurs when a trucking company receives a request for capacity but rejects that request. Often, the shipper will then send a tender request to another carrier, the second in line. If that carrier also rejects it, the shipper tries the third one, fourth, fifth, etc. until the shipper exhausts its options in the routing guide.
At that point, the tender is sent into the spot market, where it is then quoted around the same time it is being tendered. If you see an increasing tender rejection index, you know that carriers are being more selective and have other options for their capacity. A declining tender rejection index means that carriers are being less selective and more willing to take the freight that is being offered.
You can use this to your advantage. In a market with increasing tender rejections, you know carriers are being more selective with capacity. This also means that higher spot pricing is likely to follow. If you are a shipper, it is advisable to try to be more flexible with the times and requirements of a load, or prepare to accept someone that is more expensive in the routing guide or pay a higher spot rate. If you are a broker, it is advisable to pad your quotes with more margin than the rate indices suggest. If you are a carrier, it is advisable to quote more on a load.
The same game can be played with a declining tender rejection index. In that case, brokers can get more aggressive with their quotes. They will likely buy cheaper than the index suggests the market is at. Shippers can expect to have higher route guide compliance and carriers should be more willing to take loads that are less desirable.
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Shippers want to hold carriers to these rates, until there is an event such as COVID then they hold an RFP to ‘take advantage of the marketplace’
Shipper don’t seem to like it when carriers do it to them….
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