The trucking and transportation industry is one with a lot of moving parts—so to speak. What keeps owner operators and carriers of all sizes moving along and in their lanes, aside from diesel fuel, is that motivating factor that fleet financial managers can never take their eyes off of: the market — or market rates, to be specific.
Freight load rates are the cost of a load delivered. That price is influenced by a number of factors that keep fleet financial managers on constant alert. Easy Logistic Management has spent decades determining the biggest factors impacting rates. Their insights, along with additional research, suggest the following considerations in understanding dynamic pricing:
1. The volume of the load: Calculating the density of shipments allows carriers to maximize the load capacity of their trucks. It also offers them another metric by which to calculate freight rates for specific shipments. Density is calculated by multiplying a load’s overall width x height x length and dividing it by the total weight of the shipment.
2. The weight of that load: The weight of the shipment is one of the most important factors affecting freight rates. In the case of freight shipping, generally, rates are cheaper when it comes to shipping price per 100 lbs. and can create discount incentives for heavier loads.
3. Distance between the pick-up and the destination: In general, the longer the distance between the origin and the destination, the higher the cost of shipping. But shipping rates may vary from place to place depending on capacity and complexity of pick-up and delivery locations. Additional costs related to distance may be added if the carrier doesn’t serve the destination area and the shipment has to be transferred to another carrier.
4. Freight classification: Freight class is yet another factor affecting the freight rates. There are currently 18 freight classes, ranging from class 50 to class 500. The higher the freight class, the higher the overall freight rate will be per shipment. Freight classes are based on the shipment’s density and weight, the complexity of handling, and delivery requirements. Thus, shipping rates will be lower for freight in a lower freight class with fewer handling and delivery requirements.
5. Shipping mode: After determining the freight class, the next thing you’ll want to know is how quickly you want your shipment to reach its destination. You can choose expedited shipping for faster delivery, but the rates will be higher. You can use consolidating carriers to keep freight rates low if you have some flexibility on when shipments deliver.
6. Accessorials: Another major factor affecting your overall freight rate is accessorials. Generally speaking, these are any service provided by a trucking company beyond shipping products dock to dock. These can be commonly needed services like use of lift gates, residential deliveries, inside deliveries, calling ahead for appointments to deliver, or delivery to alternative commercial facilities such as a strip mall. All of the services can affect your overall freight rate and will need to be included when quoting.
7. Fuel cost: The cost of freight is, of course, in large part tied to the fuel cost. With a decrease in fuel prices, freight rates also go down. Shipping carriers may choose to take the cost of the fuel or reduce the amount so that the shipping rates are cheaper while still achieving profits.
8. Tariffs and negotiated rates: Shipping costs depend on the type of shipping charges you get from the carrier. Therefore, if you opt for tariff fares or negotiated shipping rates, your shipping costs will vary. Third-party logistics companies (3PL) can often negotiate prices that owner operators cannot.
Each of these factors play their own role in determining the price or rate for the load, but they are also all interconnected. So while fleet financial managers are generally making supply chain decisions based on the long-term forecast for the bottom line, choosing the right load is a daily decision that can affect the bottom line even more. The most obvious factor to look at when choosing a load is the money you will make for delivery—that is, the amount based on the current rate. To be specific, it is the market rate, which is influenced by the availability of loads, the capacity of trucks, and the price of fuel. To understand market rate, it is important to look at two categories that impact fleet financials in entirely different ways.
Spot vs. Contract Rates
Freight spot rates and contract rates each offer shippers and carriers a different benefit. While a contract rate provides the security and consistency of one price, the spot rate can fluctuate, often offering a better rate (on the spot). InTek Freight and Logistics boils it down to the following:
A spot freight rate is the price a freight service provider offers a shipper at a point in time to move their product from point A to point B.
A contract rate is the rate a motor carrier, freight broker, or logistics service provider (LSP) agrees to use when moving a shipper’s freight for a set time and its freight characteristics over a set period of time.
The catch, in both cases, is that fleet load rates are most commonly influenced by market conditions at the time, and those market conditions can be difficult to forecast due to the changing nature of business from day to day or even hour to hour. While spot rates may influence the direction of contract rates, it is important to understand the variables that influence the spot rates. In short, the answer is supply and demand.
For fleet financials this means doing business using a fundamental economic model. If demand for a product is high and supply is low, spot market rates go up. If demand for a product is low and supply is high, spot market rates go down. Additionally, depending on the number of trucks and drivers that are available for delivery, spot market rates will fluctuate. Clearly, if there are more loads than trucks to move them, owner operators will likely be getting a higher rate. If, on the other hand, the same load quantity is outnumbered by trucks to move them, the rates will fall. Rates can also shift based on freight lanes or roads that fleet traffic is using. If lanes are more condensed, there are more trucks on the route, which means rates will likely be lower given the truck-to-load ratio.
How Contract Rates Can Benefit Your Business
Owner operators and carriers choosing spot market rates may benefit when the market is high, but that is not always the case. The dynamic market can be hard to depend on, which is why many operators rely on contract rates for consistency and reliability. While spot market rates are paid out based on the current rates from load to load, contract rates are a predetermined amount based on shipping over a certain period of time. Contract rates are negotiated and then fixed, typically for a 12-month period. Contract rates can be more attractive to a single owner-operator who needs to be able to rely on steady work. While spot market rates can be profitable when rates are high, when they are low, owner-operators are vulnerable and cautious in taking the risk.
If it all seems complicated, it is—and it only grows more complex depending on current market conditions and things like global trade and the price of fuel.
The Current Market Conditions and Complexities
As a carrier or owner-operator you may not always see how important the state of the economy and geopolitical position are to your business, but fleet financial managers are very much aware of it and here is why—the global economy, U.S. trade strategies, and the cost of fuel. Currently rates are down because there are fewer loads and more trucks, but the reasons why are very much intertwined.
- Fewer U.S. inbound containers have resulted in decreased load volume
- Trade disputes reinforce economic uncertainty and fear of domestic recession
- Fear of recession leads to a decrease in retail sales and consumer confidence
- A decrease in retail sales results in less manufacturing and production.
These factors along with severe weather conditions, fires in California, weak agricultural production in other parts of the country, and current labor disputes are all having an impact on load rates.
There is always a reason for optimism, and in many cases, fleet financial managers are reliant on partners to help create efficiencies in their own accounts payable in order to leverage the accounts receivable based on current rates. Companies like EFS/WEX are leading the charge in saving money wherever possible, especially when fuel costs are high. Fleet cards can help to manage fuel costs with rebates, discounts, and proper tracking. In a changing market, every bit of savings helps.
So, while fleet financial managers are focused on efficiencies in operations within their control, they are also developing strategies to help keep track of the external market and the rates that it drives.