Rising inflation, a looming recession and constant supply chain disruptions are making annual contract agreements, which are static by definition, inefficient.

An on-demand contract model creates value for both shippers and carriers. Businesses need to rethink how they renegotiate contracts — on an as-needed basis rather than a time-based schedule — to optimize deals for both sides.

In a time of economic volatility, annual contract agreements are either inflated to protect from risk or too low for carriers to justify doing business. As a result, short-term (or on-demand) rate contracts have become the norm for shippers, because they’re more responsive and scalable to market fluctuations.

Companies that entered long-term freight contracts at the peak of the supply chain crisis, when capacity was tight and retailers were desperate to restock inventory, are now looking to renegotiate for better rates. Prices are dropping as a result of decreased demand and heightened fears of recession, and these lower rates are appearing on the spot market first. Spot rates started falling in March of this year. and are now often cheaper than longer-term contracts. 

While spot rate contracts are more attractive during a volatile economy, they come with their own set of risks and challenges, such as moving large volumes on uncontracted, fluctuating rates which can lead to revenue loss. Additionally, the spot rate process is extremely complex, costly and resource intensive, and requires manually searching for and negotiating last-minute rates with numerous suppliers every week.

For example, August is traditionally the peak season for ocean shipping. Between the current backlog of containers at international ports and companies already beginning to prepare for the holiday season, the increased congestion and long wait times could cause rates to fluctuate yet again. Fears of a labor strike are mounting as a result of the prolonged contract negotiations for West Coast port workers, which handle nearly 40% of all U.S. imports. With companies eager to avoid further delays, many may start to proactively reroute shipments to the East Coast. causing a new wave of disruptions and challenges. 

Nothing is guaranteed in today’s climate, but the risks associated with spot rate negotiations are still outweighed by the benefits of contract flexibility.

The freight market has fundamentally changed. The entire ecosystem is turning to short-term rates instead of the traditional annual contract. This creates tremendous pressure on operations teams and carriers to find and negotiate last-minute deals.

Autonomous negotiation is an entirely new category of technology that enables Fortune 500 businesses and their suppliers to reach optimal, mutually beneficial deals at scale by drawing on artificial intelligence and negotiation science. The technology combines the benefits of contracted rates with the agility and flexibility of spot rates. By reducing prices or improving payment, freight or warehousing terms, autonomous negotiations can free up tangible capital that can help businesses mitigate losses as a recession approaches.

Timing is important when it comes to locking in the best rates. Autonomous negotiations use predictive pricing and prescriptive recommendations to enable logistics teams to negotiate short-term contracts in a matter of minutes, allowing them to act quickly in light of the ever-changing market.

This is crucial, as global enterprises have thousands of suppliers, nearly 80% of which go unmanaged due to a lack of time and manpower. With autonomous negotiation technology, hundreds of thousands of possible agreements can be evaluated simultaneously to create mutually beneficial deals that ensure supply continuity and strengthen supplier commitments. Instead of just adjusting contracts on an annual or quarterly basis, the technology can be set to automatically initiate a renegotiation when the data indicates that demand, commodity prices and labor costs are starting to rise or fall.  Over time, AI will learn about supplier preferences and offer insight that can be used in future negotiations and strategies.

As e-commerce grows and customers focus on reducing the last-mile costs, autonomous negotiations enable inland networks to be more responsive and scalable to market fluctuations. When faced with record high inflation, a recession and geopolitical instability, technology — like autonomous negotiations — will only become more important as businesses fight to mitigate further financial losses.

Martin Rand is co-founder and chief executive officer of Pactum, an AI startup that conducts autonomous negotiations for global businesses.