If you pay attention to the stock market, you know that prices can fluctuate on a day-to-day basis but generally trend one direction or another for a period of time. The same is generally true about spot rates in the trucking and logistics sector. There are a few key factors that go into pricing the transportation of goods on the spot market, but when it comes to one-time shipments, a few dollars can make the difference in winning or losing a bid.
Spot market rates are directly impacted by supply and demand. If demand for a product is high and supply is low, spot market rates go up. If the demand for a product is low and supply is high, spot market rates go down. Furthermore, when you factor in the capacity of trucks and drivers that are available on the road at any given time, spot market rates can really fluctuate.
In an industry where every dollar matters, and it’s critical to keep goods moving along the supply chain, understanding the ins and outs of the spot market can be a difference-maker for companies. At the end of the day, the bottom line is often the driving force behind certain decisions. That’s why it is so important for companies to utilize technology to better their businesses. For example, artificial intelligence (AI) is an under-utilized tool in the supply chain, and it is something that can help better analyze market conditions and help make key decisions to boost that bottom line.
Understanding the Pendulum of the Spot Market
The spot market is like a pendulum. It swings back and forth, favoring shippers sometimes or carriers on the other side. But one thing is for certain, it’s all dependent on truck capacity.
Since the summer of 2020, carriers have largely held all of the power in rate negotiations. The economy was doing well, businesses were moving a lot of goods, the accelerated usage of e-commerce, a labor shortage in the trucking industry and other challenges made for tight capacity across the board. Shippers were often left to accept the rates of their contracted carrier or risk higher prices on the spot market, where available capacity was able to charge a premium to move goods.
In the last few months, the pendulum has begun to swing back in the favor of shippers. Gas prices have been trending down and the economy has slowed to where goods aren’t being moved as much and as quickly as a year ago. This has loosened capacity constraints and caused prices to trend downward month-over-month.
No matter who the pendulum is favoring, it’s important for companies across the board to analyze the market conditions and forecast their needs to maintain a healthy budget. While the COVID-19 pandemic caused some unexpected and swift changes for a time, the market has leveled out. Both shippers and carriers are taking a more calculated approach with forecasting where the market will be in a few months, including spot market prices.
How AI Moves the Needle
The nature of putting a load on the spot market leaves room for bidding to either drive up or lower the price. The goal of any shipper entering the market for a truckload spot rate is to secure the best rate possible in a short amount of time. Today, the market standard is to broadcast the available freight out to a group of carriers and wait for rates to come in. It’s highly reactive and leaves the shipper in the position of being a price taker.
But by using AI, the shipper is able to perform pricing discovery that would be too time consuming to run manually. The automated technology is best used to influence the right user towards a certain price target.
In practice, the first step is to predict an end price and adjust from there. The key is to get authentic reactions to different prices for that shipment at that moment in time, and ultimately understand the price willingness of individual carriers. Continuous market testing ensures the shipper is securing capacity for the best possible rate.
Even by adjusting the price up or down a few dollars, it could entice a carrier to take on that load — all without driving up the cost. AI-assisted rate forecasting removes the guesswork. Granted, the predictions are not perfect, but they will enable businesses to make informed decisions and successfully bid on loads, negotiate rates and more profitably execute those loads.
With accurate AI-assisted rate predictions, shippers and freight brokers can budget adequately, improve logistical decision-making and build solid carrier relationships. Ultimately, companies that implement and deploy AI in an effective way will further separate themselves from competitors and win the spot market.
Andrew Sobko is founder and chief executive officer of CDL 1000.
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