What Causes Rate Volatility?
Contract rates are determined during shipper RFP processes and are based on predictive models, historical volumes, and the assumption of guaranteed capacity. However, it is difficult for contracted rates to accurately predict annualized conditions. Any number of factors continually impact and shift market rates to move freight. Research from digital freight network Convoy noted the current market is impacted by multiple factors and that, “the American economy continues to run at two speeds: The industry sector gearing down while consumers stay revved up in high gear.” Seasonality is another factor that reliably shifts rates up or down depending on the product being hauled and the lane. Shippers and carriers use historical data and models to produce a contracted rate, but unanticipated factors such as new tariffs can make that rate no longer relevant.
If the market cost to move a load drastically increases from a contracted backup rate, carriers may no longer be able to accept a load tender. Historically, shippers have had to rely on time-consuming back-and-forth processes when requesting rates from carriers in their backup routing guide. If the routing guide fails a shipper, then they must move to the spot market, where there is no set contracted rate, and the shipper will inevitably pay more for last minute coverage. In today’s market, shippers need a careful balance between contracted and real-time rates to keep freight spend under control while maintaining coverage. Introducing automated real-time rates to routing guides can provide another way to capture value in any market and avoid overspending on freight.