)
It’s difficult to survive in such an environment, especially for smaller fleet companies. Read on to find out how contract (or dedicat
ed) freight can address many of these challenges and help your business.
What is Contract freight?
What does contract freight mean in truckload shipping? It refers to a freight agreement between a carrier or 3PL and a shipper with a fixed price and volume over a set period, typically an average of three months to two years.
The freight agreement will always include the following elements:
Consistent shipments of typically the same type and freight volume.
Fixed rates are agreed in advance between the parties.
Specified periods usually average between three months to two years.
Fuel Surcharge clause (often but not always included) to protect both parties from diesel price changes.
Contract freight Vs. dedicated fleet
Contract (or dedicated) freight should not be confused with a dedicated fleet. A dedicated fleet refers to a set of trucks the carrier has exclusively allocated to a specific customer. This option gives the operator the advantage of buying a fleet without the complexity of managing it. The shipper can customize the carrier’s fleet to its own needs and streamline its operations, often resulting in increased flexibility, improved efficiency, and service levels.
Characteristics of Contract Freight
What are the key defining characteristics of a contract, and how can they benefit carriers?
Consistency
Carriers benefit significantly from consistent transport volumes (at least one load per week). The reliable revenue stream allows them to plan their resources and capacity accordingly. By working with the same customer on the same contracted lanes, they can perfect their operations and deliver an enhanced service. This, in turn, ensures the customer will continue working with the carrier.
Stability
The road freight market is notoriously volatile, with shippers and carriers having to battle fluctuating rates and shifting demands. Recent years have been particularly challenging due to global events and the resulting economic shocks.
Contract freight agreements, therefore, offer carriers economic stability and assurance to help weather these storms.
Long-term nature
The average duration of a contract freight agreement is between circa three months to two years, allowing both parties to plan strategically and invest in future growth. And it’s enough time for mutually beneficial partnerships to develop.
Efficiency
The stability, reliability and longer-term nature of contract freight lead to higher operational efficiency. Carriers can build strong working relationships with shippers, which help with problem-solving and improve overall productivity.
Service-oriented approach
Due to the longer-term nature of a contract agreement, the carrier can customize its operations to the shipper's needs, from delivery schedules to specific equipment requirements. This leads to improved carrier performance and higher service levels.
Requirements for Hauling Contract Freight
Before entering into a contract freight agreement, a trucking company needs to look closely at the shipper’s requirements and assess its capabilities in meeting them. Here are some areas to consider:
Operational capacity
The carrier must handle the contracted volumes and consistently meet the shipper's transport needs. They need, therefore, to have sufficient fleet capacity, equipment, and workforce to support this. In addition, expertise in capacity planning is necessary to make the right decisions.
Reliability
The shipper expects the carrier to meet both the contracted volumes and shipping deadlines. A contract freight agreement demands a high level of reliability and service quality on the part of the carrier.
Communication and Technology
Coordinating and tracking shipments are vital in road freight logistics. Trucking companies must have the technology to enable real-time GPS tracking through an API or Apps like the sennder App, which allows carriers to proactively address and communicate issues that may arise during transit.
Flexibility
Although contract freight gives the carrier stability, it can also happen that the shipper’s needs change within the contract. In such cases, it's important to be flexible and adaptable to maintain a good working relationship.
The feasibility of small fleets handling contract freight.
Given some of the abovementioned requirements, how feasible is it for smaller companies to haul dedicated freight?
In fact, you do not need to be a major player to succeed in the dedicated freight area. However, there are a number of points to examine before embarking on it.
Fleet size could limit the volume of work a company can take on. At the same time, it can also be more flexible and offer the shipper a more personalized service with the advantage of building stronger relationships.
Other factors could be operational capacities, such as the number of drivers, equipment and maintenance resources available, the type of freight to be transported, whether it requires specialized equipment, etc.
Can your company use technology to streamline processes and be more efficient, and has it the geographical coverage necessary to fulfill the contracted loads?
However, it is certainly feasible for companies of 50 trucks or less to haul contract freight, depending on the scope and criteria of the work.
Accessing Contract Freight for Small Fleets
How, therefore, can smaller carriers break into the dedicated freight market?
It’s necessary to take a more strategic approach - for example, to work on marketing and networking and potentially focus on a niche market or specialization. Establishing your company as a credible and attractive prospect within the freight industry is critical.
Here are a few steps you can take:
Establish an online presence
A professional-looking website and strong social media presence are vital for promoting your business and establishing credibility. It’s also a platform to showcase your services and customer testimonials.
Leverage online platforms
Digital freight forwarding platforms can connect carriers with available contract loads while offering advantages over other online load boards and freight-matching companies.
sennder’s digital freight exchange uses advanced data to optimize route planning, increase efficiency and offer carriers shipments tailored to their business.
Carriers can find and bid on loads within minutes, plan trips more efficiently, and avoid empty kilometres while accessing enterprise-level shipments for contract and spot freight.
Make use of technology
Invest in TMS, real-time GPS tracking, and electronic documentation. It will improve efficiency and help your company provide a superior service.
For example, by utilizing sennder’s TMS and driver app, carriers gain real-time visibility in their operations.
Focus on your Unique Value Proposition (UVP)
Emphasize what makes your fleet different, such as a specialized niche, expertise, or cost-effectiveness. Customize your offer to the needs of your potential customers.
Leverage social proof
Collect references and testimonials from satisfied clients. They are a powerful way to establish credibility and attract new customers.
Partnering with large, service-oriented brokers or third-party logistics providers (3PL)
Connecting with freight brokers or third-party providers is an excellent way to get a foothold in the dedicated freight business. They can provide carriers with access to freight opportunities with enterprise shippers and supply the logistic, administrative, and sales resources necessary.
Collaborating with service-oriented brokers allows the small carrier to scale and grow its contract business at its own pace.
As Europe’s leading digital road freight forwarder, sennder helps carriers find thousands of dedicated loads via its online marketplace, where they benefit from a secure revenue stream and access to major enterprise shippers. Many carriers also choose to charter with sennder and utilize our vast shipping market.
sennder technology also helps carriers to digitize their businesses and compete in the road freight logistics market. Leveraging sennder technology and expertise in contract freight helps you better schedule loads, have fewer empty miles and enjoy consistent revenue.
How a Latvian carrier successfully grew his trucking business with sennder’s help.
Comparison Between Contract Freight and Spot Market
The alternative to contract freight is spot shipping, which refers to a one-off, short-term shipping order that the carrier fulfills for a price agreed for just that order. Depending on market fluctuations, shippers will generally operate a strategic mix of contract and spot freight.
Spot shipping has the advantage of offering flexibility, but it also comes with potential rate volatility. Contract freight, as we’ve discussed, refers to a freight agreement with a fixed price and volume over a set period. While both large and small companies use spot freight, there are some cases where spot freight may be the best strategy:
Exceptions/unplanned shipments
Shippers will rely on one-off spot buy orders to move freight shipments that fall outside of their contracted orders or to fill delivery gaps that have occurred unexpectedly.
Expedited Shipments
The spot ship method is the best choice when there is an urgent need for a freight shipment, regardless of the extra costs involved.
Lower volume freight
This is often relevant for small shippers who don't command the larger freight volumes to secure lane contracts.
Which one is the best for your business? Contract or Spot freight?
As often, the answer is - it depends. The truckload market is fragmented and volatile, with capacity supply and demand constantly shifting in favor of carriers or shippers. Sometimes, contract rates are higher than spot rates and vice versa.
To develop the best strategy for your business, it helps to know how the market operates:
The truckload market moves in reoccurring cycles: the interaction between supply (carriers) and demand (shippers). These cycles can be broken down into 7 steps, as illustrated in the chart below:
Chart Source: Coyote Logistics
Steps 1 to 3: Equilibrium to Peak
Step 1: Equilibrium - market rates are stable with carrier capacity and shipper demand balanced.
Step 2: Inflation - there is less capacity than demand, causing spot rates to rise and exceed contract rates. Additional capacity starts entering the market.
Step 3: Inflationary peak - contract freight rates are high; spot rates are low. Enough capacity enters the market to tip it back downwards.
Steps 4 to 7: Deflation, trough and return to equilibrium
Step 4: Deflation - spot rates begin to fall while contract rates continue rising because of the recent peak. Eventually, as rates drop, capacity leaves the market.
Step 5: Deflationary trough - low rates have caused too much capacity to leave the market despite shipper demand, causing spot rates to rise again.
Step 6: 2nd market inflation - the market begins to inflate (again), and the upward climb begins setting up the next cycle.
Step 7: Return to equilibrium - carrier supply and shipper demand are balanced for a period before the cycle begins again.
You can see how the market moves from equilibrium (balanced demand) to inflation (more freight demand than truck capacity) to deflation (more trucks than freight) and back to equilibrium again.
Consistency Vs fluctuation
Knowing the cyclical nature of the truckload market, a carrier with a longer-term contracted freight agreement in place may lose out to higher spot rates. But as demand shifts, this can turn around, and they can profit from having a fixed (higher) contracted rate compared to the spot market.
As we have mentioned, the consistent nature of dedicated freight has other advantages that can outweigh periodical losses to spot rates. It’s important, therefore, to look at how much a contract agreement will pay out over the long term, not just financially but also how much it contributes to your overall business goals and strategy.
Benefits of hauling contract freight
If you have growth plans and a longer-term strategy for your business, it’s wiser to focus on contract freight rather than the quick gains per load/lane that may be made in the spot market. Though it may not immediately pay off in the short term, hauling contract freight is a strategic investment with many benefits:
The consistent revenue stream is topmost among these, giving your business confidence to invest in future growth. Financial stability is also attractive to drivers, who are more willing to join stable and reliable employers and remain with them.
Operational efficiency is another advantage; a carrier servicing the same shipper’s lanes weekly can streamline and perfect its operations, which helps reduce empty kilometers and save costs. It can also customize its business to the customer's needs and improve service quality.
More rewarding business partnerships often grow out of contract freight. Carriers can make genuine partnerships with their customers, which leads to trust and, ultimately, to contract renewals. Favored carriers are often given access to the most profitable shipper routes and can provide a superior carrier performance.
Smaller carriers have more opportunities when they commit to contract freight, especially when they then partner with larger 3PLs or freight brokers. For example, sennder’s carriers get access to a growing pool of enterprise shippers, enjoy profitable routes and are supported by advanced technology to help establish themselves in the market, not to mention benefiting from advanced fuels to reduce CO2 emissions.
Conclusion
We started this deep dive into contract freight, looking at the industry's challenges and how contract freight can help address some of these. We outlined the requirements for hauling contract freight and showed how smaller carriers can enter the market - specifically by leveraging partnerships with 3PLs, freight brokers and road freight industry leaders like sennder. Regarding the question: Which is best for your business? Spot or Contract freight? As mentioned, neither is good nor bad and much depends on a company’s own strategy and the current market cycles. However, what contract freight does supply is vital stability and consistent revenue, which allow companies room to focus on strategic growth instead of just day-to-day operations. If, therefore, you are a carrier with ambitious success goals and are in it for the long haul (excuse the pun), then shipping dedicated freight is the right move for you.
Would you like to grow your carrier business with sennder? Start now
Hear what our partners think of us:
)
)
)