The Spot Market Remains Untapped, but New Freight Rate Management Systems Hold the Key for Global LSPs

The freight transportation industry is worth a staggering $3.3 trillion, two-thirds of which is road transportation. With a projected growth rate of 3.7% CAGR over the next five years, every Logistics Services Provider (LSP) is looking to make sure they gain the greatest possible share of this vibrant market. Yet, an especially lucrative area is frequently overlooked: the spot market. But why? The biggest issue is undoubtedly dated freight rate management systems – but before we dive into the subject, let’s examine the numbers.

Current stats published by McKinsey shows that the spot market represents a remarkable 50% of the overall value of the entire freight forwarding industry. While the rest of the market tends to be low-ticket or low-margin, the spot market is largely a high-ticket or high-margin game. Consequently, the spot market could represent more than 50% of net revenue. 

According to the same Mckinsey report, freight spot rates are significantly above contract rates, generally commanding +20% more per kilometre. This indicates enormous revenue and margin potential in a highly competitive industry like freight road transportation. So why aren’t LSPs leveraging this lucrative revenue stream to its full potential? And how are industry leaders leveraging modern freight rate management systems to help them pull ahead?

The current state of play in the spot market

Surprisingly, reluctance to engage in the spot market includes global LSPs with a focus on large tenders, planning and 3PL operations. Certainly, exceptions exist. For example, CEVA Car Carrying Express in Australia or Rhenus Express Freight Transport in Iberia treat such operations as distinct divisions, often labelled as express, urgent or emergency services. They target specific vertical sectors, expanding their operations to minimise notice periods and cater to particular needs.

Meanwhile, specialised players in the industry focus exclusively on extremely urgent spot needs, typically within specific geographic regions or customer segments. Companies such as these primarily serve clients through third-party subcontractors, who while offering flexibility, are often smaller in scale. Therefore, they are commonly situated in industrial hubs with high demand, such as the Basque Country in Spain or Central-Eastern industrial zones, with a notable emphasis on the automotive sector.

So how are other LSPs developing their strategy? Are they applying an end-to-end (E2E) approach? Or do they approach it tactically from an opportunistic standpoint? Are they truly paying attention to what should be a significant part of their strategy? 

The technological challenges holding LSPs back

Despite a clear gap in the market and plentiful opportunity, the spot market remains a blindspot for many LSPs. So what are the challenges that contribute to most LSPs' reluctance to address it as a significant revenue stream? The spot market operates on a buy-side or sell-side model that is highly dynamic, very volatile and time-sensitive. In this model, technology is essential, much like in trading. The freight rate management system used needs to be advanced, intelligent and highly agile. In short, the spot market demands the invention of innovative processes and methods to adapt and thrive.

Therefore, the challenges facing LSPs are primarily related to technology:

1. The legacy tech problem

According to S&P Global Market Intelligence, the freight industry struggles with technological change: “The most commonly cited hurdle to digital transformation is skills and people shortage (40%), followed by a legacy mindset and not enough proof of return on investment”. 

All mid and large-scale freight companies typically have highly complex and diverse IT legacy stack. This, naturally, creates resistance to change. Several factors contribute to this situation: 

• Many large freight companies have been around for decades. Two notable examples are DHL, established in 1969 in San Francisco and acquired by Deutsche Post (formerly the German public postal system, founded in 1866) in 2001, or UPS, founded in 1907. When a company has been operating for over a century, they have been investing in technology for a long time. It’s possible they’re using a freight rate management system from 20, 30 or 40 years ago. 
• The usual method of growth has been mergers and acquisitions (M&A), resulting in the partial integration of systems. This again compounds the legacy technology issue, with a further tendency to rely on legacy freight rate management solutions. 

2. Their cultural framework

All LSPs tend to have decentralised operations, where dispatchers often hold significant authority. This “pride mentality” makes it challenging to introduce new technology or harmonise processes, as it requires managing cultural change in a context of resistance with potentially significant impacts on operations. 

Hence, LSPs have typically managed spot rates for major clients using existing processes or by establishing specific divisions tailored to market demands. Nonetheless, the spot market has often been undervalued and disregarded, leading to the rise of agile specialists aiming to tackle these challenges. Despite this, these specialists lack the scalability required in a technology-driven environment.

It is time for LSPs to rethink their approach

Is it still reasonable for major LSPs to overlook this opportunity? The straightforward response would be no, given the significant revenue potential. Yet, despite its evident potential over the years, major LSPs haven’t seen the spot market as high priority. So, what might prompt a shift in this attitude? Three primary reasons or trends could drive this change:

1. Supply chain dynamics will drive requests 

The spot market will become even more crucial as most analysts observe shorter and tougher business cycles in the supply chain. According to McKinsey, an increased need for agility will define the freight market going forward. As highlighted by KPMG, this involves ensuring that your supply chain is responsive and agile, with the capacity to efficiently manage disruptions while protecting profits.

2. Global LSPs are currently exploring growth opportunities

LSPs are encountering a period where two main growth levers, M&A and e-commerce, appear to be plateauing. This tendency can be observed in current M&A trends in freight transportation between 2022 and 2023, as reported by Capstone Partners. Specifically, deal activity experienced a slowdown in the latter half of 2022, with M&A volume showing a notable 29% year-over-year (YOY) decline as of September.

Moreover, macroeconomic activity indicates a volatile and uncertain landscape. This shift in the market, along with geopolitical uncertainties, prompts LSPs to prioritise revenue management and consider new opportunities within their existing operations.

3. New tech-driven approaches to freight rate management could address key challenges

Freight rate management systems with AI co-pilot tools, low-code platforms and API integration make tackling previously complex or seemingly impossible projects feasible. This advancement in technology could potentially overcome the challenges posed by legacy IT stacks and cultural resistance within LSPs.

There is movement in this direction. By examining investor documents from large LSPs, it becomes apparent that they are beginning to prioritise different growth levers and strategies. Revenue management and AI pricing are emerging as priorities, as evidenced by discussions in their investor reports. For example, XPO October 2022 Investors day deck clearly positions advanced freight rate management systems with pricing optimisation as a priority.

A new era in freight rate management is approaching for global LSPs

Emerging technological advancements in freight rate management, incorporating AI, co-pilot tools and low-code platforms, alongside evolving market dynamics, are prompting LSPs to pivot their attention towards revenue management strategies. 

Within this context, the spot market emerges as a pivotal growth opportunity. It's now imperative for global LSPs to harness their scale, expertise, customer base and innovative technologies to position the spot market as a key driver of growth in the coming 2-3 years. This will require investment in a new approach to freight rate management, which cutting-edge providers are already developing. Find out more here. 

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References:

• Arora, S., Boin, R., Rau, P., Ruß, M., & Stoffels, J. (2023,February). A balancing act: How trucking companies can find the optimal spot/contract mix. McKinsey & Company. https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/a-balancing-act-how-trucking-companies-can-find-the-optimal-spot-contract-mix
• Alicke, K., & Iyer, B (2020). Next generation supply chain: Supply Chain 2020. McKinsey & Company. https://www.mckinsey.com/~/media/mckinsey/business%20functions/operations/our%20insights/next%20generation%20supply%20chain%20supply%20chain%202020/next%20generation%20supply%20chain_%20sc%202020_final_without%20cropmarks.pdf
• Capstone Partners. (2023,September). Transportation & logistics M&A update.https://www.capstonepartners.com/insights/transportation-logistics-ma-update/
• CEVA Car Carrying. (2024). CEVA Express. https://cevacarcarrying.com.au/services/transport-options/ceva-express
• KPMG. (2022, December). The supply chain trends shaking up 2023. https://kpmg.com/xx/en/home/insights/2022/12/the-supply-chain-trends-shaking-up-2023.html
• Rhenus Group. (2024). Express freight transport. https://www.rhenus.group/es/en/freight-transport/road-freight-transport/inland-freight-transport-for-industry/express-freight-transport/
• S&P Global Market Intelligence. (2023,February). Logistics sector prioritizes digital transformation but needs technology leadership skills. https://www.spglobal.com/marketintelligence/en/news-insights/blog/logistics-sector-prioritizes-digital-transformation-but-needs-technology-leadership-skills
• TI Insight. (2022,May). Global freight forwarding market size and forecasts 2021-2026. https://www.ti-insight.com/whitepapers/global-freight-forwarding-market-size-and-forecasts-2021-2026/
• XPO Logistics. (2022,October.). Investor Day Presentation https://investors.xpo.com/static-files/a3ae0f4b-f9d2-4af3-8666-c9b2c44a0093

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