Every industry uses its own language which can sound quite cryptic to people who are not in the know. For some people these are everyday terms and for others they're confusing. This applies to the logistics industry, especially when it comes to the different ways in which freight rates are purchased. Procurement, sourcing, tendering? Spot buying, contract buying? Why so complicated? Are there really such big differences? Yes, there are. So here's an explanation of these terms, so you're in the know.
What does procurement (eProcurement) mean?
The word procurement means purchasing. Procurement is therefore the generic term for the operational purchasing process and includes everything which relates to the purchase of materials or services from companies and organisations. In our context of logistics purchasing, in particular, it includes: the procurement of freight rates. So who offers the best conditions for my freight?
The digital version, i.e. eProcurement, means that the processes do not take place on an analogue basis using a telephone or paper, but via digital platforms.
What is sourcing (eSourcing)?
Sourcing stands for procurement strategies in purchasing, i.e. the company’s own plan as to which suppliers freight and services are to be obtained from – and for what period of time. It is therefore important to find the optimum supplier for your own needs with the highest quality and reliability at the best price. This requires a detailed analysis of the market and an extensive comparison of products and quotes from a wide range of suppliers.
Sourcing (or the digital version, eSourcing) thus forms the foundation for the entire procurement process.
What does tendering mean?
One way of procuring contract transport services is through logistics tendering. A logistics tender is when shippers request carriers to quote for their business (shipping their goods) using an 'invitation to tender'.
The shipment and transport data is prepared before the invitation to tender so carriers can see how much and what type of cargo the shipper wants to transport and on which lanes. Once the tender data is prepared, it is sent to the carriers so they can analyse the shippers needs and quote a price based on their requirements.
Shippers then assess the quotes to determine which service provider has offered the best terms under the required conditions. They compare the quotes using different scenarios, such as an incumbent scenario (the cost of staying with the same carriers as they're currently using) or a best price scenario (the cheapest quote combination).
Shippers will usually choose several carriers to work with for different lanes - or even contract multiple carriers for one busy lane.
What is the difference between contract buying and spot buying?
If a suitable supplier or logistics service provider is found for cooperation, there is a difference between long-term contracts that are concluded, called contract buying, or short-term, day-to-day purchasing, which is called spot buying.
In contract buying, a long-term tender is issued and the fluctuations in the rate prices are taken into account so that the freight rates are fixed for the entire term of the contract. Contract buying is the right choice when someone needs to have something transported from A to B all the time. The right timing of the rate purchase is also decisive here since the rates fluctuate on a seasonal basis. It may therefore be that a long-term rate purchase in the peak season will lead to a higher rate. The transport times are also decisive here: Depending on the season, the rates can vary greatly.
In spot buying, the daily rate prices play the central role. As a result, purchase prices are much more dynamic and can fluctuate heavily depending on the time. Spot buying is more suitable for those who want to have goods transported occasionally and at irregular intervals.
SHIPSTA offers a digital logistics procurement platform
Hopefully these short explanations were of some use in helping you find your way through the jungle of the language that is used in the logistics industry. And, if you want to combine all these processes, SHIPSTA is the perfect solution. We want to digitalise logistics procurement and, above all, make it easier, which saves time and money!
From the first quarter of 2020, spot buying will find a perfect home at SHIPSTA thanks to the new ShipstaGO marketplace, meaning that short-term transport can be purchased with just a few clicks. Especially in contract buying, the tendering process is still largely very similar. With the end-to-end platform from SHIPSTA we have optimised this process so that it is carried out digitally without media disruption and provides full transparency.
SHIPSTA powers smart logistics procurement with a digital platform that connects shippers and carriers to ensure a frictionless procurement process for spot and contract buying, entirely online. It automates complex tasks, provides unrivalled visibility and supports fast data-driven decision-making. Designed and built by experts in logistics procurement, it is bringing transparency, automation and efficiency to the global logistics industry. It is used by some of the world’s largest companies to respond to market volatility, control freight costs and manage risk. The company was founded in 2015 and is based in Mertert, Luxembourg and Hamburg, Germany.