Spot-market Rate Indexes: Truckload Transportation Author: Andrew - PowerPoint PPT Presentation

Spot-market Rate Indexes: Truckload Transportation Author: Andrew Bignell Advisor: Dr. Christopher Caplice Sponsor: Coyote Logistics MIT SCM ResearchFest May 22-23, 2013

An index is a statistical measure of changes over time in a representative set of data points. May 22-23, 2013 MIT SCM ResearchFest

LIBOR Scandal: The importance of index design Used as benchmark for: • $10 trillion in loans • $350 trillion in derivatives Manipulated by several banks from 1998-2008 $2.6 billion in fines (so far) “This dwarfs by orders of magnitude any financial scams in the history of the markets” - Andrew Lo, Professor of Finance, MIT May 22-23, 2013 MIT SCM ResearchFest

U.S. Trucking Industry: The spot market is a small component 25.5 Private LTL 268 229.5 TL-contract (estimated) TL-spot (estimated) 40 Spot: Price is negotiated at (or near) the time of delivery May 22-23, 2013 MIT SCM ResearchFest

U.S. Trucking Industry: Basic spot-market structure Shipper Shipper Shipper Shipper Shipper Shipper Shipper Shipper Broker Carrier Carrier Carrier Carrier Carrier Carrier Carrier Carrier May 22-23, 2013 MIT SCM ResearchFest

Motivation • Changes in spot-market rates experienced at Coyote have not tracked existing truckload transportation indexes. • Accurate spot-market indexes could be useful for: • Long-term, flexible contracts • Derivatives • Procurement planning and decision-making Plan • Review indexes from other industries to determine the characteristics of sound indexes. • Review indexes from the trucking industry. • Make recommendations for improving and/or developing spot-market truckload indexes. May 22-23, 2013 MIT SCM ResearchFest

Characteristics of sound freight indexes: Part 1: Index calculation and data collection 1. Should be an accurate reflection of the real spot market 2. Should be rigorously computed and unbiased 3. Should be expressed in units familiar to the industry 4. Should be based on a sufficiently broad and balanced input 5. Should be transparent and simple 6. Should provide different levels of aggregated information in a clear and calculable hierarchy May 22-23, 2013 MIT SCM ResearchFest

Characteristics of sound freight indexes: Part 1: Index calculation and data collection 1. Should be an accurate reflection of the real spot market 2. Should be rigorously computed and unbiased 3. Should be expressed in units familiar to the industry 4. Should be based on a sufficiently broad and balanced input 5. Should be transparent and simple 6. Should provide different levels of aggregated information in a clear and calculable hierarchy May 22-23, 2013 MIT SCM ResearchFest

Characteristics of sound freight indexes: Part 1: Index calculation and data collection Baltic Dry Index Weightings: 25% each Baltic Supramax Index Baltic Capesize Baltic Handysize Baltic Panamax Weightings: 2.5-20% Route Route Route Route rate #1 Rate #2 Rate #3 Rate #4 Route Route Route Route Rate #5 Rate #6 Rate #7 Rate #8 e.g. 52,000 dwt carrying grain from US gulf to Ned.

Characteristics of sound freight indexes: Part 2: Index management 7. Should be published regularly and frequently 8. Should be audited and monitored by an independent body 9. Should have proper procedures for dealing with complaints 10. Should be low-cost 11. Should be supported by the major participants in the market 12. Should have procedures for updating and adjusting components or index structure as market conditions change May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012 Stephens Freight Index 140 135 130 Line-haul rates (October 2010 = 100) 125 120 115 110 105 100 95 90 May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012 Cass Line-haul Rate Index Stephens Freight Index 140.0 135.0 130.0 Line-haul rates (October 2010 = 100) 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012 Cass Line-haul Rate Index Stephens Freight Index DAT Spot Van Rates 140.0 135.0 130.0 Line-haul rates (October 2010 = 100) 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012 Cass Line-haul Rate Index Stephens Freight Index DAT Spot Van Rates Coyote Logistics 140.0 135.0 130.0 Line-haul rates (October 2010 = 100) 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012 DAT Spot Van Rates Coyote Logistics 140.00 135.00 130.00 Line-haul rates (October 2010 = 100) 125.00 120.00 115.00 110.00 105.00 100.00 95.00 90.00 May 22-23, 2013 MIT SCM ResearchFest

Possible explanation: Geographic Distribution

Possible explanation: Tender Lead Time May 22-23, 2013 MIT SCM ResearchFest

Approach: • Examine rate behavior in different geographies in the US. • “Corridor” • 1 origin region to 1 destination region • 100-250 miles in diameter • 8,400 corridors with volume • 5.2% of corridors account for 50% of dollars spent • Selected 10 corridors that represented high-volumes and various regions • Examine the relationship between tender lead time and rates May 22-23, 2013 MIT SCM ResearchFest

Average weekly rates - by corridor Weekly average line-haul rate ($/mile) 0.5 1.5 2.5 0 1 2 3 3-Oct-10 3-Nov-10 3-Dec-10 3-Jan-11 3-Feb-11 3-Mar-11 3-Apr-11 May 22-23, 2013 MIT SCM ResearchFest 3-May-11 3-Jun-11 3-Jul-11 3-Aug-11 3-Sep-11 3-Oct-11 3-Nov-11 3-Dec-11 3-Jan-12 3-Feb-12 3-Mar-12 3-Apr-12 3-May-12 3-Jun-12 3-Jul-12 3-Aug-12 3-Sep-12 Corridor 10 Corridor 9 Corridor 8 Corridor 7 Corridor 6 Corridor 5 Corridor 4 Corridor 3 Corridor 2 Corridor 1

Weekly average line-haul rate (lane average = 100) Rate stability - by corridor 100 150 200 250 300 50 0 3-Oct-10 3-Nov-10 3-Dec-10 3-Jan-11 3-Feb-11 3-Mar-11 3-Apr-11 3-May-11 3-Jun-11 3-Jul-11 3-Aug-11 3-Sep-11 3-Oct-11 3-Nov-11 3-Dec-11 3-Jan-12 3-Feb-12 3-Mar-12 3-Apr-12 3-May-12 3-Jun-12 3-Jul-12 3-Aug-12 3-Sep-12 Corridor 4 Corridor 9

Weekly average line-haul rate (lane average = 100) Seasonal patterns – by corridor 100 150 200 250 300 50 0 3-Oct-10 3-Nov-10 3-Dec-10 3-Jan-11 3-Feb-11 3-Mar-11 3-Apr-11 May 22-23, 2013 MIT SCM ResearchFest 3-May-11 3-Jun-11 3-Jul-11 3-Aug-11 3-Sep-11 3-Oct-11 3-Nov-11 3-Dec-11 3-Jan-12 3-Feb-12 3-Mar-12 3-Apr-12 3-May-12 3-Jun-12 3-Jul-12 3-Aug-12 3-Sep-12 Corridor 10 Corridor 9

Annual rate change - by corridor 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6 7 8 9 10 -5.00% -10.00% May 22-23, 2013 MIT SCM ResearchFest

Conclusion #1 To be useful, a spot market index should measure each corridor independently. May 22-23, 2013 MIT SCM ResearchFest

Relationship between lead time and rate • High rate premium for same-day pick-ups • Beyond 3 days, rates are stable May 22-23, 2013 MIT SCM ResearchFest

Impact of lead time by season • During peak seasons, same-day loads had higher rate premiums than during slower seasons. % difference between same-day and next-day rates 30% 25% 20% Peak 15% Low 10% 5% 0% Corridor 6 Corridor 9 Corridor 2 Corridor 10 Corridor 5 May 22-23, 2013 MIT SCM ResearchFest

Conclusion #2 To be useful, a spot market index should specify a lead time. May 22-23, 2013 MIT SCM ResearchFest

Ongoing challenges May 22-23, 2013 MIT SCM ResearchFest

Ongoing challenges May 22-23, 2013 MIT SCM ResearchFest

Key Findings • Indexes should provide information at different levels of aggregation • Corridors, regional, national, etc. • DAT uses this approach • An index of spot-market truckload transportation should specify a lead time • No existing indexes do this • Indexes can only provide partial understanding of rates • Each transaction has a set of unique characteristics May 22-23, 2013 MIT SCM ResearchFest

“… individual experiences may vary…” May 22-23, 2013 MIT SCM ResearchFest

Thank you! Q & A May 22-23, 2013 MIT SCM ResearchFest