Noam Frankel & Phoebe Noce | FREIGHTFRIEND
IN PART 1, we talked to Noël Perry, a long-time transportation economist and founder of Transport Futures, Chris Pickett, Market Analyst at Pickett Research and former Chief Strategy Officer at Coyote Logistics, and Kris Glotzbach, a 25-year veteran in tech-enabled logistics, on whether or not U.S. truckload market dynamics have changed and if market cycles were becoming more volatile. We looked at historical data and some of the factors affecting the market.
At the end of Part 1, we established that unplanned events—such as weather—could impact the market. Keeping these factors in mind, we now ask: Have the cycles historically been accelerating in frequency? Let’s revisit the data from Pickett’s accompanying graph.
The length or duration of each cycle (or how long it took the spot market to return to contract pricing) can be a potential indicator of the severity of each shift.
- Cycle 1: 8 quarters
- Cycle 2: 12 quarters
- Cycle 3: 12 quarters
- Cycle 4: 12 quarters
We are currently in the fifth cycle, and it’s unclear how long the cycle will last.
What Does the Data Tell Us About Volatility? And How Do We Use It to Plan for the Future?
Given this data, the cycles historically show no signs of lengthening, which could suggest that freight market cycles are not occurring more frequently, though they still might be growing more volatile.
We define volatility as a statistical measure of the dispersion of returns. In the truckload market, this can be measured by how far the market deviates from the equilibrium between capacity and freight (where x=0 on Pickett’s graph).
Additionally, forecasting has proven difficult in large part due to unplanned, exogenous events, which seem to affect both duration and volatility. As I mentioned in Part 1 of this series, the increase in truck orders we saw as an effect of Hurricane Katrina set the market up for a period of overcapacity at the start of the Great Recession.
Similarly, Hurricane Irene lengthened Cycle 2 by several quarters, keeping spot prices high. Later, we experienced a very shallow trough of -7% when capacity decreased as a result of Hurricane Sandy. Had Sandy not occurred, we could have endured a longer cycle if the market troughed much lower and spot prices slowly recovered to contract pricing. Although events like this increase unpredictability and make forecasting difficult, do they genuinely have a big effect on the market or is it just perception?
Per Pickett, the effects are less dramatic in actuality. “They create ‘short term’—generally speaking—imbalances between supply and demand,” he said. “They’re secondary dynamics at most. They might move or tweak the market for a quarter or so.” Historical data seems to support Pickett’s position, but some of our other experts call for a wider scope.
How the Supply Chain Affects the Truckload Capacity Market
Industry veteran Glotzbach looks holistically at the total supply chain for his understanding of what impacts the capacity market. Most of the volatility we see, he said, occurs upstream and downstream in the supply chain.
Historically, Glotzbach remembers a more predictable market, approximately 18-month periods that cycled through tighter, then looser capacity. This has changed however, he said, partially due to consumer buying behaviors.
Originally, the supply chain followed a make-to-stock model, and manufacturers would create product and deliver directly to the customer as they demanded it. As time and buying needs changed, the model shifted to make-toorder, where inventory and forecasting were required, and manufacturers sent stock to distribution centers who then sent products to customers. Make-toorder then gave way to make-to-customization, or the model we see today.
“We’re in the age of the customer,” Glotzbach said. As supply chains trend toward just-in-time, manufacturers send parts of products to local and urban distribution centers. Assembly doesn’t occur until an order comes in, allowing for limited customization and speed to ship.
In this model, however, any shock to the supply chain can create devastating ripple effects that can then affect the truckload capacity market. When we see volatility upstream to suppliers and downstream to customers, it creates a bullwhip effect. It’s why we see the sharp peaks and deep troughs of increased volatility. The current cycle, impacted by the COVID-19 pandemic, is one of the best examples of these effects.
Is the COVID-19 Pandemic an Indicator That Volatility Is Increasing?
The market was already beginning to tighten in the months leading up to the pandemic, mirroring past cycles of demand. “2019 was a very loose market,” Glotzbach said. “A lot of [asset] procurement events happened in Q4 and Q1 and [people] were betting the market long, assuming there would be some tightening.” Few people, however, could predict the effect COVID-19 had on accelerating the demand for capacity.
What Contributed to the Increased Demand for Capacity?
Upstream manufacturing: The virus first hit China, which affected many supply chains. That, coupled with the fact that production was already delayed due to the Chinese New Year, meant that manufacturing shut down and containers were stuck on the wrong side of the ocean.
Carrier adaptation and exit: Per Glotzbach, many carriers are becoming more specialized, even down to driver recruitment. So, when the U.S. economy (along with other global economies) stagnated due to stay-at-home orders and quarantining, some industries, such as hospitality and automotive, also slowed to a trickle, resulting in carriers that had difficulty pivoting to take on freight from industries that demanded it, such as consumer packaged goods. With so many businesses impacted, many carriers exited the marketplace, further reducing available capacity.
Unplanned lanes: What’s surprising, Pickett said, is that total consumption has not gone down dramatically due to the pandemic. The demand, instead, has shown up in different industries (like in paper and health products). Many of the issues with capacity, he said, have been due to unplanned lanes.
As volume and demand increased in certain categories, capacity tightened, and routing guides began to fail. As the pandemic gained momentum again, tender rejection rates hit an all-time high of 27.84% the week of November 15, according to FreightWaves SONAR. Rejection rates during this time were higher than the same period in 2019 and 2018.
“In 2020, we expect that rejection rates will stay strong through the rest of the year, though they shouldn’t climb at similar rates to the previous two years due to the already extraordinarily high levels,” SONAR said.
How Will the COVID-19 Pandemic Affect the Future?
The pandemic, undoubtedly, will have several effects. For one, it’s possible that we start to see a pattern of increased volatility in the market. “If you’re comping a record high, the tables are already set to probably have a record low,” Pickett said. “You’re setting yourselves up for more [volatility] going forward.” He said the historical data, however, proves inconclusive, unless the market continues to react in a similar way to the current shift.
Glotzbach, on the other hand, sees enough additional evidence to suggest the cycles are becoming more frequent and more volatile than in past years. COVID-19, he said, is simply a “final punch.”
GLOTZBACH, ON THE OTHER HAND, SEES ENOUGH ADDITIONAL EVIDENCE TO SUGGEST THE CYCLES ARE BECOMING MORE FREQUENT AND MORE VOLATILE THAN IN PAST YEARS. COVID-19, HE SAID, IS SIMPLY A “FINAL PUNCH.”
What Other Factors Might Impact the Market Later?
One possible factor is the truck driver shortage. As drivers skew older (the average driver age in the for-hire, over-theroad truckload industry is 46, according to a 2019 report by the American Trucking Associations) and the industry fails to recruit enough younger drivers, capacity will continue to fall out of the marketplace as drivers retire.
Consolidation and commoditization might also contribute to market volatility in the future. Glotzbach expects the trucking industry to become more commoditized within a decade and predicts that brokerages and asset-based carriers will consolidate. We will also likely see self- driving trucks in the middle mile in the next 10-15 years, he predicts.
Economists such as Perry also point to the expected impact from technical disruption. Though disruptive technologies (such as autonomous vehicles) can have unplanned effects on the shifting truckload capacity market, they are part of an existing economic cycle known as the Kondratiev wave, which occurs every 30 years as old technology is replaced by new. “There is usually a period of destruction followed by a period of rapid growth,” Perry said. Some of the most recent examples include the evolution of automotives (beginning in 1930) and information technology (beginning in 1970). If the Kondratiev wave holds true, we might see significant volatility in the market but, as Perry alluded, it would be considered a “normal” or expected market shift.
Taking all of this into consideration, it’s clear that there are a lot of variables that could cause the market to swing more severely and more often. Our experts might not agree on their impact or effect on the market, but the data does show that the market has seen significant shifts in recent years with record high peaks and record low troughs. If we continue the same pattern, we could expect a wild ride in the near future.
In the following sections, we’ll dive into strategies to prepare your business for big market shifts in the future.
WHEN YOU UNDERSTAND HOW THINGS BEHAVED IN THE PAST, IT WON’T BE AS ABRUPT OF A CHANGE WHEN ANOTHER SHIFT HAPPENS.
– KRIS GLOTZBACH
Strategies & Changes for Future Considerations
Earlier in this two-part series, we talked to Noël Perry, a long-time transportation economist and founder of Transport Futures, Chris Pickett, Market Analyst at Pickett Research and former Chief Strategy Officer at Coyote Logistics, and Kris Glotzbach, a 25-year veteran in tech enabled logistics, about U.S. truckload market dynamics and whether or not the market was becoming more volatile.
In Part 1, we looked at historical data and some of the factors affecting the market. In the first half of Part 2, we explored causes for volatility, the effects of the total supply chain on the capacity market, and other factors that impact the market, such as the COVID-19 pandemic.
We can now draw some conclusions, dig into strategies to prepare for future market shifts, and consider what, if anything, about this industry needs to change. We also talked to Ken Heller, Chief Transportation Officer at CJ Logistics America, for some insight into market dynamics and the future of the industry.
Let’s look at the question we initially posed: Is it just perception or are these cycles starting to occur more frequently ISTOCK.COM/HOFRED and with more volatility? Have market dynamics changed, and if so, why is it happening?
We’ve considered the historical cycles and some of the key drivers of volatility in the U.S. truckload capacity market. What conclusions can we draw from our discussions and data?
As we navigate the latter half of the current market cycle, what’s surprising is that even when we include the COVID-19 pandemic, the curve doesn’t look that different from those in the past—at least not from a macro perspective when we look long term, year-over-year. So, then why does it feel different?
We’re still dealing with the effects of today’s tight market. At the same time, the previous market shift (from Q1 2017 to Q4 2019) hasn’t faded from memory. When the pandemic started, the pendulum shifted consumption away from services into goods at a time when transportation was already at near capacity.
This combination, Heller said, is why a small shift can be so disruptive to supply chains. With the U.S. GDP breaking down to roughly 77% services and 23% goods in a normal economy, “even a 10% swing in spending from services to goods is a more than 30% increase in goods that need to be shipped,” Heller said.
At a micro level, lack of proper forecasting results in pockets of volatility that, when combined with unplanned, exogenous events such as the pandemic, create points of failure. “Forecasting hasn’t quite caught up with the evolution in the supply chain,” Glotzbach said.
Without real-time sales and operations planning, any volatility upstream with suppliers or downstream with end-consumers can cause big ripple effects that affect truckload capacity. Supply chains were put to the test in 2020 as e-commerce accelerated and buyers made larger, less frequent purchases. And more recently, the 2021 Texas power crisis overwhelmed the entire ecosystem for weeks.
Speed of Business & Access to Information
Information is shared more quickly than ever before, which can affect any trading market. “If you go back five years ago, the amount of information was much less than it is now,” Heller said. “With more information—and more people looking at information—it creates greater gyrations in the market.”
For example: With increased visibility into available capacity via marketplaces and software, a carrier can see where capacity is needed and invest in that lane. That increase in capacity naturally alters the rate structure. More data and easier access to information enables all logistics stakeholders to make decisions that they might not have in the past.
What Can We Expect to See for Contracts & RFPs in the Near Future?
In the short term, for companies that are predominantly contract-based, Pickett expects year-over-year rate increases until at least the third quarter. This is primarily due to the fact that contracts that were renegotiated at the end of 2020 reset higher than the previous year. “Think about why contract lags spot,” Pickett said. “[We make contracts based on] observations of what’s happening now and expectations as to what the market will be like over the term you’re contracting for. It’s the psychology of the market during the bid process.”
When the market is low, contracts are typically under-bid. When the market is high and forecasting hasn’t accounted for it, mini bids go out and commitments are abandoned. The market overcorrects for these actions, causing the volatility we see and feel. One key challenge is that most cycles have a duration of three years while most bids are based on one. “If everyone contracted on a longer-term basis and trusted each other on both sides of that contract, then you wouldn’t see these wild swings,” Pickett said. When commitment is an issue on all sides, larger industry-wide changes will need to take place in order to solve the contract problem.
IF EVERYONE CONTRACTED ON A LONGER-TERM BASIS AND TRUSTED EACH OTHER ON BOTH SIDES OF THAT CONTRACT, THEN YOU WOULDN’T SEE THESE WILD SWINGS.
– CHRIS PICKETT
How Can Companies Better Prepare Themselves for Market Shifts in the Future with These Factors at Play?
Start with what you can control and where you can reduce risk. One place to start is to define your procurement process.
- What is your strategy?
- What data do you have available?
- How do you compare to the broader market?
- Where have you had success?
- Where have you failed?
For Glotzbach, looking outside of your four walls is also imperative, especially as other companies mature their procurement processes. “I think the way that people procure is going to shift to more of a dynamic capability for 3PL or long tail capacity,” he said. This will be especially true as companies upgrade their tech stacks and empower themselves to quickly react to changes in the market. Similarly, Pickett also recommends an internal audit. “You have to build a capability to understand what’s happening to you and have the operational controls to at least do something about it,” he said. When you understand how things behaved in the past, he said, it won’t be as abrupt of a change when another shift happens.
This methodology also applies to strategy diversification. Being spotbased might have worked last year, but if you’re not rethinking your growth strategy for this year, it will be too late by the time the market deflates.
Ultimately, there are many tactical approaches to prepare your business to weather market shifts in the future. As you look at your business and decide what’s right for you, remember these big ideas.
Look internally. Do a deep dive into your data—use it to understand your business and create your own forecast tailored to your business.
Don’t put your eggs in one basket. Diversify your strategy. Create contingency plans. What worked for you before likely won’t hold up because the market is always changing.
Invest in proactive decision-making. Lean on technology to increase your visibility into available capacity, and give your team the ability to make dynamic decisions. As real-time information becomes more accessible, fluid decision making will help you successfully manage the highs and lows of the freight market.
Noam Frankel, Founder and CEO of FreightFriend, with Phoebe Noce, Director of Marketing at FreightFriend. Noam is a pioneer and innovator in the logistics industry. He draws from his experiences building teams and brokerages from nearly four decades of leadership at top brokerages such as American Backhaulers and Echo Global Logistics. Noam is an expert in building brokerages and carrier-relationship strategy.
Image credits: Noam Frankel, Chris Pickett, hofred/Shutterstock.com, Dilen/Shutterstock.com, iStock.com/Zarkru, spukkato/iStock.com