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

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

LIBOR Scandal:

The importance of index design

May 22-23, 2013 MIT SCM ResearchFest

268 40 229.5 25.5

Private LTL TL-contract (estimated) TL-spot (estimated)

U.S. Trucking Industry:

The spot market is a small component

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

May 22-23, 2013 MIT SCM ResearchFest Shipper Shipper Shipper Shipper Shipper Shipper Shipper Shipper Carrier Carrier Carrier Carrier Carrier Carrier Carrier Carrier

Broker

• 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

Motivation

May 22-23, 2013 MIT SCM ResearchFest

• 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.

Plan

• 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

Characteristics of sound freight indexes:

Part 1: Index calculation and data collection

Route Rate #2 Route Rate #3 Route Rate #4 Route Rate #5 Route Rate #6 Route Rate #7 Route Rate #8

e.g. 52,000 dwt carrying grain from US gulf to Ned.

Baltic Dry Index

Baltic Supramax Index

Weightings: 2.5-20% Baltic Capesize Baltic Panamax Baltic Handysize Route rate #1

Weightings: 25% each

• 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

Characteristics of sound freight indexes:

Part 2: Index management

Truckload Indexes – Oct. 2010 – Sept 2012

90 95 100 105 110 115 120 125 130 135 140 Line-haul rates (October 2010 = 100)

Stephens Freight Index

May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012

90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0 140.0 Line-haul rates (October 2010 = 100)

Cass Line-haul Rate Index Stephens Freight Index

May 22-23, 2013 MIT SCM ResearchFest

Truckload Indexes – Oct. 2010 – Sept 2012

90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0 140.0 Line-haul rates (October 2010 = 100)

Cass Line-haul Rate Index Stephens Freight Index DAT Spot Van Rates

May 22-23, 2013 MIT SCM ResearchFest

90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0 140.0 Line-haul rates (October 2010 = 100)

Cass Line-haul Rate Index Stephens Freight Index DAT Spot Van Rates Coyote Logistics

Truckload Indexes – Oct. 2010 – Sept 2012

May 22-23, 2013 MIT SCM ResearchFest

90.00 95.00 100.00 105.00 110.00 115.00 120.00 125.00 130.00 135.00 140.00 Line-haul rates (October 2010 = 100)

DAT Spot Van Rates Coyote Logistics

Truckload Indexes – Oct. 2010 – Sept 2012

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Possible explanation: Geographic Distribution

Possible explanation: Tender Lead Time

May 22-23, 2013 MIT SCM ResearchFest

Approach:

May 22-23, 2013 MIT SCM ResearchFest

• 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

0.5 1 1.5 2 2.5 3 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 Weekly average line-haul rate ($/mile) Corridor 1 Corridor 2 Corridor 3 Corridor 4 Corridor 5 Corridor 6 Corridor 7 Corridor 8 Corridor 9 Corridor 10

Average weekly rates - by corridor

May 22-23, 2013 MIT SCM ResearchFest

50 100 150 200 250 300 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 Weekly average line-haul rate (lane average = 100) Corridor 9 Corridor 4

Rate stability - by corridor

50 100 150 200 250 300 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 Weekly average line-haul rate (lane average = 100) Corridor 9 Corridor 10

Seasonal patterns – by corridor

May 22-23, 2013 MIT SCM ResearchFest

Annual rate change - by corridor

May 22-23, 2013 MIT SCM ResearchFest

• 10.00%
• 5.00%

0.00% 5.00% 10.00% 15.00% 1 2 3 4 5 6 7 8 9 10

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

May 22-23, 2013 MIT SCM ResearchFest

• High rate premium for same-day pick-ups
• Beyond 3 days, rates are stable

Impact of lead time by season

May 22-23, 2013 MIT SCM ResearchFest

0% 5% 10% 15% 20% 25% 30% Corridor 6 Corridor 9 Corridor 2 Corridor 10 Corridor 5 Peak Low

• During peak seasons, same-day loads had higher rate

premiums than during slower seasons.

% difference between same-day and next-day rates

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

May 22-23, 2013 MIT SCM ResearchFest

• 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

“… individual experiences may vary…”

May 22-23, 2013 MIT SCM ResearchFest

Thank you!

May 22-23, 2013 MIT SCM ResearchFest

Q & A