Spot-market Rate Indexes: Truckload Transportation Andrew... · •Changes in spot-market rates...

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


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


U.S. Trucking Industry: Basic spot-market structure


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


• 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


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


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

Lin

e-h

aul r

ate

s (O

cto

be

r 2

01

0 =

10

0)

Stephens Freight Index



90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

Lin

e-h

aul r

ate

s (O

cto

be

r 2

01

0 =

10

0)

Cass Line-haul Rate Index Stephens Freight Index



90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

Lin

e-h

aul r

ate

s (O

cto

be

r 2

01

0 =

10

0)


DAT Spot Van Rates


90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

Lin

e-h

aul r

ate

s (O

cto

be

r 2

01

0 =

10

0)


DAT Spot Van Rates Coyote Logistics



90.00

95.00

100.00

105.00

110.00

115.00

120.00

125.00

130.00

135.00

140.00

Lin

e-h

aul r

ate

s (O

cto

be

r 2

01

0 =

10

0)

DAT Spot Van Rates Coyote Logistics



Possible explanation: Geographic Distribution

Possible explanation: Tender Lead Time


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

0

0.5

1

1.5

2

2.5

3

3-O

ct-1

0

3-N

ov-

10

3-D

ec-1

0

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1

3-F

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1

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1

3-J

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-11

3-J

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3-A

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11

3-S

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-11

3-O

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1

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3-D

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1

3-J

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2

3-F

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We

ekl

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era

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-hau

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e (

$/m

ile)

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


0

50

100

150

200

250

300

3-O

ct-1

0

3-N

ov-

10

3-D

ec-1

0

3-J

an-1

1

3-F

eb

-11

3-M

ar-1

1

3-A

pr-

11

3-M

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1

3-J

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-11

3-J

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11

3-A

ug-

11

3-S

ep

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3-O

ct-1

1

3-N

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11

3-D

ec-1

1

3-J

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2

3-F

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-12

3-M

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2

3-A

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12

3-M

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2

3-J

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-12

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12

3-A

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We

ekl

y av

era

ge li

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-hau

l rat

e

(lan

e a

vera

ge =

10

0)

Corridor 9

Corridor 4

Rate stability - by corridor

0

50

100

150

200

250

300

3-O

ct-1

0

3-N

ov-

10

3-D

ec-1

0

3-J

an-1

1

3-F

eb

-11

3-M

ar-1

1

3-A

pr-

11

3-M

ay-1

1

3-J

un

-11

3-J

ul-

11

3-A

ug-

11

3-S

ep

-11

3-O

ct-1

1

3-N

ov-

11

3-D

ec-1

1

3-J

an-1

2

3-F

eb

-12

3-M

ar-1

2

3-A

pr-

12

3-M

ay-1

2

3-J

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-12

3-J

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12

3-A

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12

3-S

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-12

We

ekl

y av

era

ge li

ne

-hau

l rat

e

(lan

e a

vera

ge =

10

0)

Corridor 9

Corridor 10

Seasonal patterns – by corridor


Annual rate change - by corridor


-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.


Relationship between lead time and rate


• High rate premium for same-day pick-ups

• Beyond 3 days, rates are stable

Impact of lead time by season


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.


Ongoing challenges


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

“… individual experiences may vary…”


Thank you!


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Spot-market Rate Indexes: Truckload Transportation Andrew... · •Changes in spot-market rates...

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