Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

When Reading the Market Generates More Heat than Light

MoreHeat

Shipper anxiety over freight rates often tracks with the upward movement of industry indexes, and since the Stephens Index recorded 6.5% year-on-year (YOY) and 0.8% sequential increases for the first quarter of 2011 (See Figure 1 and Figure 2 respectively), we thought it timely to put this uptick in perspective.

The Stephens truckload market index monitors rates per mile for the loads moved by a representative group of publicly traded carriers. 

Figure 1:

Stephens_2011_2

Figure 2:
Stephens_2011_2 fix
The YOY growth is indeed significant and, understandably, a concern for many shippers. However, it is entirely possible that the next two quarters will bring more favorable news. This observation is not based on blind optimism but a dispassionate analysis of freight market trends.

In making the YOY comparison, it is important to remember that rates were still going down in the first quarter of 2010. Moreover, for the index to continue ascending at the current pace for the rest of this year, it needs to notch up increases of 2.7% and 2.5% sequentially for the next two quarters. Since the index’s inception in 1998, the market has only ever recorded five sequential increases greater than or equal to 2.5%. In other words, in percentage terms the required increases have only happened 9.6% of the time. In fact, since its inception, the index has averaged a yearly increase of 1.85%.

It is also worth noting that the new motor carrier safety program Compliance, Safety and Accountability (better known as CSA 2010), is unlikely to become a rule until early 2012 or later.  Additionally, the proposed new HOS rule will not likely be finalized until late 2011 (for more information on CSA 2010, look for an update on this subject in a future blog or read the past blog How to Start Preparing for CSA 2010, by Jason Craig, November 4, 2010). So even if any disruptions associated with the program do occur, they are probably not going to have much of an influence on this year’s freight rates.

Of course anything is possible, and we are not suggesting that the Stephens Index will inevitably turn south for the remainder of 2011. Perhaps there will be above average increases over the next two quarters. Either way, the point is that the latest figures should not be a cause for panic. Shippers need to be aware of long term market trends and not make rash decisions on the basis of short term data, particularly when procuring truckload transportation.

If you have a feeling of déjà vu then you are indeed paying attention! In a post published more than a year ago (Truckload Procurement Exercises, March 25, 2010) I noted that shippers frequently ask us about the timing of truckload procurement exercises.

All too often, we see shippers who don’t want to conduct a bid procurement exercise when the market shifts and prices increase. The rationale is usually something along the lines of, “if I bid now, my carriers will take an increase.” We agree that it’s possible, but we think a different scenario may be more likely.

Depending on what carrier agreements are in place, the specific procurement strategy being followed, and the overall marketplace, a shipper’s Tier 1 carriers may very well have little to no incentive to accept tenders. As a result, the buyer is forced to move down to Tier 2 carriers — or lower. The shipper typically has to pay more, spend more time managing freight and endure significantly lower service levels.

Clearly, this is not always the case — but we think it is more often than not.  If there is a sustained shift in the marketplace, shippers must address rates or potentially suffer through problems relating to capacity, cost and service levels.

It is perhaps one of the strongest arguments in favor of adopting a TMS and business intelligence tools. In the words of the well-known thought leaders Peter Drucker and Edward Demming, “If you can’t measure it, you can’t manage it.”

Which brings us back to the rising Stephens Index. The index is measuring truckload freight rate movements, but it is up to users to manage the expectations that these movements generate. Just because the curve starts to climb does not mean that industry temperatures should follow suit!

 

- Director, Research and Market Intelligence, C.H. Robinson
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