By Matt Harding | Vice President, Freight Market Intelligence Consortium | Chainalytics
In my last blog, we talked about the abundance of information in transportation markets and that more data is not always better. Buyers of transportation services face difficulties in converting data into relevant insights because market conditions constantly change behind the daily grind of real-world priorities surrounding efficient and competitive execution. We also raised the prospect that the changing technical and analytical landscape is creating new opportunities to address these challenges through increased speed and efficient representation of transportation markets at lower costs. This blog will discuss how analytics and technology are now developing into a potent remedy for understanding current and future market conditions that enables better decision making for buyers of transportation services.
Across industry, thousands of organizations annually spend anywhere from 25 million to multiple billions in transportation expense dollars. The dual challenge of increasing customer satisfaction and controlling costs lead to key decision makers asking the same questions: “where is my cost relative to the market?” and “what does the future hold for rates?”. Knowing the relative market position offers opportunities for cost savings; however, knowing where the market is heading offers direct feedback on the aggressiveness in which they should be achieved – or not. So how do we answer these questions and why is technology such an important part of the equation?
Spot premiums, contract rates and the forecast
Most companies operate their transportation on a routing guide that designates specific carriers on a lane at a predetermined price and weekly volume requirement. When markets are soft and a surplus of capacity exists in the market, route guides generally work very well. When markets are tight and a limited capacity occurs – they fail. Basic stuff. What is not so basic is how market-level business conditions – in aggregate – offer a glimpse into the future. This visibility is key to structuring a route for success in the long term. Enter the subject of spot premiums and contract rates.
While seasonality and other events change the balance of capacity on a regular basis, roughly 90% of transportation costs in large organizations is executed on a contract rate. The other 10% is an annoyance for most shippers and requires a spot rate. The price difference to a contract rate is what we call a “spot premium”. This premium is either negative or positive based on market conditions – the more volume that enters the spot market, the higher price for those shipments ranging from 20% to well over 100% of contracted rates.
Looking across $50B of transportation spend which occurred over five years, we have concluded that the scope, severity and the persistence of high spot premiums lead to a measurable – but delayed – uptick in contract rates. The critical impact that measuring the spot market premiums has on the overall health of the transportation market cannot be overstated – it is a leading indicator of the state of capacity that forecasts everything from new equipment purchases for the asset providers to adopting capacity-centric bid strategies for shippers and 3PLs.
So what does this mean for improvements in forecasting? Spot market premiums offer a “canary in the coalmine” opportunity that provides shippers a means to forecast the 90% of volume that is the derived from contracted rates.
The evolution of benchmarking transportation is entering a much more interesting paradigm. Data is being collected in real-time. Contract, spot and forecast measurements are live, and visualization technology allows strategic and tactical information to address specific network opportunities, as well as broader market-level insights. This evolution is bringing greater clarity and decision support to executives who are expected to manage significant amounts of transportation spend with deliberate intention.
More broadly, the current renaissance of data and visualization technology is different now than in the past partly because it’s not just about measuring business parameters at a lower cost – the focus of these tools for the foreseeable future is more human in nature and results from advanced algorithms and machine learning to gain insights and understandings about behaviors and interconnected relationships within the data. The linkage between outcomes and specific strategic decisions are embedded in the residual information created in transactional systems, and only now are algorithms evolving to understand and quantify those linkages – in very affordable solutions.
Those steeped in data are excited about the transformation that is occurring. Data is not just about calculating and summarizing – it’s about explaining complex decisions across an entire industry and bringing that value to market for more intelligent decision making.
Matt Harding is vice president of Chainalytics’ Freight Market Intelligence Consortium (FMIC). Chainalyltics’ FMIC provides strategic freight market intelligence, benchmarking and comparative analysis to its members in a private forum.
Read Part One of Matt’s Blog to learn more about how FMIC and Chainalytics help our clients navigate a complex transportation world: