Is the U.S. truckload market more volatile than ever before (Part 3)
By 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.
This is the third article in a 3-part series.
Earlier in this 3-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 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.
In our final article, we’re drawing some conclusions, digging into strategies to prepare for future market shifts, and considering what, if anything about the 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.
Did you catch the webinar for this series? Kinetic's Ryan Schreiber interviews Chris Pickett, Kris Glotzbach, and Noam Frankel in a fascinating conversation about the state of the market and how to prepare for future market shifts. Watch it here now.
Let's look at the question we initially posed: Is it just perception or are these cycles starting to occur more frequently 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 says, is why a small shift can be so disruptive to supply chains. The U.S. GDP, which breaks down to roughly 77 percent services and 23 percent goods in a normal economy.
“Even a 10 percent swing in spending from services to goods is a more than 30% increase in goods that needs to be shipped,” Heller says.
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 says.
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 and 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 says. “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 and RFPs in the near future?
In the short term, for companies that are predominantly contract-biased, 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 says. “[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 3 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 says.
When commitment is an issue on all sides, larger industry-wide changes will need to take place in order to solve the contract problem.
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 says. 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 says.
When you understand how things behaved in the past, he says, it won’t be as abrupt of a change when another shift happens.
This methodology also applies to strategy diversification. Being spot biased 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.
We hope you enjoyed our three-part series and webinar on making strategic decisions in a volatile capacity market. If there’s anything we missed or if you just want to talk shop, feel free to send us a note.