Volume has a large influence on capacity, but it is not the only thing that matters when judging the freight market. (SONAR chart of OTVI.USA and OTRI.USA)
FREIGHTWAVES’ SONAR CHART OF THE WEEK (Dec 16 -Dec 22, 2018)
Chart of the Week: Outbound Tender Volume Index versus the Outbound Tender Rejection Index (SONAR:OTVI.USA and OTRI.USA)
Trucking capacity has been on a roller coaster ride in 2018. Coming out of an eventful second half of 2017, the freight market appeared to be in uncharted territory in terms of volatility and network disruption. FreightWaves proprietary outbound tender rejection index (OTRI) was developed for the purpose of identifying when and what direction the freight market was moving – a declining rejection rate indicates capacity is increasing and an increasing rejection rate indicates capacity is decreasing. The tender volume index (OTVI) was developed to measure how freight volume was impacting freight capacity. Intuitively, one would think volume and capacity are as intertwined as the two pieces of bread that make a pretzel. Looking at a chart of the OTRI and OTVI it reveals the two concepts are related but not perfectly correlated.
Trucking capacity, by its simplest definition, is the availability of someone to drive a load from an origin to a destination at a given time. There are two main reasons capacity is unavailable. The most obvious reason is there is simply no truck available to carry the load. The less obvious reason is that the carrier has a better use for the truck. In other words, they are getting more money to haul other freight.
Tender rejection rates were relatively high in early 2018, averaging 23.60% throughout March and April. Most of this was due to the fact many freight contracts were negotiated well below the market rates on the transactional or spot market at the time. Contracts between companies and carriers are not like contracts in other industries. The contract only guarantees the rate if the carrier accepts to haul the load. On the other end, the shipper does not give any volume guarantee. It is a very relationship driven business agreement on both ends. Too many loads rejected, and the shipper gets upset. Low or inconsistent volume from the shipper, and the carrier gets upset.
In early 2018, carriers could not afford to haul freight at 20-30% lower rates than they could assume on the spot market. Before you get too upset with the carriers, think about it like you agreeing to take 20% less than your co-workers for doing the exact same job every day just to be considered a “good person”. Now imagine your boss continuing to increase your workload and your co-workers get bonuses for all the “extra” work they do. Depending on your relationship with your boss, you are going to either leave and get a better paying job or attempt to negotiate a raise based on the current market conditions.
Looking at the OTVI, the early part of 2018 volume was only 2% higher on average than it is now, but tender rejection rates are over 1,000 bps lower than the March-April average. After a volatile start the market has stabilized. One of the main reasons we see this divergence in the second half of the year is the consistency of outbound shipment origins. The Los Angeles market has driven freight volume as inbound containers pour in from China in front of tariff concerns. Consistent outbound volume from a market enables carriers to adjust their networks and manage supply more effectively. So it is not only volume that matters but consistency as well.
About Indices presented in this article
(SONAR: OTVI.USA) Outbound Tender Volume Index – USA – An index of freight volume based on March 1st levels with a base value of 10,000. An OTVI value of 10,100 indicates a 1% increase in volume over the March 1st level.
(SONAR: OTRI.USA) Outbound Tender Volume Index – USA – The average rate at which carriers are rejecting loads. An OTRI value of 10% indicates carriers are rejecting one out of every ten loads offered by shippers.
About Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry- in real time.
The FreightWaves data-science and product teams are releasing new data-sets each week and enhancing the client experience.
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