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Characteristics of Spot-Market Rate Indexes for Truckload Transportation ASSACHS NSTTUT By

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Characteristics of Spot-Market Rate Indexes for Truckload Transportation ASSACHS NSTTUT By Characteristics of Spot-market Rate Indexes for Truckload Transportation ASSACHS NSTTUT by Andrew Bignell I ' B.A. (Hons), Business Administration University of Western Ontario, 2007 Submitted to the Engineering Systems Division In partial fulfillment of the requirements for the degree of Master of Engineering in Logistics at the Massachusetts Institute of Technology June 2013 © 2013 Andrew Bignell. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly Paper and electronic copies of this document in whole or in part. Signature of A uthor.................................................... Andrew Bignell Master of Engineering in Logistics Program, Engineering Systems Division ayWO;013 C ertified by ................................................ (j/ Dr. Chris Caplice Executiv e Director, Center for Transportation and Logistics Thesis Supervisor A ccepted by................................................. ... ...................... Prof Yossi Sheffi ia Gray II Professor, Engineering Systems Division Civil and Environmental Engineering Department Director, Center for Transportation and Logistics Director, Engineering Systems Division 1 Characteristics of Spot-market Rate Indexes for Truckload Transportation by Andrew Bignell Submitted to the Engineering Systems Division In Partial Fulfillment of the Requirements for the Degree of Master of Engineering in Logistics ABSTRACT In the truckload transportation industry in the United States, a number of indexes are published that attempt to measure changes in rates, but no single index has emerged as an industry standard. Industry participants, particularly those exposed to the spot-market, have found that existing indexes do not effectively represent their experiences in the marketplace. A widely-used and valid spot-market index could allow for more effective tactical decision-making, the development of freight derivatives, stronger analysis and negotiation of contract rates, and contracts with index-tied rates. This paper examines pricing indexes from other industries and expands upon a framework of characteristics that support successful indexes. Using this framework to evaluate existing industry indexes, it finds that two commonly used indexes are not designed appropriately for use by the spot-market. It also examines rates experienced by a large North American provider of non-asset based logistics services and finds that they differ significantly from rates measured by existing indexes. The analysis suggests that indexes of the spot market would be improved by disaggregating rate information based on geography and tender lead time. Thesis Supervisor: Dr. Chris Caplice Title: Executive Director, Center for Transportation and Logistics 2 Acknowledgements To my MIT Supply Chain Management colleagues who have always been free with their time and ideas as this thesis has taken shape. And also to Dr. Chris Caplice and Thea Singer, for their ongoing support and advice. Finally, to my parents - they always believe in me and support me in my ongoing adventures. Thank you. 3 Table of contents L ist of figures....................................................................................................... .. 7 L ist o f tab les...............................................................................................................8 1 Intro du ction ......................................................................................................... 9 1.1 T rucking industry basics...................................................................................10 1.2 Procurement of transportation..........................................................................12 1.2.1 The spot m arket.................................................................................. 12 1.2.2 Contracting with non-asset based carriers.....................................................13 1.3 R ate variability........................................................................................... 14 1.3.1 Impact on contract execution...................................................................14 1.3.2 Impact on brokerages...............................................................................15 1.4 Factors that influence spot-market rates..............................................................16 1.4.1 G eographic factors............................................................................... 16 1.4 .2 Other factors..........................................................................................18 1.4 .3 Fu el....................................................................................................18 1.5 R esearch questions.........................................................................................19 1.6 C hapter sum mary...........................................................................................20 1.7 Looking ahead........................................................................................... 20 2 Indexes....................................................................................................... .. 2 1 2.1 Indexes design characteristics - basic framework.................................................. 21 2.1.1 Index calculation and data collection - evidence from other industries...................23 2.1.2 Index management - evidence from other industries...........................................26 2.2 R oles of indexes......................................................................................... 28 2.2.1 Price visibility and opportunistic optimization..................................................28 2 .2 .2 D erivatives...........................................................................................29 2.2.3 Development of risk-sharing contracts....................................................... 29 2.2.4 Evaluation of contract agreements and the value of risk-avoidance.......................31 2.3 C hapter sum m ary...........................................................................................32 3 Review of existing truckload industry indexes............................................................33 3.1 Indexes and other market information................................................................33 3.1.1 DAT Trendlines and RateviewTM.................................................................35 3.1.2 Cass Truckload Linehaul IndexTM ........................ .. ....... ....... ........ ....... ...... 37 3.1.3 Stephens Freight Index..........................................................................39 3.1.4 C hainalytics..........................................................................................40 4 3.1.5 Morgan Stanley Freight Indexes...............................................................41 3.2 Comparison of index characteristics.....................................................................42 3.3 C hapter sum m ary....................................................................................... 44 4 Profiling the dataset........................................................................................... 45 4.1 D ata preparation......................................................................................... 45 4.2 Data description .................................................................................. 46 4.3 Comparison with existing industry indexes..........................................................48 4.4 G eographic distribution....................................................................................49 4.5 T ender lead tim e......................................................................................... 52 4.6 Chapter summary....................................................................................... 53 5 Geographic disaggregation - Corridors........................................................................55 5.1 Corridors as the basic level of disaggregation.......................................................55 5.2 Rate units................................................................................................. 56 5.3 Examining rate behaviors by corridor...................................................................57 5.3.1 Differences in magnitude of weekly average rates...........................................58 5.3.2 Differences in variability of weekly average rates...........................................60 5.3.3 Differences in seasonality of weekly average rates.........................................62 5.3.4 Differences in trends of weekly average rates................................................62 5.4 W eighted index...........................................................................................63 5.5 C hapter sum m ary....................................................................................... 65 6 Temporal disaggregation - tender lead time and day of week.............................................67 6.1 Lead time and day of week: OLS regression.......................................................67 6.1.1 OLS regression: Corridor 1......................................................................68 6.1.2 OLS regression: Corridor 10.......................................................................70 6.1.3 OLS regression: All corridors...................................................................72 6.2 Temporal disaggregation: Implications..................................................................73
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