10 lessons from 10 years on the road

Brokers are a critical element in making the market more efficient in terms of price discovery and asset utilization. There is a tremendous amount of data to be aggregated in the center of a transactional marketplace. This data can provide unique insight into the habits of capacity and the flow of goods. In isolation that data reflects the brokers’ relationships across their network, while in totality across all brokers that data can reflect a material portion of the overall market. In a future in which we gain increased transparency into the kaleidoscope of the market that brokers collectively represent combined with contract carriers and private fleet operations, we can begin to better measure the supply-and-demand dynamics of the truckload market.

3.     Logisticians Will Continue to Make Supply Chains More Efficient.

In seeking to optimize the holistic supply chain for a given shipper, logisticians can benefit from scale and density over a portfolio of growing shippers. When increased visibility into the movement of freight markets becomes a realization through data and technology, it will be increasingly feasible for logisticians to continue to seek out efficiencies that had not been possible in years prior. Given this dynamic of increased information, visibility and transparency directly enabling new levels of efficiency, logisticians continuously will be challenged to improve their offering to shippers to keep up with competition.

4.     Forward-positioned Inventory Management and Final-mile Distribution Networks are Dynamically Evolving at an Accelerating Pace.

We are amid a transition from goods sold by print-based retailers and distributed through USPS to e-commerce and instantaneous delivery. The storage of forward-positioned inventory and the final-mile distribution of goods to consumers are in a state of evolution. Consumer spending habits and the desire for instant gratification are at the heart of this trend, which appears to only be constrained by the speed of the internet. Predictive analytics on consumers will continue to home in to seek out transparency with increasing accuracy and precision, but certainty may prove ever elusive, requiring inventory management and final-mile distribution networks to remain highly dynamic.

5.     Global Warehousing Remains the Bullwhip of the Consumer.

Warehousing and distribution networks will continue to be a bullwhip as forward-positioned inventory requirements dynamically evolve. Global warehousing networks need to be flexible to keep up with these constantly changing patterns along with the practical constraints and market dynamics of transportation. Inventory stocking solutions, storage and retrieval systems, facility layouts and geographical positioning all constantly should be on the dynamic decision block. The market transparency that is granted to decision makers will enable them to be proactively prepared for upcoming demands instead of reacting to current market environments.

6.     Rails Can Accelerate Organic Revenue Growth.

The railroad industry in North America has a rich history and culture. In some instances, Class I railroads are regional duopolies, while in others they compete directly with truck. The Class I railroads have done a tremendous job in recent years optimizing for operating ratio through continuous improvement plans and implementing precision scheduled railroading (or forms of). Their economic model is highly efficient for high-density lanes of freight. They are positioned to capitalize on demographic trends pointing to increasingly urbanized populations in a highly efficient fashion. The next evolution of the rail space should involve proactively competing for growth on truck convertible freight, which starts with gaining transparency into O/D pairs and freight classifications to build dense lanes.

7.     The Full Cycle is the Unicorn of the Transportation Market.

Transportation is heavily exposed to force majeure, which makes it uncommon to witness a full cycle. We can perfect predictive analytics to model weather patterns, political events, international conflict, shifts in commodity markets and the like to gain visibility into the future. Unfortunately, visibility is not the same as certainty. The future is inherently uncertain. Living in a world of full certainty would be a fundamental evolution for humankind, one that we’re perhaps not prepared for. We can and should, however, do our best to strive for transparency into our knowledge of the world so that we can continue to move forward in as optimal fashion as our knowledge and information enables us to. 

8.     The Concept of Modal Rotation is one of Actionable Insight.

Understanding the interrelation of markets, sectors, subsectors and companies can enable one to have a strong view on the Bayesian implications for other endogenous factors. That is to say “IF some EVENT is coming, THEN what will be the implications for this MODE (or subsector) and what is the impact of the next MODE (or subsector)?”

So for example, IF a hurricane is flooding Houston and irregular route truckload carriers are seeing rates move north of 15%, THEN dedicated truckload carriers should prepare to negotiate 10%+ rates over the coming months AND LTL spill could impact tonnage by respective network capacity driving CWT and utilization AND THEN intermodal rates could be pushed 5%+ DURING WHICH brokerage gross margins will compress until contract rates expand and the spot market settles, pushing gross margins back toward peak AFTER WHICH logisticians will be pushed to reoptimize supply chain networks.

When we are prepared to think through a comprehensive set of future outcomes simultaneously and their subsequent impacts, we can begin to develop optimal operational plans to be positioned to outperform in our respective competitive environments. In transportation markets the concept of modal rotation is one in which we can better understand how different modes or subsectors of transportation interact given a current operating environment. Attaining transparency into the market will give us the ability to better predict modal rotation.

9.     Capital Allocation Remains a Game of Risk/Reward.

One of the beauties of the American system of capitalism is that it rewards risk-takers who are successful while also protecting certain elements of downside through bankruptcy. By purchasing public securities, private companies or assets for a business, capital allocators take the risk that they may lose their principal. The domestic railroad industry is one that greatly exemplifies how strategically allocating capital in the face of risk can create greatness that is unparalleled anywhere else in the world, despite its imperfections. Portfolio managers continuously think through the best way to balance their capital allocation given their current market knowledge. Dealmaking has the potential to create economic value whether through arbitrage, synergies, strategic alignment and the like. The best dealmakers can use this knowledge to avoid playing zero-sum games and continuously seek economic value for all parties involved. Executives seek to accelerate the organic growth of their businesses by strategically allocating capital to initiatives that provide them with the highest likelihood of success. What’s universally true across all different capital allocation decisions is that transparency provides the decision maker with the highest likelihood of success in the face of uncertainty.

10.  Deregulation and Regulation Have and Will Continue to Play Key Roles in Shaping the Space.

Deregulation in the form of the Motor Carrier Act of 1980 and the Staggers Rail Act of 1980 are arguably the two most material pieces of legislation for the transportation industry that shape the present state of the industry today. Many senior executives to this day have spent large portions of their careers navigating us through these turbulent times and have an extraordinary appreciation for how significant the impact of deregulation has been. Similarly, a current trend of regulation continues to have a material impact on the landscape of the marketplace, albeit not as tectonic as the deregulation that occurred in 1980. Less abrupt but still notable regulations such as hours of service, the drug and alcohol testing database, electronic logging devices, positive train control and the like continue to impact the space and are expected to continue to incrementally constrain capacity while increasing safety standards. Developing transparency into both the timing and the potential impact of incremental regulation will help inform both regulators, industry associations and operators alike.

The vision of FreightWaves is one that projects transparency into the marketplace using data, analytics and information for the betterment of transportation providers, shippers, investors and the economy as a whole.