The Waterfall Theory Of Freight

Freight rates are dictated by routing guide compliance. A shipper that achieves nearly 100% of routing guide compliance will continue to optimize its spending by taking advantage of lower-priced carriers. If a shipper sees compliance in its routing guide break down, it will be forced to buy capacity in the spot market, often at higher rates.  

If a market is decelerating (tender rejections are falling), spot rates are likely to fall until they hit the market floor. 

The market floor is equivalent to the collective operating cost of carriers. At this point, rates are unlikely to fall below.  

If a market is flat (tender rejections are near zero), in the short term there will be continued downward pressure on spot rates until rates hit the market floor.

If a market is strengthening (tender rejections are increasing), there will be upward pressure on rates. There is no ceiling on rates, but if rates stay high for an extended period of time, new capacity will enter the market. 

SONAR tracks routing guide compliance by tracking tender rejections and other data to determine if routing guides are likely to break down in the near future. This data is then compiled and compared against other data sets, including financial and operational data from hundreds of carriers, brokers and shippers. 

Using data derived from hundreds of operating and financial metrics of over two hundred carriers, we calculated the average operating cost of carriers across the market. We then backed this into the "base rate" across the market. This is basically the cost of what it takes to operate a truck in the market. This is considered the base rate. 

Then we built an algorithm that multiplies the base rate against the tender rejection data to get the current market condition rate, using historical market spot rates. 

The market condition rate is then trained against the HAUL index to allow for individual market conditions. If a market has a negative HAUL value, it's considered a backhaul market and rates can follow below the base rate. If a market has a positive HAUL value, it's considered a headhaul market. 

Keep in mind that the rate for any given lane is determined by both the origin and destination; the price of a truck has as much to do with the attractiveness of certain destination market as it does with the availability of trucks in a given origin market.

Adjusting the base rate by conditions in those markets gives the team a scientific model of "today's rate" by origin/destination pair.

Today's rate is then forecasted out a year by looking at the historical rates and future direction of the market, using SONAR data from thousands of sources. The rates adjust for seasonality variations in the model and other financial and operational components. 

The model also becomes smarter over time as more data is fed into it. Significantly, our models for each market interact with each other, so a surge in volume in Atlanta, for example, will affect how we think about the availability of capacity out of Macon.

Image Sourced from Pixabay