Shipper lead times shrank by 5% on average in 2019 compared to 2018 as capacity was almost guaranteed throughout the year — indicated by the Outbound Tender Rejection Index (OTRI) falling from over 15% to around 5% early in the year. Lead time is the amount of time between order submission and requested pickup date measured in days. Through the back half of 2018 the average lead time was 2.74 days, while the average for the last 6 months in 2019 was 2.6 days. The decline in lead time may not seem like a big deal to most who are unfamiliar with freight or transportation, but lead times are an indication of shipper perception — that perception has changed over the past two months.
FreightWaves Tender Lead Time Index (TLT) measures the average lead time for contracted freight tenders. Several factors influence lead time changes, some of the main ones are:
- Special projects (i.e. multiple week's shipments submitted all at once normally for seasonal items or rollouts)
- Shippers' concern over capacity
The first two reasons listed have a short-term impact to lead time, while the third is more of a long-run development, which is what occurred in 2019 in response to the softer conditions.
Looking at the chart, there is an obvious connection to increasing lead times around holidays, when shippers push as many orders as they prior to leaving their businesses. Many of these orders are for the days following the holiday. The problem with this practice is that it leads to demand side gluts, where multiple days shipments are scheduled to ship all at once. Many carriers are either on home time — industry term for when drivers are off the road — or stuck awaiting their customer's return so they can get unloaded in the days following holidays. Spot market rates increased 3% to 8% in the days leading up to the major national holidays this year.
Roll On Out
Special projects are when some of the larger shippers have major roll-outs or longer running inventory replacements. Many of these occur as seasonal inventories are pushed into storefronts. Shippers have a set schedule for when inventory needs to be in the distribution centers or stores so they can market the products effectively. If the promotional effort begins with no inventory, shippers miss potential sales along with now carrying extra inventory in their warehouses. March and April are prone to lead time increases from this type of behavior.
In all circumstances listed, increasing lead times are grounded in shipper's perceived need for capacity or expectation of carrier availability — both of these are tied to the basic concept of scarcity. Over the past 12 months, shippers have given carriers less time from order to requested pickup date because capacity has been consistently available or less scarce.
Scarcity not only impacts price but also behavior. The holiday shopping season is a perfect example of scarcity impacting behavior. Shoppers across the country place orders for gifts weeks ahead of when they need the item, when most other times of the year a trip to the store the day or week before will suffice. Shippers cannot order trucking capacity too far ahead of time however.
The problem with ordering capacity too far into the future is the number of things that can interfere with planning, such as weather events, customer delays, and traffic. Any delays can throw carrier schedules into disarray, making planning exponentially difficult after about three days.
Ideally, carriers want as much lead time as possible, but the reality is that they cannot plan reliably too far out into the future and shipper cancellations or reschedules increase significantly after about 5 days.
Same-day or next-day pick-ups — 0 or 1 day lead times — are the most troublesome for carriers to manage unless they are the ones initiating the transaction. These types of pickups have the highest rejection rates, and incur significant cost as carriers struggle to position drivers with enough hours to drive in an area on short notice. Carriers pass along this cost if they can. In a soft environment as we have seen in 2019, carriers lose a lot of this ability due to elevated competition.
Towards the end of the year, lead times increased along with rejection rates as capacity tightened. Lead time increases led tender rejection increases slightly in this scenario. Interestingly, the same pattern was not present last holiday season save for the holiday increases.
Lead times have been trending higher since early October, whereas they fell slightly last year. This could be another early sign of the market turning towards a tighter environment in 2020. It probably wont be evident through the rest of the winter as volumes traditionally plummet.
About the 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 a Market Expert 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.
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