Chart of the Week: Logistics Managers Index — Transportation Utilization, Transportation Pricing (SONARLMI.TPUT, LMI.TPPR)

Like a heartbeat on an echo-cardiogram after a flat-line, trucking has found a pulse. After months of under-performance compared to 2018, volumes finally showed growth from a year-over-year perspective in August. Unfortunately for carriers, these volumes did not translate to a significant increase in transportation prices, which would be well timed leading into the upcoming bid season that typically occurs in the last few months of the year into January when many shippers place their transportation bids for the upcoming year. But there is positive news, as the Logistics Manager’s Index (LMI) for transportation utilization increased for the second consecutive month in August.

The
LMI is a collection of indices that are produced in a collaborative effort by
Arizona State University, Colorado State University, Rochester Institute of
Technology, Rutgers University, and the University of Nevada, Reno in conjunction
with the Council of Supply Chain Management Professionals (CSCMP).

Like the Purchasing Manager’s Index created by the Institute of Supply Chain Management (ISM), the LMI indices are based on a value of 50.0 being equilibrium with a reading above 50 indicating expansion and below being indicative of contraction. In August, the utilization number went from 53.2 to 55.1 while the pricing index value fell marginally from 49.2 to 48.9, indicating better utilization with continued softness in transportation prices. So how can utilization improve, while prices remain subdued?

Freight volumes are up YoY, while capacity has expanded, leading to lower rejection rates. Chart: SONAR – OTVI.USA, OTRI.USA

Earlier in the week, we reported on how there was no driver shortage as all signs point to an oversupplied market on the capacity side. Looking at the numbers, this becomes very apparent as volumes averaged over 3% higher this August versus 2018, while base spot rates were down 18% on average compared to last year from $1.71 to $1.40 per mile. There were higher volumes on lower rates. Tender rejection rates averaged 17% last August versus 4% this year, indicating carriers were much more willing to honor their contracted rates this year.

As
with an undersupplied freight market, as we saw in 2018, an oversupplied market
takes time to correct. Utilization always leads rate changes, regardless of
direction. As carrier utilization improves, capacity tightens and vice versa.

Utilization is the lifeblood of any carrier operation. Trucks that do not generate revenue lose money. Once a carrier commits to the purchase of a truck, it can be several years before the cost of that truck is recovered.

Trucks are a depreciable asset. This means carriers can spread the cost of the truck over several years if it chooses. Many large capital expenditures are treated in this manner, so the costs do not make any single month look worse than they were. This also allows time for the truck to generate revenue to offset the cost of purchase. If the truck sits idle, the cost remains on the income statement while revenues do not grow reducing profit margins and operating ratios. Increasing utilization does not mean increasing rates every time, but it is a step in the direction of higher rates.

It is apparent the supply of trucks is being reduced as trucking failures continue to be at multi-year highs and growing. If volumes persist, there could be a slowing of supply side contraction in the fourth quarter.

The post Trucking utilization improves while prices remain suppressed appeared first on Logistics Marketing.

SHARE:

ABOUT THE AUTHOR

Blythe Brumleve
Blythe Brumleve
I've spent more than a decade in print, digital, and broadcasting. Now I help other companies build their online presence by generating leads, gathering insight and growing revenue.

Outsmart Your Competition

#TeamNoSpam