Freight forecasting is the process of developing predictive models of what the freight market will look like in the future. This could range from short term (24 hours) or long term (more than one year). The freight market is the area of the economy where the movement of goods are priced and take place. In other words, it is all about the liquidity of the global supply chain.
A freight forecaster develops a model of what freight rates will be in the future. Freight forecasters also project risks (financial and physical) to supply-chains that will disrupt the flow of cargo or cost of transportation from one location to another. Examples include weather, earthquakes, geo-political, capacity disruptions, etc.
Freight forecasters have the pulse on the global freight market, understanding the context of how freight moves between modes and how capacity and freight demand are impacted by external elements.
A freight forecaster tracks different segments of the economy and has a pulse on how freight is moving across all modes of traffic.
What is the purpose of freight forecasting?
The main purpose of forecasting freight is to determine the specific capacity needed to move freight from origins to destinations and monitoring disruptions to capacity in the market. The amount of capacity allocated to the amount of freight moved is the most important factor in determining freight rates.
Frequently used data sets for forecasting freight volumes and rates are economic activity data, import/export data, tendered load volumes, tendered rejection rates, weather, critical events, traffic and current freight rates.
One of the most important calls that freight forecasters can make is predicting when issues in one mode — spot truckload, for example — will spill over into other modes. Because SONAR is the only truly multimodal freight data platform in the world, it’s a necessary tool for a holistic understanding of the transportation industry.
By presenting air data alongside maritime, trucking and rail, SONAR allows freight forecasters to acquire a real-time view of the fundamentals driving the North American industrial and retail economies. SONAR data contains leading indicators for everything from regional economic performance to individual retailers’ sales volumes, industrial production and international trade.
The charting and mapping functions in SONAR display data on both micro and macro levels. If a freight broker wants to know what the price of a truck from Atlanta to Chicago will be next week, she can find it in SONAR. If a commodities trader wants to know how many trucks are visiting oil well sites in West Texas, she can use SONAR to find it. If an economist wants to know how many containers the United States will import from China next month, it’s in SONAR.
What is the role of a freight forecaster?
- Collect and analyze economic and freight data (Industrial Production, Purchasing Managers Index, SONAR) to model long term trends in load volumes and capacity.
- Create freight forecasting models to estimate load volumes and available capacity across multiple shipping modes (truck, rail, intermodal, ocean, air).
- Forecast freight rates for specific transportation modes based on freight demand and capacity trends for specific origins and destinations.
- Identify seasonal and structural load volume and capacity trends to anticipate volatility in freight rates.
- Monitor weather, news, and seasonal freight calendars to identify events or disruptions that are taking place in the global freight map or are likely to at some point in the future.
- Quantify opportunities where it makes the most financial sense to use contract rates or spot rates to secure capacity.
- Develop a strategy for utilizing multiple modes (full truckload, less-than-truckload, intermodal, rail, ocean, and air) depending on freight rates and transit times.
Why forecast freight?
Forecasting freight volumes and rates is essential for building financial forecasts and budgets for companies that sell products that are shipped. The basics of a company’s financial budget include an annual forecast of sales, cost of goods sold (labor and raw materials), shipping, cost of sales and marketing, along with management and administrative expenses.
While finance and accounting usually control a company’s budgeting and forecasting process, each department submits its own individual forecast. The sales department estimates the annual sales for the year, which is then used to calculate how much raw material and labor will be needed to manufacture products. The shipping and logistics departments use both the sales and cost-of-goods-sold estimates to build freight forecasts across the different transportation modes they need — truckload, less than truckload, intermodal, rail, ocean, air — to estimate shipping costs.
The value of a freight forecaster
Having the volume of products along with the origins and destinations is important, but it is only half of the equation. Freight forecasts also need to estimate freight rates for all products shipped across different transportation modes.
Forecasting freight rates is one of the most difficult tasks. The number of variables involved in forecasting freight rates is almost infinite. Freight forecasts depend not only on a single company’s freight volume, but on the freight volumes of the entire economy. Freight forecasts are also dependent on the amount of capacity needed to move these volumes. In times when volume exceeds capacity, freight rates increase, and when capacity exceeds volumes, freight rates go down. The magnitude of these imbalances determines the volatility in rates.
Imbalances in volume and capacity can happen seasonally each year, or a structural imbalance can take the freight market months or years to correct.
Determining which transportation modes to use adds yet another layer of complexity to forecasting freight. Certain modes, like trucking, are highly fragmented, whereas others are regional monopolies or duopolies, like railroads. With any of the major transportation modes, shippers can switch in and out of each mode depending on rates and delivery timelines.
The margin of error in freight forecasting has a major impact on a company’s bottom line. One of the prime examples of the importance of forecasting freight appeared in the first and second quarters of 2018. The sharp increase of volumes outstripped available capacity and sent freight rates soaring which caught most companies off guard. This had a significant impact on the quarterly earnings of publicly held companies. Most cited freight costs as having a significant negative impact on their bottom lines, with several attributing their earnings misses solely to freight rates.
Skills of a freight forecaster
Using a professional freight forecaster is essential. Freight forecasters balance the art and science of building models to determine where demand, supply and rates will go in the future.
The art includes evaluating the variables to include in a forecast and how significant each variable is within the freight forecasting model. The science involves using historical patterns for all variables to build a freight forecasting model that has the power to explain how these variables account for the results of the freight forecast.
With the right combination of art and science, a freight forecaster can keep freight costs in line with the company’s budget.
Freight forecasting tools
The tools needed to build a freight forecast are varied. These include rate forecasts for multiple transportation modes, industry and macroeconomic research, diesel pricing, weather forecasts, and financial market data, to name only a few. The key is gathering all this diverse information into one easy-to-digest data source.
FreightWaves SONAR is designed to do this for freight forecasters. It includes hundreds of data sources for volumes and rates in multiple modes of transportation, along with economic data, weather analytics, financial market coverage and news coverage.
Having all of this data in one platform allows a freight forecaster to spend time analyzing the data and building a freight forecast, rather than collecting the data.
Becoming a freight forecaster
Freight forecasters learn their craft by trial and error. Forecasting is difficult to master in any industry, but it is even more difficult when a forecaster has to evaluate the global economy to determine which direction freight rates will go over the course of a year.
Besides experience, the most important skills for a freight forecaster are analytical skills, intellectual curiosity, an open mind and the ability to make decisions despite high levels of uncertainty.
Data used in freight forecasting
Economic data — This includes forecasts that encompass the economy as a whole (called macroeconomic data) along with forecasts that cover specific industries or markets (microeconomic.) The most popular macroeconomic forecasts include forecasts for the gross domestic product (GDP), ISM Purchasing Managers Index (PMI) and the Producers Price Index (PPI). Examples of microeconomic forecasts include the future price of oil, housing starts and a company’s own internal forecasts.
Tendered load volumes — Tendered load volumes are the number of loads shippers tender to transportation providers (carriers and third party logistics providers). This measures the demand side of a forecast.
Tendered load rejections — Tendered load rejections measure the available capacity for contracted rates. This is done by determining the frequency of carriers rejecting a tendered load from a shipper. When tender rejections rise, it suggests the number of trucks willing to haul loads for the contracted rate is decreasing. When tender rejections fall, it indicates the number of trucks willing to accept contracted rates is increasing.
Weather – The weather can play havoc on the capacity map. Tracking hurricanes, blizzards, flooding, or general weather conditions can help a freight forecaster anticipate a surge in demand or a disruption to capacity.
Seasonality – Seasonality is a key driving force in the capacity and demand makeup of the freight market. Produce season, Chinese New Year, Black Friday, and beverage surge season all have an impact on freight demand. Produce yields (up or down) can impact how much freight gets moved. Knowing when the Chinese New Year is can impact the flow of cargo into ports, as well as, the movement of Black Friday can shift e-commerce shipping cycles.
News alerts – Staying informed with different developments such as trade policy, strikes, bankruptcies, or supply shortages can all have an impact on freight flows in and out of a nation.
Research Reports – The goal of any freight forecaster is to stay on top of changes in the freight market. A freight forecaster has a pulse on events that are disrupting the market today and could disrupt in the future. The develop quality forecasts, the forecaster must stay informed of events and turbulences that may take place in the future. One way to do this is to subscribe to research reports and develop relationships with industry analysts that track industry trends.
Capacity – Knowing how much capacity is available in the market at any moment in time is critical to understanding the availability (or lack) of equipment to haul a shipment. Knowing how much capacity has been produced (i.e. number of trucks) and available for dispatch helps drive how much supply is the market and therefore drives rates and capacity access.
Freight rates — Cargo and capacity dictate rates in specific markets and modes. The two primary markets for truck, rail, ocean and air are the contract and spot markets.
- Contract market — Trucking rates based on an agreement between a shipper and carrier for a specific origin and destination and estimated volume. The agreement is usually non-binding and can be adjusted by either the shipper or carrier when the demand for trucks changes.
- Spot market — Trucking rates based on one-time or inconsistent load volumes for specific origins and destinations based on the current demand for trucks. This is the most volatile market, in which trucking rates are negotiated on a load-by-load basis.