What is freight forecasting?
Freight forecasting consists of creating models based on a variety of data sets, including key indicators for both demand, or the amount of freight that will be shipped, and supply, the number of trucks, railcars, vessels and airplanes needed to move products between specific origins and destinations.
The main purpose of forecasting freight is to determine the specific capacity needed to move freight from origins to destinations. 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.
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.
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.
