Echo Global Logistics CEO Waggoner assesses market conditions, with an eye on the future

Logistics Management Group News Editor recently spoke with Doug Waggoner, CEO of Chicago-based Echo Global Logistics about various topics, including: capacity and rates, Peak Season, the election, and logistics technology, among others. Their discussion follows below.  

LM: Echo delivered a strong third quarter amid what you called a “challenging environment of constrained capacity and supply chain disruption.” That said, what do you think have been the biggest changes in the market going back to March, at the onset of the pandemic in the U.S.

Waggoner: Going back to the latter part of March and into April, what we saw certainly was a lot of people working from home a lot and a lot of businesses went remote. In particular, the smaller shippers seemed to shut down. It was a very chaotic time for everybody and every business. The larger shippers seemed to stay open and were relatively unaffected, but then when things started to open up again later in May and into June, we saw that a lot of smaller shippers had a backlog of orders. They shipped them and then depleted their inventory so they then had to order more inventory in maybe bigger quantities. But there were delays from their suppliers, which created a backlog and down the road, when trade resumed from Asia you had a lot more coming into West Coast ports. In June, July, and August, we saw this surge of freight. And another thing that happened simultaneously with that is as people were spending more time at home and could not travel and go on vacation and not staying at hotels with business travel coming to a screeching halt, people started buying more stuff. And when you buy stuff, it has to move on a truck so we benefitted from that. The demand side was really a kind of a rebound from the trough, and it has continued to hold up. Retail goods are flowing pretty well, and people are drinking more beverages and eating at home more and using consumer goods at home and not the office. There are all these unique twists to the demand side and then on the supply side, many truckers had reduced workforces at the trough, and a lot of those truck drivers, once they got unemployment and supplemental dollars to go with it, decided to stay at home, because it is a tough life and you can make the same or more money staying home. A lot of people chose to do that. Even when those benefits started to expire, there was a sense that a lot of drivers believed there would be a second [stimulus] program and elected to stay home.

LM: What about the impact of that on truckload carriers?

Waggoner: Ones that I have talked to are having difficulty finding drivers, and truck driving schools, where a lot of larger carriers typically source from, are either shut down or have minimal enrollment. They cannot find the drivers, which, in turn, has caused them not to buy more trucks. We saw truckload rates go up 19 weeks in a row in the third quarter, and, if you looked at Class 8 truck sales, the first time they exceeded replacement level orders was in September. The last time that happened was October 2019. There really is a shortage of trucks, and, to the extent that demand stays strong, it is going to keep truckload prices elevated and keep capacity tight and make it harder for shippers to find a truck. That is where Echo adds a lot of value.  

LM: DAT recently reported that spot market rates in October really saw a big increase. Where do you think spot market activity has impacted things the most, given where it is, at the moment?

Waggoner: We saw it in 2018, when we had the same market conditions. In October 2017, we had the two hurricanes and you could not get trucks into or out of south Texas and that kind of disrupted the national network for a couple of months. And then there was the ELD mandate in January 2018 and that had an impact. We have some of the same market conditions now, with respect to supply and demand. The way it works between contract and spot is when these larger shippers that have routing guides run an RFP bid and award lanes to truckers and brokers…and prices go up and up, truckers say no thanks and can go get a better rate in the spot market and the brokers kind of follow suite. And when a shipper offers loads to their carrier and the carrier says no thanks, it still has to move the freight to their customers so they put it into their spot market pool, with every shipper generally having its own rules, but generally speaking, when it is put into the spot market pool, all of the participating carriers and brokers can bid on that freight and charge at a market price. They don’t have to adhere to their contract commitment…and because a shipper has to move its freight it will then do it. That is a little bit self-correcting, because then what happens is the shipper has very attractive contract rates because the prices have gone up so much in the spot market. But if a shipper cannot move its freight, it becomes willing, at some point, to renegotiate contract rates higher in order to avoid putting so much freight in the spot market, where the rates are even higher. Sometimes it will all get rebid, and sometimes a shipper and its carriers will make a gentleman’s agreement for an increase or will run what is known as a mini-bid, and will take the lanes where they are feeling the most pressure and re-bid those. The whole reason the shipper is motivated to do that and basically end their contractual rate just to get their freight out on the spot market and back into their contract at new rates. As that happens, you will start to see some freight move back from spot into contract. That is kind of how it ebbs and flows. If you look at 2019 market conditions, when there was plenty of capacity, there was virtually no spot freight. At Echo, we are really good at spot freight, and, in those market conditions, we had a much higher percentage of contract [freight] than spot. And, in these market conditions, our spot increases because it is there and kind of reduces the proportion of contractual freight.  

LM: Addressing Peak Season, many truckload carriers have stated that if you have not locked in capacity pretty early this year, then chances are high it is only getting tougher to do so. That said, how have you been working with customers about Peak Season planning and securing capacity at a time of the year when it has become scarce?

Waggoner: That is even more of a factor with small parcel shipping, because it is pretty well known that UPS and FedEx are at capacity, and even Amazon is telling customers to order early or your orders will not come in time for the holidays. It is probably felt more in the small parcel arena than it is in truckload. However, before it can be small parcel, it has to get to the distribution center and that is usually via truckload so some of what we have been seeing for the last couple of months is probably the precursor to Peak Season.

LM: With things so unusual and people spending more on goods than services, has that put a heightened onus on this year’s peak, coupled with the pent-up demand among consumers, due to the pandemic?

Waggoner: People are staying at home and spending more money on products…and that is what has been fueling demand, and interweaved into that is Peak Season and pre-holiday activities. And it is hard to extract that part out, and, frankly, we don’t try that hard, as we are more interested in the execution of the freight we are offered. It is kind of hard to distinguish, at this moment, what about this market is due to COVID-19 and what is due to Peak Season and they are probably intertwined.

LM: When we look at the high level of U.S.-bound import numbers in recent months, the numbers are breaking records regularly, of late, which was preceded by very bleak volumes over the first half of the year. Do you think there is some evidence that the high levels of demand represent a combination of peak and inventory replenishment, which are serving as the levers that are driving these increased import levels?   

Waggoner: There was a bleak period of time, where there were no vessels coming across the Pacific, and that created a backlog, and the next couple months focused on working off of the backlog, which was then compounded by Peak Season demand, too. I also think that for shippers, with suppliers taking them longer to get them product than in the past, that they might be ordering larger [quantities of] inventories, in anticipation of another potential shutdown.

LM: How do you view the freight market, with a new Biden administration coming in next year, in terms of things like the business outlook and the regulatory perspective, too, for things like tariffs, trucking, and infrastructure?

Waggoner: I think a lot of that hinges on whether or not the Republicans keep the Senate or not. If they do, it is probably going to be business as usual, because it is going to be tough to pass legislation that is too lopsided with a split Congress. The things I would keep an eye on are this whole drivers’ safety issue with hours-of-service and drug testing, which seem to be in flux all of the time and can dramatically affect capacity. Another thing to watch is insurance for motor carriers, with insurance companies raising their rates related to some of these nuclear verdicts being awarded to victims of accidents that involve a truck. These have forced insurance companies, in some cases, to double the premiums and reduce the coverage. For some small carriers, that is another cost burden on them.

LM: How do you view the future distribution of a COVID-19 vaccine, from a logistics perspective, in terms of the challenges it presents and how it could bring the supply chain together, in some ways?

Waggoner: My understanding is that most of these vaccines need to be stored super cool temperature settings, and I think that is going to eliminate most motor carriers. I think you will see more airfreight, as well as the military being involved. I don’t think the distribution of a vaccine is going to affect what we do, as it will be more specialized for airfreight and delivery vans and that sort of thing.

LM: What are some of the things Echo is going to be paying attention to in 2021.

Waggoner: I think there is going to be a lot of M&A, in general, in 2021, all signs are pointing towards that. Another interesting topic that is getting some chatter is if should shippers think about how they re-price their routing guides. Traditionally, shippers run an RFP and tell the boss what their budget is going to be. And then we get into market conditions like we are now, those budgets get busted pretty badly, and those transportation professionals come under a lot of pressure internally in their own organizations for busting the budget. The flip side of that is to do it on a cost-plus basis, and that is a good way to do it. But there is a caveat, which is, for that to work, the shipper has to trust that it is using a broker that is getting it the best cost. If that is the case, then that type of arrangement can work, but you also want to make sure the broker—because it knows it is going to get an automatic margin—does not get lazy and not perform for the shipper. I think there is some sort of hybrid approach to pricing that can give shippers a little more certainty and keep their freight moving.

LM: What is Echo’s view on the digital freight matching (DFM) market, at the moment, with tight capacity and in regards to rates, too?

Waggoner: I would say that our digital freight marketplace is shaping up nicely, however, it is not a panacea. If you just strictly relied on algorithms to set your prices in this market, you are going to leave a lot of money on the table or lose money. In this kind of market, where prices go up 19 weeks in a row, most algorithms can’t keep up with that rate of change. You need to have a balanced approach. The other thing is not all shippers and not all carriers are all that sophisticated. Our strategy is to have all of the technology, analytics, and data science, for those that can consume it. We certainly are going to use it internally, for our own internal productivity, but in terms of connecting to the outside world, we have the digital freight marketplace for those that can consume it and for those that are less sophisticated, we can work with them however they want to work. Another reason for our success is that we have deployed against the market in a very broad fashion. I do think it is going to continue to take hold, and it is going to favor the bigger players and the people that are technology-oriented and have the capital to do it. I think it is going to make it more difficult for the smaller players to keep up.

LM: How do you view things on the technology front, in terms of things like AI, ML, autonomous vehicles and things like that?

Waggoner: I would say that has been a big part of our recent success. About five years ago, we started implementing data science, and we have a team of people that are constantly doing mathematics and analysis and use a variety of tools, like machine learning and spatial temporal analysis and multiple regression analysis and create models with some sort of predictive capability, which makes us better and makes us smarter and makes us price more intelligently. It makes us more efficient, so, in many respects, it guides decisions that humans have to make, and gets us to the answer quicker. It has been an important part of our success over the last couple of years, because some of those projects are really starting to take hold. And just like companies have a technology roadmap, today many have a data sciences roadmap. The more success we have with it, the more things we dream about doing with it. I think there will be a day, just like how Amazon and Netflix and others use data for everything they do now, logistics will be in the same place.