Extent and implications of dynamism in demand and supply in road freight

Typically, the outbound dispatch model for a mid to large size company which ships goods entails the following characteristics.

  • It rarely operates an owned fleet unless the network consists of a few but fixed shipment points or the shipper requires specialized vehicles.
  • There are 3-5 transporters empanelled per cluster of operating lanes (source destination pairs).
  • There is no direct spot freight management by shipper in marketplace. Transporters themselves engage in spot market through preferred broker partners.
  • Maximum of 30-40% of loads served by owned vehicles of transporters, rest served through market trucks sourced by transporter on spot.
  • Rarely does a transporter give a placement guarantee within stipulated hours for open orders. However, there are clauses on assured placement within stipulated hours from order acceptance time.

Shippers fundamentally care about four needs of their operations. Firstly, the availability of supply (carriers or trucks) for their loads. Secondly, ensuring that supply is willing to work within a stipulated price band. Next, ensuring that the first and second needs are satisfied across different times of the year. And lastly, ensuring that all these aforementioned needs are managed across multiple combinations of origin-destination pairs and types of goods (hence a limited set of truck types).

So why is it that most shippers engage transporters to manage truck placement, do not operate in the spot market themselves and mostly manage road freight on contracts. It is because demand and supply are dynamic across the country and the shippers need a partner to immune themselves from the dynamism and the complex daily planning associated with it.

Let us understand dynamism in demand and supply by first understanding how spot truck pricing fundamentally works. For a given source, destination pair and a truck type, pricing is based on the following principles:

A. Operating cost

  1. Factor costs

    • Variable (distance dependent) : fuel, tyre wear, toll, maintenance, driver per diems, incidentals
    • Fixed (distance independent): loan EMIs / depreciation, driver fixed salaries
  2. Distance

B. Demand - supply gap

  1. Steady state gap between demand and supply at origin vs at destination
  2. Temporal demand surges during specific days of the week, month or year
  3. Cyclical supply disruptions during specific periods of the year
  4. Cyclical supply shift to a competing market with demand surge
  5. Sporadic supply disruptions

The dynamism in operating cost is majorly on account of fuel (constitutes 40-70% of the FTL rate). Most contracts factor in a ‘diesel price variation’ clause and hence carriers are immune from ‘losing out’ on fuel rate related cost structure changes. However, carriers have to average out a predicted view of demand-supply gap on the portfolio of lanes and vehicle types they plan to serve while bidding for contracts. Nevertheless, they still have to absorb the price shocks, if any.

Demand-supply gaps for full truck loads exist for every origin-destination combination, for a particular truck type and for a particular time period (prices usually sustain for a week for a given origin-destination-trucktype). Let us understand illustratively and simplistically to what extent demand-supply gaps exist.

Steady state gap between demand and supply at origin vs at destination

If a carrier is taking loads from region A to region B, it needs to plan for return loads from region B to region A. Unless the carriers are operating their owned trucks, have contractually agreed to bring them back to region A empty and have factored this into the contract pricing, in all likelihood, they would search for return loads. Had there been balanced demand in both regions A and B, the prices from A to B and from B to A for the same truck type, would have been almost the same. Any differential between prices from A to B and from B to A, therefore reflects the steady state demand-supply gap at origin vs the destination. For example, in spot markets, rates from Mumbai to Guwahati region are 70% of the round trip price between the two markets (as against 50% in a balanced demand scenario). Rivigo’s Prime network is a representative example of the issue being described.

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Only about a third of the lanes we operate in are fully balanced on both sides on an average across the year. In the rest of the lanes, the price differential between onward and return legs will be at least 20% and can go as high as 50% for some lanes.

Temporal demand surges during specific days of the week, month or year

It is a well known observation that demand from manufacturing organizations peak during the end of the month, quarter or financial year. This is evident from the manufacturing indices such as Index of Industrial Production (IIP) data published by Government of India.

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There is a marked surge for consumer non-durables sector in the month of May and December versus the rest of the year. Also, for consumer durables, the end of the financial year surge is more prominent than that for consumer non-durables.

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However, there statistically significant differences in weekend and weekday prices as well in 15-20% of country’s lanes. This reflects the varying demand during weekends versus that during weekdays in those lanes.

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Cyclical supply disruptions during specific periods of the year

Supply is primarily determined by the availability of truck pilots during different times of the year. Our illustrations show how the number of state and national holidays vary significantly quarter on quarter where pilots may opt to go on leave, resulting in pilot shortage and hence a truck shortage.

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Number of such holidays increases significantly during the first quarter of the new financial year (Apr-Mar), troughs in monsoons and peaks again third quarter. These shortages, which again vary state to state, will result in selective price shocks on account of supply shortages or additional salaries doled out by fleet owners to compensate for during such periods.

Cyclical supply shift to a competing market with demand surge

Supply side price shocks can also be caused by more attractive lanes (with attractive pricing) which open up in the vicinity of a particular lane. For example, truck supply on route A to B may face shortage if rates on A to B’ becomes price attractive during specific periods of the year.

Consider the example of the agriculture sector and more specifically the fruits and vegetables businesses. Six fruit families contribute to more than 70% of India’s fruit production by weight. There is variation in the peak plucking seasons for each fruit and for each of the top producing state. And fruits, which are not purchased under MSP or any state or central food security agency and which are not supported by a cold storage ecosystem, need to be moved in peak seasons.

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Hence, supply of trucks (usually Open trucks) is diverted to major producer markets in these states and prices from original truck mandis shoot up.

Another example is of e-commerce sector. Specifically in the Sep-Nov period, which overlaps with the holiday season and the mega sales from these companies, there is increased demand for Container vehicles to ship items in the consumer durables segment from vendor locations to major warehousing hubs such as Gurgaon, Bhiwandi, Hyderabad, Bangalore and Kolkata. Supply is diverted to such hubs at the expense of temporary supply disruptions in spot markets for other destinations.

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Rivigo’s freight marketplace gives several insights on how demand and supply gaps change with time across states differently. For example, there is a surplus supply originating from Maharashtra in July to December period versus the rest of the year. Similarly, unmet demand goes up in states such as Uttar Pradesh in the same period, indicating an increase in rates from truck markets in the state.

Sporadic supply disruption

These events are difficult to predict more than 12 months in advance and can only be anticipated and factored in closer to the event. For example, announcement of state elections is done closer to the election months with a gap of 4-6 months. Even more sporadic and uncertain are weather related disruptions such as cyclones, heavy rainfall or extreme fog.

These events may lead to occasional supply disruptions in one micro-market as trucks could be stuck in at the origin of the previous leg or can take longer than usual to cover similar distances.

Recollect that shippers have four fundamental needs.

  1. Availability of supply for their loads
  2. Ensuring that supply is willing to work within a stipulated price band
  3. Ensuring that 1 and 2 are satisfied across different times of the year.
  4. Ensuring that all these aforementioned needs are managed across multiple combinations of origin-destination pairs and types of goods

Therefore, keeping these needs in mind and from the discussions above, there are few definitive takeaways for shippers and carriers alike.

  • Demand-supply gaps and dynamism of the same across states and months are inevitable. Such is the nature of business and supply chains are meant to adapt to them.

  • The extent of dynamism explained above is stark but understated because of simplistic illustrations. Demand-supply gaps exist:

    • From mandi to mandi and not state to state
    • Across more than 30 vehicle types and not a single type as assumed, and
    • Across weeks and not quarters
  • Shippers have two choices to overcome the fluctuations and the resultant price variations in spot rates.

    1. Pay a premium on freight bill: By dedicating supply of trucks to one’s organization paying a premium over average spot rates or outsourcing operations


    1. Introduce digital-led elasticity in their logistics: By onboarding a digital freight broker themselves or through their transport partners and collaborate with other shippers on digital platforms for more transparency.

The first method is already in practice and has lead to several unsolved marketplace inefficiencies as discussed in our point of view earlier. It is time, the industry takes cognizance of the second method. It is one of the very few ways in which unmet demand and supply can be matched at valid prices across millions of lanes and truck type combinations.

Write to us at nfi@rivigo.com