Latest / Freightvine / Andres Mendoza Pena, Kearney | Forged in Disruption
Transcript
- Chris Caplice: This is the truckload market update for 23 July 2026. In dry van, we saw the change in active contract rates increase 4.1%, spot rates increase 2.9%, and the current level of replacement rates for dry van is 10.6%, which means on average, new contract rates coming in are about 10% higher than the ones that are replacing. Now this lags a little bit, and we'll talk more about that in a second. The market gap between spot and contract for dry van is 20 cents a mile. Hello and welcome to the Freightvine Podcast. This is your source for all things freight transportation. I'm Chris Caplice chief scientist here at DAT Freight and Analytics. And today my guest, fresh from Argentina's stunning win over Egypt last night in the FIFA World Cup, is Andre Mendoza Pena, partner at Kearney. I Andre on the podcast this year, as I've done in past years, to discuss the latest CSEMP Kearney State of Logistics report titled Forged in Disruption. Now the primary takeaway this year. Hi Andre, welcome to the Freightvine Podcast. Andres Mendoza Pena: It's a pleasure to be here, Chris. Chris Caplice: Yeah, you're you're obviously excited because we're in the as we record this, Argentina just had a miraculous win. Or is that the wrong word? Had a great win ⁓ last night. Andres Mendoza Pena: Yeah, yeah, well, ⁓ be careful. Don't get me talking about workout because you might need to run this for like two, three hours, Chris. Chris Caplice: Yeah, yeah, yeah. And most Americans still don't understand the you can't explain offsides to me. I just don't understand it. And some ⁓ V A R I am not a fan. It it there's some calls in there, it's pretty crazy. rather than World Cup, we're gonna talk about the latest ⁓ state of logistics report that Kearney has been doing with C S C ⁓ P for the last several years. And so this year's report is called Structural Volatility. spot above contract. Year for year change in spot rates is forty-three point seven percent, biggest I've seen in the last several years. year over year change in contract rates 15.3%. So a little under half, really a third. In temp control, we also saw contract rates rise 1.2%, and spot rates rose 1.4%, with the current level of replacement rates between for temp control is 8.9%. Is that uncertainty is no longer this temporary fog that will eventually lift. Instead, volatility is the baseline operating condition for global supply chains. In our conversation, we explore why the old playbooks of extreme cost optimization and single sourcing are being replaced by a need for resiliency, adaptability, and speed. discuss the reality of a hyper-con-interconnected world where a geopolitical conflict or a natural disaster on one side of the globe. And last year's report was Navigating the Fog. So I was at when I asked the question, why this title? What does structural volatility mean? Andres Mendoza Pena: Yeah, yeah, yeah. The official title is Forged in Disruption, right, which refers to the structural volatility. look, ⁓ key difference from last year ⁓ the point uncertainty is not temporary, right? And when you think about... Chris Caplice: The market gap between spot and contract for temp control is six cents a mile, much smaller than ⁓ dry-van. And the year-over-year change in spot rates is about 23.6%, and change year over year in contract rates is about 10.8%. So intermodal, we found that ⁓ contract rates rose 3.5%, spot rates dropped 0.3%. but it's it's there's so little spot in intermodal. But we'll talk more about that in a second. Can impact day-to-day operations of a supply chain on the other. Andre explains how the current environment rewards optionality, and this is pushing companies to manage more fragmented, multi-country supply chains, with Mexico emerging as a safe bet for many firms. We also discuss the practical applications of AI and logistics, hopefully moving beyond the hype to identify real proof points in workflow redesign, exception management, and route optimization. Furthermore, Andres Mendoza Pena: the fog, well the fog is a temporary condition, right, then you expect that fog to eventually lift to some extent kind of ⁓ back to normal. Well, the reality is that ⁓ volatility a ⁓ baseline condition and basically supply playbooks ⁓ now need to designed ⁓ to deal with of, you know. Chris Caplice: Current level of replacement rates for intermodal is negative 2.5%, which has been negative for a couple periods now, which is surprising. Market gap between spot and contract is negative 12 cents a mile, where contract is above spot. And the year-view change in spot rates is 7.8%, and year-veryear change in contract rates for intermodal is 9.2%. Okay, finally, flatbed. We saw contract rates rise slightly, 0.1%. It's been creeping up for the last several periods. We touch upon the rapid progress of autonomous trucking, which is quickly approaching cost parity with human drivers and holds the potential to fundamentally reshape network design. we define a new critical challenge that the report calls network drift. This occurs when a series of reactive one-off tactical decisions leads to an unnecessarily complex and expensive network. To counter this, Andre stresses the importance of applying scenario planning to help an organization. Andres Mendoza Pena: continues volatility and that means need to be designed for resiliency, adaptability, speed. other words, we should not be waiting for a return to That's not gonna happen. Chris Caplice: Spot rates up 3.2%, but we see the current level of replacement rates for flatbed is 11.3%. Been double digits for a c a little while now. Market gap between spot and contract is 16 cents a mile for flatbed, where spot is above contract. And year-over-year change in spot rates for flatbed is 32.8%, and it's 15.3% for contract rates. Okay. ⁓ contract rates are up across the board, spot rates are up across the board, except for intermodal. Identify non-regret moves or strategies that provide positive outcomes regardless of how the future unfolds. So join us for a deep dive in how to thrive in a world of constant disruption. And following my conversation with Andre, I'll present the latest truckload market update. So let's get started. Let me ask you a question, 'cause I I I I fear that we're we have recency bias and we think that I don't know if that's the right term, but we think that this days right now are the most X than they've ever been. But it's always been uncertain, hasn't it? did you see a an area where is it looking over our shoulder and it seems like it was so stable back then? But at the time it seemed like we always have uncertainty. Which is, you know, staying steady, point three percent drop. spot rates were up twenty to forty percent year over year, ⁓ while contract rates are up ten to fifteen percent ⁓ for drive and temp control and flatbed. So we're seeing big increases over the short ⁓ time, looking especially looking at year past. Replacement rates are going through the roof again, have been for the last three ⁓ periods or so, and all are positive between nine to eleven percent, again, except for intermodal. Intermodal is the outlier here. Andres Mendoza Pena: Yeah, yeah, we as humans, I think we tend to overestimate near term issues and underestimate longer term or long term issues. If you take a step back, right, in the last few years, we've been through a global pandemic that happens once in a century. Chris Caplice: And similarly, the gap between spot and contract rates is anywhere from six to twenty cents a mile, again, except for intermodal. So we're well within a tight market cycle. It started in December 25, it's continuing on, and our best estimates are that it'll continue through 27, or through 26 rather, and into about half of 27. ⁓ the cycle, we're guessing it'll be around, you know, 18 months or so from ⁓ spot ⁓ exceeding contract before. Yeah. Andres Mendoza Pena: We have a underway in ⁓ Europe years. have ⁓ the U.S. engaged in a conflict the nuclear power. We have ⁓ an ongoing ⁓ battle because of this ⁓ policy that the ⁓ administration has embarked on. And shouldn't forget about series of natural disasters that have become more common ⁓ the last years. And then you should lay over some local conflicts that erupt in the last few years. Chris Caplice: spot will drop below contract, that half of the whole cycle. ⁓ but we'll see how that goes. We'll see how the Q three and Q four shipment volumes come in. But for right now we are seeing we're in a tightening market and it'll continue to tighten for the next certainly several months. That's it for the truckload market update for twenty three july twenty twenty six. Andres Mendoza Pena: So Chris, think when you take that step back and look at that big picture, I don't think it's hard to conclude that we are going through a period of exceptional volatility and disruption. And I am afraid that, well, no one is counting on another kind of global pandemic in the near term. All these other factors. geopolitical dynamics, ⁓ local conflicts. ⁓ Unfortunately, the it's hard to discount any of those. So hence this that we are in this period of ongoing ⁓ volatility. Chris Caplice: Yep. That that's So I think ⁓ yeah, perhaps, but do you think? Well, a couple of things. I don't know if you read anything by Steven Pinker. He's ⁓ at Harvard and he talks about how the decline in violence. And so as far as over the years, this is even with the war in Ukraine and top of Iran, it's still a blip compared to what it was, what it used to be, if you go back a hundred years, two hundred years, you know, in the history of man. ⁓ but I wonder if it's what makes is it that there's more volatility or they're aware of it more now? And that if something, you know, if a butterfly flaps its wings, I feel the effect. Is it because we're so connected now? Because it used to be if there was a war between two countries and weren't trading between them, it wasn't impacting us. Is it the connectedness or is it actually the number of disruptions? Andres Mendoza Pena: Well, that's very interesting angle, I what you're saying is true. What is also true ⁓ is we are living a more interconnected world. ⁓ And supply chains global. And the reality is Chris Caplice: Yes. Yeah, yeah. Andres Mendoza Pena: These issues ⁓ ⁓ seeing are happening in Europe, in the Middle East, or somewhere in end up impacting our lives ⁓ because of this interconnectedness exists. Chris Caplice: Right. Yeah, it's the downside or not it's the reverse side of the coin of globalization where you have more efficiency but you're more at risk because you have more partners. To me it's the same thing as different different topic, but similar to this, the digitization of a lot of business opens the door to fraud because it's easier if if business is done with a handshake and you're face to face, it's harder to Andres Mendoza Pena: 100%. Chris Caplice: have fraudulent activity than if it's all digital transactions. So the efficiency of globalization, of of digitization has a downside. And maybe we're just finally recognizing that. Andres Mendoza Pena: Yeah, I think it's a reality. And specifically ⁓ supply chains, the I reckoning is that the period of over efficient supply chains, extremely focused on cost ⁓ optimization, ⁓ inventory that mentality, that kind of playbook that work well for ⁓ Chris Caplice: Yeah. Andres Mendoza Pena: years, unfortunately, it's not relevant ⁓ these circumstances, right? And therefore, need to now ⁓ change mentality and ⁓ again, call to recognize this period that is kind of forcing disruption, ⁓ Thinking supply chain executives specifically. Chris Caplice: Yeah, yeah. So no, it's an interesting discussion 'cause the other thing is you talked about damage, hurricanes and natural disasters and things. I I know the the the financial damage of property of ⁓ hurricanes and things that have gone way up, but not necessarily 'cause there are more storms, but we now build b bigger things and houses on the shore. So there's more property put at risk. So there's some of that as well, but yeah. Andres Mendoza Pena: Yeah, yeah, yeah, yeah. That's again, right? it's called population growth and you have development in areas that were not, thinking about supply chain and logistics, those disruptions impact flow of trade the movement of goods, right? And it creates disruptions in supply chains. Chris Caplice: So the interconnectivity of supply chains, global supply chain, because it's very hard to think of a supply chain. I always ask my students, think of a supply chain that doesn't cross a country's border. It's very hard, unless it's like spring water. And even then, you know, most of it comes, you know, gets moved around. but but the question is, what is the response to this? So one is, okay, I have a more flexible supply chain, but the other, the the the call that we hear a lot is bring everything back. Andres Mendoza Pena: Yep. Chris Caplice: And have everything isolated because then you're not if you're not interconnected, then you're kind of buffered from all of this. What what are you seeing in companies? Are they moving to one, the more f keep keep the connectedness but be more fluid and flexible? Or let's bring it all back home and keep it buffered? Andres Mendoza Pena: Yeah, yeah. I can tell you that there are different responses and there is no silver bullet, right? ⁓ That's for sure. ⁓ we do see ⁓ the on ⁓ Chris Caplice: Sure, sure, sure. Andres Mendoza Pena: just moving away from single source The traditional play of focusing on China suppliers, we all know that that's a that thing of the past. We are seeing ⁓ a strong momentum across Asia. of course, Vietnam, Malaysia, India, Mexico, of course, is a clear winner in these dynamics. Some companies are bringing manufacturing into the US. I think, if I don't recall wrong, think Toyota recently announced ⁓ a facility ⁓ the US, a facility in the US. ⁓ The key, yeah. Chris Caplice: I guess my my question is, are you seeing companies do one or the other or are they it's more of a portfolio? Andres Mendoza Pena: Yeah, I I know. And that's a portfolio, right? At the end of the day, this new environment rewards optionality, right? And the ability to manage a more fragmented multi-country supply chain. Chris Caplice: Yeah. Andres Mendoza Pena: is critical, of course, without losing control of cost and service, right? And that's the challenge. To some extent, it's becoming a more sophisticated game. It's challenging to get right. But unfortunately, simple playbooks about cost efficiency, single source, low cost suppliers are a good strategy for these days. Chris Caplice: That make that make that makes sense. Let's let's get back to the reason why I brought you here to talk about the report. all we've talked about is the name, the title. ⁓ but let me ask ⁓ in writing this report, this is what, your fourth year doing this? Do you remember? Fifth year? Yeah. Andres Mendoza Pena: ⁓ yeah, personally, ⁓ so although I've been involved with the report for many years, many of our consultants ⁓ I've been a lead author, and this is my second year as my lead author, yeah. Chris Caplice: Okay, okay. So what was your biggest surprise? What's the biggest surprise that you found for looking at this year compared to previous years? Andres Mendoza Pena: Okay, I don't know if I can find the surprise because we live in this world, right? So basically when we put this report together, it's kind of a summary of the things that we have been on and seeing day to day. I believe a couple of things. One is the... Chris Caplice: Right, right. Andres Mendoza Pena: Slow down in the penetration of e-commerce that was But but then when you when you look at the the evolution you realize that there could be some still side effects from the COVID pandemic. And when you look at the long-term trend, the e-commerce penetration continues to grow at ⁓ the trend. And ⁓ the why I'm mentioning this is I think was a minor reduction, ⁓ I think, e-commerce penetration from one year to the other. I am not an expert in consumer behavior. I'll let that to the colleagues and focus on that. But reality is that the long-term trend, I think this is what we were discussing with our colleagues from the Consumer Research Institute that we have here at Kearney, that long-term continues and ⁓ will evolve. is, of course, ⁓ to get back ⁓ to more kind physical experiences that can explain some of these kind of near-term Chris Caplice: Yeah, yeah. Andres Mendoza Pena: know, volatility in that penetration. Associated with the ⁓ one big number ⁓ that was expecting, but the number was big was the ⁓ reduction parcel coming from China because of the ⁓ end of the de minimis. That was huge, right? So yeah. ⁓ Chris Caplice: Minimus. That surprised me, the impact. I think you you reported in there that it collapsed by eighty five percent from four million to six hundred thousand shipments per day. Andres Mendoza Pena: 4 million. Yeah. Yeah. That was a big number, right? So when I saw the number, said, those are the two numbers. said, OK, wow, this is interesting, But when you think about it. you have Ti Mu and Shane, that their entire strategy was based on leveraging these tax exception advantages, right? And they doing very well, right? Until they weren't. ⁓ basically that just down from one day to the other. Chris Caplice: Bit but did it did it shut it down or did it just shift it? I mean, is the same amount of volume going? Did is it's going more like by ocean, so it's probably a little maybe a more efficient mode of coming in. Andres Mendoza Pena: Well, no, sorry. Yeah, yeah, yeah. Look, at the end of the day, and going back to the consumer, the demand, the end demand is still there, right? And the consumer spending is not down. Chris Caplice: Yeah, yeah. Andres Mendoza Pena: has been shown to be extremely receded. Now we are seeing some signs, some elements that can put some question mark about what's going to happen in the rest of the year. But in general, consumer spending has been strong and therefore the demand is there. So how that demand is fulfilled, that's the issue. And that flow that was coming via air directly from China, well, that's the one that basically shut down. But then, as you are saying, that volume Chris Caplice: Yes. Andres Mendoza Pena: has been rerouted through other means. And even these companies that we mentioned, Shemontaine, Temmon Shane, they have changed their fulfillment model as well. So ⁓ are adjusting to the new reality. ⁓ The products are still getting into the hands of consumers. Chris Caplice: Right, right. Yeah. So let me ask you you mentioned about the slowdown in e commerce and we all saw during the pandemic just shot up, but then it fell down to its natural growth, very steep growth, but still but I was talking to some retailers and they're talking about how the distinction of what is e commerce, what is not, is kind of blending. And so do you think the term e commerce is gonna it's just gonna go away? Is there a a distinction for this? Because you have all the buy online, pick up and store, which is a dominant Andres Mendoza Pena: Yeah. Chris Caplice: method for a lot of for certain verticals. Do you see that going away? The e commerce? Is it it's it's blurring? Andres Mendoza Pena: Yeah, yeah. So, ⁓ I, I, I will, I will let my, my colleagues from the consumer research Institute to, to point on that. What I look, what I can tell you is that is true. That is ⁓ Chris Caplice: Okay. Andres Mendoza Pena: multichannel, right? How we consumers buy is more multichannel, right? All of us, you know, do some research online and then we can place the order and pick it up, but we just do the research and then go to the store and go exactly. Chris Caplice: All those different yeah. Andres Mendoza Pena: could be, I think that there is some element about how order is being fulfilled. And if there is an element, is the consumer going to the product or the product going to the consumer, right? That's at ⁓ least very simple way to about it. That's how I think about it. Chris Caplice: Yeah, too 'cause I I was just at a ⁓ transportation conference at a large retailer and they're now using they're talking about how they're using their in store stock to satisfy online when they can. So they have total visibility. It used to be if it's on the shelf you have no visibility really ⁓ until point of sale picks it up. ⁓ but that's changing things 'cause now the inventory might have come through the channel for in store, but it gets used for online. So it's kind of interesting how that's Andres Mendoza Pena: Yeah. Yeah. Yeah, 100%. And again, so look, my clients are transportation companies, logistics companies. So I think about how the product flows and where it ends, right? Does it end in a store? Does it end in the home of a consumer, right? So that to me is an important distinction. Yeah, know. Okay, so that's my world, right? Chris Caplice: ⁓ not how they pay it or how they find it. It's how it how the That's you. Yeah, yeah, yeah. Andres Mendoza Pena: But for others, that distinction ⁓ I think is very important. Chris Caplice: Yeah. Another big difference from last year's report this year is the how how it addressed ⁓ AI. And it seemed to move from being a potential thing to actual proof points. Can you talk more about that? What you've seen, ⁓ companies are are adopting or adapting AI? ⁓ Andres Mendoza Pena: Yeah, yeah. I believe that in ⁓ report, we introduced this simple to think about the different ways in which... models ⁓ been used or can be used, ⁓ there are four stages. Interpret, predict, recommend, and execute. Now with ⁓ AI you can see more on the execute, more of full extent of ⁓ actions that can be taken. The more concrete examples where we see entire workflows being now ⁓ and enabled by AI, would say, quoting, ⁓ that's very ⁓ application for exception appointment scheduling. freight audit, route optimization, ⁓ maintenance. These are all, I would say, very ⁓ workflows in which we are seeing that end-to-end redesign of the workflow the ability to leverage. Of course, you need to have clear data ⁓ it ⁓ then the economics that ⁓ sustain the business case. ⁓ something very important. Yeah, so I would say elements that we see in successful cases is workflow redesign, the clean data, and the clear economics. Chris Caplice: Yeah, so for the for workflow, what's interesting what I see when I talk to companies and we say is I haven't seen too many people do the complete end to end transaction, but they do it for pieces within. And it maybe it's just a matter of adopting and and getting into that, but it seems like right now it's more the the task than the complete workflow level. Andres Mendoza Pena: Yeah. Chris Caplice: ⁓ I in transportation I've seen this. There's I think ⁓ there's a lot of real time for dynamic procurement when you have an API connection and the shipper's making you respond within seconds. You know there's an there's a AI tool in there and it's it's going automatically. but beyond those things, have have you seen some complete end to end workflows? Or do you see it more task level? Andres Mendoza Pena: We are seeing some, we are seeing some, it's true that the of resistance is to bring the AI solution a specific task, right? ⁓ Without... ⁓ Chris Caplice: Do do you think that's just getting us is that like change management? You know, you don't implement everything all at once, you do a little piece and then you know it's like boiling a frog? Is that is that what we're doing? A little bit of AI, a little bit of AI. Andres Mendoza Pena: Yeah, it- Yeah, yeah, look, and I think with all these technologies, it takes some time for us, ⁓ to take advantage the value unlock that they can bring. I always have this example ⁓ of the... the layout of ⁓ that even when they implemented electricity, they will still having a layout in several different floors to leverage the hydraulic ⁓ setup, right? And then they realized that didn't need ⁓ that set anymore, that layout anymore, right? I believe that ⁓ is a big of that, but I do ⁓ Chris Caplice: Yeah. Andres Mendoza Pena: see some companies that are taking that step back and rethinking an entire flow and say, okay, let's revisit how we do appointment scheduling. Let's ⁓ how manage ⁓ preventive They do end-to-end workflow redesign. ⁓ Quite that's when you the big return on investment. Chris Caplice: So are you seeing it this is interesting 'cause I've talked to some companies and there seems to be two approaches. One is grassroots up, I've got this problem, maybe AI can help me with it, versus a dictate. You know, AI first, find an AI solution. Have you seen that changing? Have you noticed that? Andres Mendoza Pena: seeing both different environments. What I'm seeing is that to some extent is this element of let them ⁓ have, give access let figure it out. I believe that the challenge with approach ⁓ becomes the return on investment. And ⁓ am is that now there is a stronger emphasis on governance to understand, what are we doing? Who is responsible? What are the right priorities? When should we to get results? ⁓ So I'm seeing more and more companies implementing structures around the of AI to have the ability ⁓ to measure understand priority and deploy the resources in the right areas. Chris Caplice: Yeah. I know I know governance is really important because a lot of companies, you know, what what data gets trained, gets trained upon, and what do you release? And so most companies have a private instance and protect that. but I'm curious, and we should have opened with this, I guess. When you talk about AI, what do you mean? Because a lot of people, you know, when I was at Manifest and you go to some of these conferences or trade shows, if you use math, it's suddenly AI. you know, so you've got you've got Operations research, you've got statistics, you've got machine learning, and then AI. Do you have a classification or do you kind of lump some of those together? Andres Mendoza Pena: Yeah, look, think ⁓ is AI because it's sexy, right? ⁓ sales, right? ⁓ you have data analytics, right? When you have the model, Chris Caplice: Yeah, yeah. Yeah, yeah. Andres Mendoza Pena: making the recommendations or a model executing, being an agent that can execute, that's how we think about our proper artificial intelligence. But the reality is that it's a relatively loose term that is applied in broad sense. Chris Caplice: Yeah. 'Cause one of the areas you know we usually a lot of people think chat GPT or large language models and large language models are great for certain things. But more recently we've seen some work here at MIT as well as some of the partners we work with is reinforcement learning, which is another form of AI where it's ⁓ that you don't tell the machine or the robot how what to do, but you say the objective is X and they go they experiment through training and try to find up with different strategies. Andres Mendoza Pena: Figure it out, yeah. Chris Caplice: What have you seen adopted more in companies, the L LMs, where I'm using Chat GPT or Copilot or whatever, or there are more of these reinforcement learning models? Have you seen any of the reinforcement models? Because that's relatively newer than the LMs. Andres Mendoza Pena: Yeah, I have to be candid with you. I haven't much about reinforcement learning models. I also have to acknowledge that I'm not an right? So I can talk about it, but it's more on the use cases than the underlying ⁓ models it. Chris Caplice: Okay. But but but Andre, Andre, you're a consultant. You can talk about anything. Andres Mendoza Pena: Yeah, yeah, I know, but I'm also honest, right? ⁓ But ⁓ I can tell you ⁓ that... Chris Caplice: Okay. Andres Mendoza Pena: I've been looking into the driving space, particularly autonomous tracking space. And actually, we are ⁓ on a perspective with the ⁓ Mobility Initiative. And models progressing rapidly. the technology ready have trucks being 100 % off, ready in the routes. There are other considerations there. have regulations, economics, ⁓ but from a technology these new models. Chris Caplice: So Andres Mendoza Pena: are advancing at the very fast clip. Chris Caplice: Yeah, so but you raised really good point. So there are different gates that have to be done and so the technology gates getting better and and it's whether it's there, i I think it's it's sufficient if I'm driving in Arizona in the summer, right? In the daylight. But is it sufficient over the Rockies or in New England in the snowstorm? You know, we can talk about that. But then the regulatory one is another ⁓ piece that that's having an an impact. But the big one is economics. I I it i I think it's don't know, what are your thoughts? Do you think that eventually autonomous vehicles for trucking will replace ⁓ percent of long haul? Twenty percent, fifty percent? ⁓ a lot of that is it gonna pull it from intermodal? Where is it gonna pull from? So it's a little unclear to me exactly where the economics are gonna come out ⁓ where it makes sense. Andres Mendoza Pena: more Well, I see it slightly differently, Chris, because when you look at the cost per mile for a carrier, it's like 40 % or so accounted for by the driver cost. So you have a large value pool that... autonomous trucks can go after. While today, an autonomous truck is not yet at cost parity, the cost curves, as we all know, move pretty quickly. spoil some of the insights that we're going to be sharing in that study, but it's not going to take long to reach that parity. When you have so much value to unlock, I can see it, Once that conditions are in place, then regulations are a very important piece. But to some extent, If they prove their worth, think that ⁓ will ⁓ suit. it's only the economics ⁓ that can advantageous. ⁓ From safety perspective, ⁓ it's to be ⁓ safer. Chris Caplice: I agree with that. The perception though is tricky. We were tend to be less forgiving of robots than we are of humans. But I I I agree with you for that. But Andres Mendoza Pena: Yeah, yeah. And to the point that insurance companies now that been moving away from tracking because ⁓ all issues that we know are ⁓ ⁓ in space and ⁓ starting to ⁓ around how can play with autonomous tracking. So ⁓ this is a way to say that I do believe that there is a clear role for autonomous tracking. think that is going to be more than only challenging intermodal I there actually, ⁓ there will be role for intermodal. ⁓ I think there be a role for autonomous tracking. And ⁓ maybe more. ⁓ Chris Caplice: Think the real benefit, and and and I don't want you to give away any of your study, but it's more of a longer term impact. Cause if you can treat the length of hall, if you can do faster length of hall in one day, then you don't need as many DCs. And so the network design, the real benefits unlock is is how the network is going to evolve, but that's gonna take years, years for that to go. Andres Mendoza Pena: Yeah, yeah, look, view is I don't think you need to redesign the network to unlock value, right? I once you get to real driver out, right? And again, the technology is there. Once you get to real driver out, the economics start to look good. Chris Caplice: Not all the value. Yeah, we can maybe maybe this is more of a discussion for another day. 'Cause I I still have some issue of 'cause where where it makes sense. Andres Mendoza Pena: Yeah, yeah, yeah, look, mean, yeah, well, this is what I propose to you. Once we release the study, I'm happy to come back here to Fred Vine and we chat about it. Chris Caplice: Let me know. Yeah, that that'd be great. Let's get back to the report. The real reason you're here. ⁓ you you talked about something they introduced the term network drift, which I hadn't really heard that term used before. Can you define what that is and why that's a concern? Andres Mendoza Pena: Yeah, so basically it's the cost of reactive action, And basically when you see a series of one-off kind of tactical moves, and that could be kind of a new lane, looking at a new vendor, but all those individual decisions... lead to a more complex and ⁓ more expensive network. That's what we call network drift. And this an issue that we have been seeing very vividly recently because of all these issues that we were talking at the beginning of the discussion. ⁓ All this disruption. hard to ⁓ temptation to react ⁓ each of them individually. after that series of individual decisions, it's not uncommon to end up with that more complex and more expensive network design, right? Chris Caplice: Can do you do you have an example? Can you give a concrete example of this? 'Cause I think I understand it. Andres Mendoza Pena: Yeah, so look, we know that a tariff policy ⁓ ⁓ ⁓ every weeks in 2025, right? That's a stat that is like, it's a little right? Yeah, yeah, yeah. But being extremely reactive, Chris Caplice: Yeah. Yeah. In twenty twenty five. It's not it's settled down a little bit, right? In twenty six, yeah. Andres Mendoza Pena: one of those tariff and ⁓ quickly without considering scenarios is ⁓ a clear example of drift. The key ⁓ element ⁓ ⁓ we seeing an against network drift the... the prevalence of scenario planning, right? And we are seeing more and more companies. considering different scenarios before making decisions ⁓ the planning cycles, right? So the yearly planning cycle or the by year planning cycle is sufficient. So we are seeing kind of shorter planning cycles. are seeing ⁓ a amount of scenario planning and identifying what ⁓ are non-regret moves that under ⁓ different right? the company will have certainty that will a positive outcome, right? And adjusting as there are early signals of which scenario might be materializing, then adjusting your decisions accordingly. So that's a very ⁓ important that we have seen lately. Chris Caplice: Yeah. So you you're talking when you say scenario planning, you're talking about the traditional long term, like UPS slash shell scenario planning where you have potential futures and you're preparing the organization to be able to respond to things you're not necessarily it's not forecasting or predicting, but ⁓ getting more responsive. That's the type of scenario planning that we do up here at MIT. It's very valuable. But you raised a really interesting point, Andre, in that Andres Mendoza Pena: Yeah. Correct. That's right. Chris Caplice: You almost said that the the network drift is almost people being too responsive to this. And it seems like we always say, Yeah, you gotta be responsive and quick, you know, you don't wanna be ⁓ what happened to Erickson on the phone, you gotta respond quick. And now you're saying, Well, maybe not so quick. Andres Mendoza Pena: correct. Yeah, so rate of change is so ⁓ that the function to respond to every change, then you might end in the wrong direction. ⁓ it's. Chris Caplice: That is so hard for a CEO, isn't it? I mean my gosh, it's like so when do you because you just wanna you wanna do something, you wanna act. So are you finding that this is do you think this network drift has always been there? It's just being manifesting itself more or more visible to it? Andres Mendoza Pena: Yeah. I think that is manifesting itself ⁓ because the of the change and the of change is ⁓ much erratic therefore it is likely end in this of network drift than before. Chris Caplice: I'm thinking of the pandemic where people were doing network designs weekly, you know, flow and and everything was being done but they had to at that point because things were changing so quick. Andres Mendoza Pena: ⁓ yeah, yeah, yeah. But again, right, and to your point about it's really challenging, absolutely. And that's why we're thinking about this increase in sophistication of the game, right? It's a more complex, more sophisticated game. And the point that I made about rewarding optionality, having optionality built into your network and a scenario to ⁓ decisions ⁓ ⁓ Chris Caplice: Yeah. Andres Mendoza Pena: will be net positive regardless of the potential scenarios that might materialize. Those are some of those key kind of access factors that we're seeing right now. Chris Caplice: No brainers. Yeah, yeah. Yeah. And but they the options that you might have, they're not all the same. And so I like what Jeff Bezos did at Amazon years ago, the one way versus two way doors. You know, some things you make a decision, you can always undo it pretty quickly, but there's some you just close the door. And that y once you make a decision it's done. So treating those differently. Andres Mendoza Pena: Yeah. think that's a very good way to put it, right? And again, when you're making those decisions that there is no way back, that's when assessing the scenarios is very important. Chris Caplice: Yeah, yeah. Cause it's it's interesting. We did a project up here for a estate company and the whole ⁓ their question was how will these tariffs impact where the flow of goods coming in to different ports? 'Cause they mainly invest in logistics ⁓ facilities at different ports. And so we developed something that looked in and said if a tariff on this this HOS ⁓ and this what ty ⁓ of product in this country did this, it would shift this way. And it it was it's pretty interesting model. But the question is how quickly can you shift back? And how quickly can you shift? Because as you know, you can't just move manufacturing because these products are so complicated. They're sourcing from multiple places. So do you do you think that moving things more to Mexico or other other areas, is that a a one way door? Is that a two way door still? Or is it just an amount of time? Andres Mendoza Pena: ⁓ yeah. So it's a bit challenging to answer that question in the vacuum or like in a generic sense. I would say, but in general, I would say that. Chris Caplice: Sure. You're you yeah, that's a valid point. Andres Mendoza Pena: While it's almost impossible to make predictions in terms of tariff policy with the current administration, I find it hard to envision an end game in which our main trading partners and near trading partners like Mexico do not end up with relatively favorable. tariff regime. a long way to say, I say Mexico to is one of those likely safe bets, if there is any safe bet in the current environment. Chris Caplice: Yeah, no, that makes that makes sense. That's g going back to the report, ⁓ something we talked about earlier in this this conversation is the China plus one or what I hear now is China plus N, whatever it is, moving things away from China. Ha have you seen this friendshoring or this diversification being successful? Or is it more like I've read so many cases where yes the assembly moved to Vietnam, but all the components are still coming from China. Do you see this actually moving away from China or just putting another layer in between the US and China? Andres Mendoza Pena: Well, don't know if matters. Sorry, what I by that is if the company is that decision and is able to diversify away and avoid any ⁓ tariff issues with such up, assuming that the origin the content restrictions on origin are met, would say that the operating officer, ⁓ the supply chain officer, I don't if they're going ⁓ to be if ⁓ the of the part still from country X, right? ⁓ Chris Caplice: I g that's that's a really interesting example because ⁓ so do you think that a lot of this is tariff avoidance is it really ⁓ I'm I wanna get out of the stranglehold 'cause China can sometimes restrict the supply. Andres Mendoza Pena: was just giving an example on right? More from a geopolitical realignment perspective, right? Now, if the concern an over-reliance on China because other issues than geopolitical realignment and tariffs, well, in that case, that will be a concern, right? So it ⁓ has to be a kind case-by-case basis. And I think... The key point that you're making implicitly is ⁓ ⁓ end-to-end visibility in the supply chain and understanding the supplier's suppliers and the exposure that exists in that end-to-end supply chain is ⁓ critical. a must nowadays. Chris Caplice: Yeah, yeah, that's that's kind of the thing I was trying to get at. ⁓ there have been some Chinese regulations that came out in April that are starting to get enforced. Are you familiar with these at all? The Chinese regulations eight three four and eight three five, where essentially you're ⁓ an international company is not allowed to trace its supply chain. it's putting it as a security measure. Are you familiar with these at all? Andres Mendoza Pena: Look, heard of them, but I haven't dived into details. Chris Caplice: Okay. That'll be another day. Let me ask you something more transportation in your in your wheelhouse. the UPNS merger. What are you what are your thoughts? Andres Mendoza Pena: Yeah, look, it's interesting times, right? I think the ⁓ merger had talked for a while, and now actually happening. the expectation is sooner or later it's to approved. And then... the question becomes, well, will respond or not, right? And if they do, when? And a very strategic issue. regardless... ⁓ Chris Caplice: But but do you think do you think BN and CSX will merge or they'll just form a tighter partnership? Andres Mendoza Pena: I would say that in the long term, think going to be challenging for VN and CSX ⁓ not evolve from current status. How would that look like? It's hard to tell. ⁓ But the is once... ⁓ Chris Caplice: Yeah, yeah. Andres Mendoza Pena: you have an integrated network between the UP and NS, gonna have a better product, ⁓ When you think about ⁓ dwell the interchanges and... gonna ⁓ only increase speed, ⁓ gonna increase reliability because you do not have handoffs, it ⁓ is better product. ⁓ And will to be a need to respond to that, right? So ⁓ I do that in the long term, at the minimum UP is going to able to drive some ⁓ to rail conversion. think Chris Caplice: Do you think it's a speed? It's is speed or is it gonna be a cost improvement? Andres Mendoza Pena: It's a, I think it's a of speed, reliability, also cost, But I think it's a combination of factors. ⁓ And when think ⁓ you mentioned intermodal a ago, you are minimizing the... transit time, right, and interchanges, like in one, two days, you are minimizing the handoffs and the number of parties involved in the movement of a container. It is a significantly better product, right? So, I think that they are going to be very well positioned. And then, of course, Chris Caplice: Yeah. Yeah, yeah. Andres Mendoza Pena: It's going be interesting to see if there will be a realignment of intermodal marketing companies and rail partners. The hub group ended up with a very interesting and nice setup right now. How will other response, it's going to be very interesting, but they definitely are in a very, very good position at the moment. It's going to be interesting to see to what extent they will take advantage of pricing power. and to your point, are they going to use that cost advantage to gain share, or they will try to improve margin, how they're going to, if you will, monetize value. So they're creating value. Do they take the value? Do they share the value to drive more volume? Those issues are going to be very interesting to see how they unfold. But ⁓ in think it's ⁓ net obviously. Chris Caplice: Right, right. Yeah. For shippers. Andres Mendoza Pena: Yeah, I think it's positive for UP and for shippers. ⁓ Chris Caplice: Yeah. Yeah, yeah. 'Cause it it we'll see about captive shippers. There's a little bit of issues with that. But ⁓ la okay, last question. Last question. What do you think the name of the report's gonna be next year? Any guesses? Andres Mendoza Pena: I think it's going to have a more positive tone. I that we ⁓ clearly the corner in the freight market. And ⁓ has a very long corner, but we... ⁓ Chris Caplice: Well it depends. It you the coin has two sides. So so for shippers, the last three years have been awesome. For brokers and carriers, not so much. And now it's coming up. Andres Mendoza Pena: Yeah, yeah, but it's been, the end of the day, I believe that ⁓ always need a healthy partner, A partner that can make right? To improve service, et cetera. And the conditions in which carriers and ⁓ logistics service have been operating lately ⁓ were extremely Chris Caplice: Yes. It w yeah, it took a long time to bleed out the capacity, the over capacity that came in in the pandemic. It just took years for that to go. And then we'll see. This is this is a very much a capacity driven cycle, it appears. ⁓ but what's interesting, Andre, December twenty twenty four and December twenty twenty five looked identical in the freight market. It's just that in January twenty five, the tariffs hit and everything collapsed. Here it just it it didn't stop. Andres Mendoza Pena: Exactly. 100 percent. Chris Caplice: So they we'll see how that goes. So I lied. My real last question is, when do you think this cycle that started in kind of December twenty five, when do you think it'll end? And by that I mean for the full truckload when spot goes back, goes below contract. Andres Mendoza Pena: Yeah. ⁓ the cycle going up, going ⁓ ⁓ Chris Caplice: So n not a full because right now we're we're tightening up. When do you think it's going to come back down? So it's a half cycle, half the sine curve. Andres Mendoza Pena: ⁓ So I think it's going to be shorter than what we experienced. What we experienced ⁓ was right? So ⁓ I don't see it likely that we will have a ⁓ similar going forward barring another pandemic, right, as we were discussing. I think it's going to be Chris Caplice: I agree. Andres Mendoza Pena: a shorter cycle and less pronounced cycle ⁓ than what we have experienced. Chris Caplice: Okay. Yeah, it's an open discussion whether the n technology, communications, availability of the market, visibility of the market, all that is making things more volatile or dampening volatility. And that's a conversation probably for another day. Over beers. All right. Andre, thank you so much. I really enjoyed talking with you. It's a great report. I always look forward to it each year, get get insights on what's coming. And it's also the place I go to get state of the market as far as the Andres Mendoza Pena: That's exactly right. That's for the next one. That's for the next one. Chris Caplice: size of the markets. and that's such a hard thing to do. It you know, it changes a little bit every year. How do you figure that out? But it's a n it's a great resource for that. So thank you for joining me today. Andres Mendoza Pena: Yeah, no, thank you for having me. As always, I really enjoyed our discussion and look forward to the next one. Chris Caplice: All right. Thank you. Everyone, stay tuned for the truckload market update.