The Supply Chain of the Future – Tomorrow's Vision or Today's Reality?
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Hungry for a better strategy
Start with a raw boom-and-bust business cycle, add demands for low-cost flexibility, ladle on liberal amounts of regulation while going light on drivers and credit, and then simmer over a fire of rising fuel and equipment costs. That's a recipe for the "stew" that makes up the U.S. trucking market today.
Unfortunately, that stew may not have enough servings for everyone. "Capacity will continue to get tighter in the marketplace as regulatory, insurance, and financial pressures in a slow-growing economy force service providers to exit the marketplace or scale back their operations to a limited offering," predicts Phil Clouden, director of corporate logistics at NBTY, a producer, distributor, and marketer of nutritional supplements that makes truckload, less-than-truckload (LTL), and intermodal shipments across the United States and Canada.
[Figure 1] Cass Information Systems freight index for January 2009-July 2012 Enlarge this image
Despite that gloomy outlook, there are ways for shippers and carriers to succeed in the current market. The successful ones will be those that rethink the "ingredients" they put into the business they share.
Carriers change course
Trucking rates have been steadily rising since 2009 and are forecast to continue on that track for the next two to three years, even if economic growth remains anemic. The main drivers of rising rates are surging costs for motor carriers and narrowing supply options for shippers as both continue to rely heavily on the "ingredients" mentioned earlier: traditional approaches to network planning and sourcing, relationship management, and daily operations. The Cass Freight Index (see Figure 1) shows how shippers' expenditures are rising even though shipment volumes are holding steady.
For carriers, the traditional recipe calls for buying and maintaining the assets, training and retaining the drivers, and finding profitable routes where shippers will pay a premium for reliable service. Selling consists of maintaining and growing the shipper base, ideally by making every shipment a head-haul, as customers are developed in destinations that could provide reliable round trips. If carriers can't create the perfect fit of shipper with lane, then brokers find the loads and the trucks' owners pay the broker's margin, either from their own pockets or by passing that charge on to the head-haul shippers. The worst outcome of this traditional pattern, of course, is the "empty mile," which shippers pay for either as a minimum charge in short-haul lanes or as a premium fare when their carriers cannot find a load for part of or the entire return trip. The rest of the empty mile is eaten by the carrier.
Forward-thinking carriers are increasing their profitability by investing in more fuel-efficient equipment, better technology, and improved driver screening and training. More of them are getting into the brokerage business as a way to supplement their incomes by utilizing existing resources. Larger brokers, meanwhile, have not stood still and are growing in size and sophistication. They have heavily invested in people and technology that allow them to go beyond traditional load-matching services to earn their margins. Some, for example, offer shippers a managed transportation management system (TMS) that includes contract management, safety-rating monitoring, and freight auditing and payment. Others provide attractive features (such as factoring, fuel programs, and pooled insurance buying) that bind carriers to them and, most importantly, differentiate themselves from the new entrants in the market. In these times of constrained capacity, the best carriers and brokers are also becoming more selective when it comes to the shippers they serve, and they're using freight rates to help them make those choices.
Turning to shippers, their basic recipe has been to build a base of reliable carriers, give the new ones that call on them a shot at some lanes, and keep them all on their toes by asking for occasional bids for some part of the distribution network. Less-regular lanes or seasonal volumes are bought on the spot market. Larger shippers might leverage benchmarking databases to find out where they're paying above-average rates, and then focus and time their bid efforts accordingly.
The prognosis for these shippers is that their freight rates will rise and fall with the boom-and-bust market trends. While shippers may be able to get cheaper rates when volumes are low, high rates will eventually catch up with them when capacity shrinks.
Although the basic recipe for transportation management is already resource-intensive for both shippers and carriers, some successful shippers have taken the extra time and effort to investigate how to work with their carriers to reduce network costs and raise efficiencies. "Carrier relationships will be vital to shippers as they narrow their carrier base and leverage the available volume in a slow-growing economy," says NBTY's Clouden. "Frequent communication, metrics-driven performance analysis, and quarterly business reviews will become standard in carrier and shipper relations."
As Clouden suggests, the days of simply meeting around the negotiation table to talk about rate increases and benchmarks should give way to reviews of which components of the network work well, which don't, and what improvements can be made.
A new recipe for success
With a backdrop of increased volatility that drives uncertain returns, together with the tighter credit and increased regulation that are capping capacity, truckload rates may continue on a path of 3-percent to 6-percent increases for the market at large. But that won't be true for everyone. The most effective shippers and carriers have found that they must regularly re-examine their entire network and the inefficiencies and opportunities that arise within them. Only then can they reallocate capacity to where it will best be used, work to remove inefficiencies (such as clogged yards, long unloading times, and long payment terms), and minimize the empty miles in their respective networks.
Clouden summarizes this new recipe for success: "The [truck transportation] sourcing process will continue to be more strategic and confined to more financially strong service providers with a broader footprint and multimodal offerings. The willingness of carriers to form stronger partnerships with shippers and share in the savings by offering a greater value proposition will be more critical over the next 18 months when [shippers are] sourcing transportation providers."
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