CSCMP's Supply Chain Quarterly
Trucking
December 18, 2018
Trucking

Under pressure

Comment
As the economy strengthens and the driver shortage intensifies, shippers should prepare to feel the pinch from higher trucking rates and tighter capacity.

It would be fair to say that 2017 saw mixed results for the trucking industry with rates starting out the year at levels similar to those seen in 2015 and 2016. However, in the second half of the year, the sector entered into an unequivocal turnaround period. To put things in perspective, the U.S. Bank Freight Payment Index shows that spending on truck freight increased by 25 percent for 2017, although freight volume shipment rose by only 12.6 percent.1 In other words, it cost shippers disproportionately more to obtain truck freight space to move their goods than it did in the past.

That momentum has carried over into 2018, and as a result, shippers need to take measures now to deal with the operational and budgetary pressures created by the heavy volume of demand.

Article Figures
[Figure 1] Cass truckload linehaul index
[Figure 1] Cass truckload linehaul index Enlarge this image

A New Norm

Whether it's due to driver shortages or other factors, such as changing regulations or increased activity by the likes of internet retailer Amazon.com, the reality is that high or elevated truckload rates and tight capacity have become the new norm—at least the foreseeable future.

This trend can be seen in the Cass Truckload Linehaul Index (see Figure 1), which measures fluctuations in the per-mile truckload linehaul rates charged to shippers by truckload transportation companies since the index began in 2005, which serves as the base year. The Index shows a clear turning point in mid-2017. Rates had been comparable to 2015 levels, until a spike occurred around August 2017. At the start of 2018, there appears to have been some mild rate softening, likely due to the seasonal post-holiday slowdown. But the index has reached 134 twice over the past six months, thus indicating that rates continue to reach a high point on a more frequent basis. It has already attained rate levels seen at the end of 2017, when a sudden spike was seen in rates.

Nor can shippers look to the spot market for some relief, as those rates are up by nearly 30 percent since June 2017, according to the DAT Freight Index, which is compiled by DAT Solutions, a truckload freight marketplace.2

As in past years, we can likely expect another bump in rates during the back-to-school season, followed by the busy holiday period. Indeed, this year we may see an exception to historic trends. Normally late summer and fall periods are slow periods for freight demands and rates. This year, however, we may see spikes during those months due to a number of unique challenges.

First, a major shortage of drivers is creating tighter than normal capacity. The industry saw a shortage of approximately 248,000 drivers at the end of 2017, according to the transportation consulting company FTR—a number that was compounded by a paltry driver replenishment rate.3 Additionally, strong economic conditions have helped to fan the flames of soaring truckload rates and squeezed capacity. Furthermore, possible mitigating factors, such as autonomous vehicles, changing trade regulations, or even Amazon's entry into the shipping marketplace haven't been strong enough to douse the blaze.

What can shippers do to prepare?

What does all of this mean to savvy shippers seeking to maximize their freight dollars whilemaking good on customer commitments in this increasingly seller-based market? First, shippers should lock in some portion of their freight right now by engaging in competitive bidding and/or contracting. This would allow for some level of security when the capacity pinch intensifies down the road (which will drive up rates even further). Second, consider improving dock efficiencies to help shorten the time drivers spend at your door—an unnecessary cost. Third, implement packaging optimization (or having the right-sized package for the product) to limit dead space on trucks, which costs more withno benefit. Fourth, shippers should be thinking about mode mix and/or combinations to limit reliance on trucking. For example, companies with loads that are not time-dependent may want to consider intermodal shipping as a way to mitigate over-the-road costs. Another option is using pool distribution to consolidate together in a truckload a group of less-than-truckload orders bound for the same region. Finally, many organizations realize and accept that shipping and/or logistics management is not their forte. Employing the help of a seasoned third-party logistics provider or using a transportation management system can help drive greater cost efficiencies, shorten learning/adaptation curves, and reduce complexity.

Whichever path you decide to pursue, you should keep in mind that supply chains work best when there is an inherent level of flexibility and adaptability. These attributes will provide a valuable cushion during trying times. Flexibility and adaptability can be increased by taking actions such as employing cost controls and competitive bidding, having contingency plans, and outsourcing to companies with core competencies that yours does not possess. The only other option is to pass on these cost increases to your customers, which can put your organization at a real disadvantage—especially if your competition has been disciplined enough to implement a well thought-out, operationally based contingency plan, which is able to weather a storm like the one we are experiencing.

With all of the above in mind, one thing is certain: Organizations that have made investments in modern-day cost-control measures stand a far better chance of weathering cost-based pressures like the one currently impacting shipping becauseadditional financial flexibility has been built into their models. But supply chain costs aside, the structural changes at play—along with driver demographics, wage growth, inflation, and innovation developments—all require some level of investment in people, processes, and technology. These investments need to be acknowledged and accepted as vital to any normal, adaptable business—and these days, that means a business that enables future growth while driving out cost and complexity.

 

Notes:

1.Burney Simpson, "U.S. Bank: Truck Freight Services Spending Grew 25% in 2017," Transport Topics, April 26, 2018, http://www.ttnews.com/articles/us-bank-truck-freight-services-spending-grew-25-2017

2."DAT Freight Index: Spot Market Truckload Rates Soar in January," DAT Solutions press release, February 12, 2018, https://www.dat.com/company/news-events/news-releases/dat-freight-index-spot-market-truckload-rates-soar-in-january

3.Thomas Black, "There Aren't Enough Trucks and That's Pinching U.S. Profits," Bloomberg, February 9, 2018, https://www.bloomberg.com/news/articles/2018-02-09/there-aren-t-enough-truckers-and-that-s-pinching-u-s-profits

Sean Maharaj is a director in the transportation and logistics practice of AArete, a global consultancy specializing in data-informed performance improvement.

Join the Discussion

After you comment, click Post. If you're not already logged in, you will be asked to log in or register.


Want more articles like this? Sign up for a free subscription to Supply Chain Executive Insight, a monthly e-newsletter that provides insights and commentary on supply chain trends and developments. Click here to subscribe.

We Want to Hear From You! We invite you to share your thoughts and opinions about this article by sending an e-mail to ?Subject=Letter to the Editor: Quarter 2018: Under pressure"> . We will publish selected readers' comments in future issues of CSCMP's Supply Chain Quarterly. Correspondence may be edited for clarity or for length.

Want more articles like this? Subscribe to CSCMP's Supply Chain Quarterly.