As the economy strengthens and the driver shortage intensifies, shippers should prepare to feel the pinch from higher trucking rates and tighter capacity.
Sean Maharaj is a vice president in the Global Transportation Practice of the management consultancy Kearney. Additionally, Maharaj is a chief commercial officer of Kearney’s Hoptek.
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.
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.
J.B. Hunt President and CEO Shelley Simpson answers a question from the audience at the Tuesday afternoon keynote session at CSCMP's EDGE Conference. CSCMP President and CEO Mark Baxa listens attentively to her response.
Most of the time when CEOs present at an industry conference, they like to talk about their companies’ success stories. Not J.B. Hunt’s Shelley Simpson. Speaking today at the Council of Supply Chain Management Professionals’ (CSCMP) annual EDGE Conference, the trucking company’s president and CEO led with a story about a time that the company lost a major customer.
According to Simpson, the company had a customer of their dedicated contract business in 2001 that was consistently making late shipments with no lead time. “We were working like crazy to try to satisfy them, and lost their business,” Simpson said.
When the team at J.B. Hunt later met with the customer’s chief supply chain officer, they related all they had been doing for the company. “We told him that we were literally sitting our drivers and our trucks just for you, just to cover your shipments,” Simpson said. “And he said to us, ‘You never shared everything you were doing for us.’”
Out of that experience, came J.B. Hunt’s Customer Value Delivery framework. This framework, according to Simpson, provides a roadmap for creating value and anticipating customer needs.
Framework for Excellence
J.B. Hunt created the above framework to help them formulate better relationships with customers.
The framework consists of five steps:
Understand customer needs: It all starts, according to Simpson, with building a strong relationship with the customer and then using the information gained from those discussions to build a custom plan for the customer.
Deliver expectations: This step involves delivering on the promises made in that custom plan.
Measure results: J.B. Hunt believes that they are not done when freight makes it to the destination. They also need to measure how successful they were versus what the customer expected from them.
Communicate performance: This step involves a two-way exchange, where J.B. Hunt walks the customer through their performance and gets verbal agreement on whether or not they have met the customer’s needs.
Anticipate new value: Here J.B. Hunt looks at what they are hearing from their customer today and then uses that information to derive what the customer may be looking for in the future.
Simpson said the most important part of the process is the fourth step, communicating performance (perhaps reflecting the piece that went wrong in that initial failed customer relationship).
Not only can this framework be used to drive excellence in a company, but it can also be adapted as a model for driving personal excellence, Simpson said. Instead of understanding the customer needs, the process starts with understanding yourself: what your strengths and interests are. This understanding helps drive a personal development plan and personal goals for the year, which can be measured and assessed. For example, each year, Simpson gives herself a letter grade on each of her personal goals and communicates her assessment back to her boss. She has also found it helpful to anticipate where opportunities lie beyond what she is personally doing.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.