Traditional approaches to transportation management won't stand up in today's truck transportation market. Shippers and carriers need a new recipe for doing business together.
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.
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[Figure 1] Cass Information Systems freight index for January 2009-July 2012Enlarge 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.
Shippers' strategies
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."
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”