Logistics managers, always under stress, got no relief in the first quarter of 2014 as they grappled with unprecedented weather-related challenges across the northern half of the country. How bad was it? Here are just a few records that were set in key U.S. transportation hubs, according to the National Weather Service:
- Detroit—Snowiest winter recorded, with more than 91 inches, shattering a 133-year-old record
- Philadelphia—Second snowiest winter on record, with 69 inches
- Chicago—Third snowiest winter ever, with more than 80 inches
The record-setting snowfalls, along with extreme cold and other weather events, resulted in delayed shipments, missed pickups and deliveries, inventory backlogs, and higher costs for both shippers and carriers.
![[Figure 1] TL supply versus demand](/media-library/20140818capacity-woes-ex1.jpg?id=53612032)
To make matters worse, the spot-market demand for truckload (TL) capacity, as measured by the Internet Truckstop Market Demand Index, reached more than 27 loads per truck in March. That dipped to only 23.6 in April as shippers continued to deal with the aftermath of heavy snowfalls and extreme cold, in some locales even after the snow had melted. Both months were well above their normal ranges over the past five years. As those statistics suggest, demand for transportation services was there, but the capacity to deliver was, literally, snowed in.
Not only did the weather impact shipping, it affected the U.S. economy as well. Although many economists had forecast real gross domestic product (GDP) growth of 1 percent in the first quarter, real GDP instead contracted by 1 percent.
All this followed a pretty uneventful 2013. Data collected by the American Trucking Associations suggests that supply and demand last year were in balance (see Figure 1). Accordingly, freight rates remained stable and the "epic capacity crunch" shippers had expected failed to materialize. As a result, many shippers have been left to wonder whether the first quarter of 2014 was an omen of market conditions to come or an anomaly. Should they gird their organizations for the epic capacity crunch, or merely blame the extent of the capacity shortage on the weather?
The short answer is, probably neither. The likely outcome for 2014 is somewhere between Armageddon and "just another stable year in the market." Nonetheless, market dynamics do appear to be shifting, and shippers need to be prepared.
Modest rate increases likely
From a demand perspective, the slow and bumpy pace of the U.S. economic recovery may last for some time to come. The Congressional Budget Office projects the U.S. gross domestic product will increase by roughly 3 percent per year for the next four years—hardly a blockbuster growth outlook for the world's biggest economy. The housing market, a key indicator of truckload volumes, has stabilized but remains near 40-year lows. Sales in the automotive sector—another bellwether of TL market health—have leveled off after seeing a strong recovery from the depths of the recession in 2008.
The supply side of the truckload market is under considerable and increasing pressure, partly as operators struggle to keep pace with regulations that are adding cost and creating extra constraints on an already tight market for drivers. Let's consider what that means for shippers in terms of rates, and how they can respond.
Many industry analysts are forecasting a modest increase in linehaul rates this year, somewhere between 2 and 4 percent. Diesel fuel costs also are forecast to increase, albeit gradually, in the immediate future. With costs appearing to be on the rise, smart shippers have been budgeting accordingly.
Weather could still be a factor in the truckload market for the rest of the year. The Atlantic hurricane season officially started on the first of June and will last through November. The National Oceanic and Atmospheric Administration (NOAA) has predicted that 2014 will be a "normal" year, with three to six hurricanes, of which one or two will qualify as major. But let's not forget that it only takes one major storm to upset the domestic transportation network, causing freight rates to increase because the government tends to pays top dollar for capacity to aid in disaster-relief efforts.
Suggested strategies
To prepare for these challenges—both market-driven and otherwise—savvy shippers should expand their carrier base and their routing guides. A larger list of vetted carriers allows shippers to tap into more capacity in a calculated progression through trusted partners and, ideally, favorable rate schedules.
They can also include more nonasset-based providers in their carrier base. These brokers can "shop" for trucking capacity when there is excess demand. Fortunately, the increasing popularity of these types of service providers has coincided with a healthy dose of scrutiny from both regulators and investors, which has made using a broker less risky for shippers.
Shippers might also want to consider dedicated contract carriage arrangements. Those with smaller fleet operations (typically fewer than 20 trucks) may benefit from outsourcing to providers of dedicated contract carriage arrangements through cost improvements, access to technology, backhaul opportunities, and the flexibility to expand capacity. Larger fleet operators, meanwhile, are looking to expand their private fleet programs to secure access to capacity and achieve economies of scale on their own.
Finally, shippers should be embracing intermodal and rail transportation. This may sound like common sense, but the reality is that although they are more economical and less capacity-constrained, these modes are underutilized by many shippers.
The trucking market promises to be challenging for shippers on many fronts for some time to come. However, those shippers that invest the time and resources in being prepared will be well-positioned to weather any storm.
