What Management Needs to Know about the Transportation Market, Part 1: Capacity

08/22/2011

What Management Needs to Know about the Transportation Market, Part 1: Capacity

Transportation may not be high on your priority list or even on your list at all, but you should probably make some room for it.  You need to pay attention to the transportation market because costs are continuing to increase and capacity continues to tighten.   This means it is getting more expensive and more difficult to get your freight to your customers.   You may have customers that will fine you if your product does not arrive on time or they may even cancel your contract over repeated transportation issues. I know that many companies view transportation as a cost of doing business, but if you are not aware of what is going on in the transportation market then you probably have not been able to make the necessary changes to keep your costs in line.  In general, your transportation costs should be between 3%-8% of your sales. Anything higher than 8% means that your transportation spend is probably cutting into your bottom line.  If you do not have a lot of free time to spend learning about transportation, but you want to be aware of what is going on in the market, then you should focus on  these 3 main areas—capacity, costs, and legislation.

Part One: Capacity

Capacity is the biggest factor that any company should be concerned about. Currently there is a major shortage of equipment as a result of the great recession. Between 2007-2010 over 5,000 trucking companies went out of business and over 380,000 trucks were taken off of the road.   That is about 7,900 less trucks available on average per day in the 48 continental states.   Certain segments have been hit harder such as flatbed, while other segments such as tankers have not been hit as hard.  But overall capacity is not where it needs to be to meet the current demand and all indicators point to it getting worse.

Drivers are also in short supply.  Many drivers have reached the retirement age and have/will be leaving the driver pool.  In addition to retiring drivers, many drivers are being forced off of the road by the new CSA regulations. CSA went into effect in 2010 and we have only just started to feel the potential impact. As a result, many trucking companies are looking to replace drivers that they have lost and are not in a position to expand.   Even with a 9% unemployment rate carriers are still struggling to recruit new drivers into the industry.  Being a professional truck driver is not a career for everyone and many people are not interested in a job that may require them to live in a truck for weeks at time. As a result many trucking companies have started to offer sign on bonuses to try and attract new drivers. They are also offering bonuses to try and lure experienced drivers away from the competition.  These bonuses will eventually be passed on to shippers as part of their line haul rates.

The same scenario is true on the equipment side. During the recession many carriers had to hold onto tractors and trailers longer than they normally would because they could not afford to replace them.  However, most carriers are now in a position to replace their older equipment and this sudden spike in demand for new tractors and trailers has been met with mixed emotions.

Many truck and trailer manufactures reduced their production capacity during the last several years and are now struggling to meet the demand for new equipment.  As a result there is a 6-9 month backup for new equipment orders.  The spike in manufacturing of new equipment has also been slowed by a lack of raw materials. The sudden demand and short supply for certain raw materials is causing the price of new equipment to go up—another cost that will be absorbed by shippers.  Keep in mind that this surge is being led by a push to replace aging equipment and not by a push to expand fleet size.   So, even if a carrier wanted to add 100 tractors to their fleet they cannot just go to the dealership and pick them up.

Many carriers are not interested in expanding their fleets because the current capacity situation allows them to control the market and generate their desired profit per truck for the first time in several years.  Most publicly traded carriers have been reporting great earnings in 2011.  http://wallstcheatsheet.com/stocks/transportation-stocks-delivering-explosive-earnings-growth.html/.

A few quick actions you can take to see what impact transportation is having on your bottom line.

  1. Determine what % transportation is of your total sales.  Examine your historical data using an average over a period of time in order to establish a benchmark. We’d be happy to help you make some changes to your processes/personnel that can save you some money.
  2.  Examine the way drivers are being treated when they come to your facility.  Many drivers have final say on which loads they haul and one of the factors that they will use to determine what loads they take or don’t take is past experience at the pick up or delivery location.  If drivers are treated well and get loaded/unloaded quickly then drivers will accept loads that involve your location. They may even request your freight.  However, if drivers are treated poorly and  have to wait a long time to be  loaded/unloaded then you will be paying more to get carriers to come to your facilities, paying detention when you hold them up or even risk drivers refusing loads that involve your company.

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Stay tuned for the next installment of this blog when we talk about cost increases in the transportation market