What Management Needs to Know about the Transportation Market, Part Two: Cost

08/29/2011

What Management Needs to Know about the Transportation Market, Part Two: Cost

It is simple supply and demand.  There is more freight than there are trucks.

After losing so much capacity during the down turn, the demand will continue to be greater than the supply for the foreseeable future, even at the anemic growth rate of the economy.   Some carriers are looking to expand their fleet size to capitalize on additional opportunities, but that is not the case with most carriers.   Even an increase to the current rate of expansion by existing carriers will not provide any relief for the capacity shortage.

Rates continue to increase on both the line haul (point to point rate) and the fuel surcharge (FSC).   Line haul costs have gone up dramatically in the last two years after haven fallen to their lowest point in ten years during the peak of the recession.  Many full truckload carriers have increased between 5-10% in the last two years and in certain niche markets like flatbed rates have increased even more.  The seasonal rates that are impacted by produce have seen even greater increases and many reached an all time high in 2010 just to see those records broken again in 2011. These rate increases are not something that is limited to the full truckload segment of the industry.  Intermodal rates have increased in the last few years as well.

Intermodal shipping rates have gone up to reflect the increase in demand for this service.   After seeing a decline in volume during the recession, intermodal business has bounced back in the last 18 months.  Many months have shown double digit increases in month over month volumes.  Small increases in the economy and the tightening of the truck market have been the driving force behind the resurgence of intermodal business.

The increases in general intermodal rates have not been as high as truckload rates and have probably averaged between 3%-6%.  However, during peak intermodal (rail shipments) season, usually between late August and December, rates will spike and capacity becomes very limited.  Intermodal shipping is considered a less costly alternative to over the road transportation and many times rate increases are kept in check. 

Many times intermodal shipping will prove to be a cheaper alternative to over the truckload shipping on the front end, but you need to be aware of the accessorials involved with intermodal.  Detention in the intermodal world will usually be applied after less waiting time and is typically more expensive than with over the road transportation.

The costs in the less than truckload (LTL shipment) market have also gone up.  LTL carriers have been raising their rates by 5%-7% per year over the last two years and there are rumors that some LTL carriers will be taking another increase in early 2012.  If certain LTL carriers do take another rate increase in February it would be the 4th rate increase in about 24 months.  Several major LTL carries have also taken steps to reduce their fleet size by consolidating operations and closing terminals.  These actions have reduced capacity, which has helped the LTL carriers justify their repeated cost increases.

Line haul rates are only a part of cost increases that you are paying to move your freight.  Fuel surcharges have almost returned to their pre-recession levels.  In the summer of 2008 we saw the average cost of diesel reach $4.76 per gallon.  In May of 2011 it was up to an average of $4.12 on per gallon. Most fuel surcharges are either based on a percentage of the line haul or per-mile based on the cost of fuel.  For instance, if the average price of fuel was $3.851 your percentage would be 28.5% or $.046 per mile.  In this example the percentage would go up .5% for every $.049 that the fuel price goes up.  The per-mile FSC would go up $.01 for every $.06 that the cost of fuel went up.

So if average price of fuel went up to $3.93 next week then your percentage would be 30% or you would be paying $.047 per mile.  If you take into account that fuel prices are up about $.90 from where they were at this time last year you are paying 18% or $.15 more in FSC depending whether your FSC is based on percentage or per mile.    These line haul and FSC increases previously mentioned refer to contractual rates.  If your pricing comes from the spot market you have probably seen much larger increases.

If your company buys transportation on the spot market you have probably seen your rates increase by as much as 25% in the last two years. I would strongly recommend that you look into moving away from the spot market if at all possible.  The spot mark costs you more in the long run.  Most spot market rates are given with line haul and fuel surcharge combined into a flat rate.  Many times this means the total cost is rounded up to a whole number.  This is a big difference from contractual rates with a varying fuel surcharge.   Let’s say you had a dry load moving from Chicago to Boston and contractual rate was $1.50 per mile on 990 miles with a fuel surcharge of $.35 per mile.

Your total cost would be $1831.50.  If you asked for a spot market quote on that load your rate maybe $1850.  If you are looking for a truck in a difficult market or maybe you need a load moved on a Friday your quote could be as high as $2,200 for that same lane.  The idea of requesting a spot market rate is to get the lowest rate possible for that one load.  However, many times you can get a rate from a transportation provider, but that does not necessarily mean that you can the truck you need for the rate.  In the current market you need to be worried about getting the freight moved first and the cost second.

The cost of transportation is going up and many of the factors driving the increases are out of your control.  However, there are many things that you can do to offset these cost increases.

  1. Look into making your processes more efficient.  If you can streamline processes you can save time and increase the productivity of your staff.
  2. Incorporate technology into your transportation.  Email and spreadsheets can do many wonderful things, but they are not the best tools available to manage transportation.  Many companies have ERP systems that may have transportation functionality available or you can look into a Transportation Management System (TMS).
  3. Invest in transportation industry training for your team members that are responsible for moving your freight.   There are many transportation industry events and associations that can be a great resource for your team members.  Even subscribing to transportation trade publications can be a big help.  If you are not spending money on the front end to make sure your people know what is going on in the transportation market you will end up paying more in rate increases and transportation service failures on the back end.
  4. Look into outsourcing your transportation.  If your transportation is handled by someone without a transportation title, such as someone in customer service, sales or purchasing you may want to explore the benefits of outsourcing your transportation to a 3PL.  Allow your employees to focus on their main responsibilities and allow transportation experts to help you streamline your processes, incorporate technology, and manage your costs.