June 2006 | Commentary | Viewpoint

Securing Truckload Capacity While Reducing Overall Costs

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The motor freight industry continues to be plagued by cost pressures that keep truckload capacity tight and drive shipping costs to record-high levels. Currently, motor freight carriers are struggling with:

  • The growing driver shortage. The lack of long-haul drivers is the fifth-largest position shortage in America—195,000 drivers less than the existing need.
  • Hours-of-Service (HOS) rules. HOS rules enacted in 2004 continue to grow the shortage gap by curbing productivity.
  • Skyrocketing fuel prices. Oil is feeding this already hot fire. In just two years, fuel prices have increased 95 percent—topping out in late 2005 at 2.90 a gallon.
  • Environmental regulations. New Environmental Protection Agency rules compound fuel' s demise. Preliminary estimates show new ultra-low sulfur diesel fuel will result in a one- to three-percent decline in fuel miles. Adding to the pressure, new onboard diagnostic system requirements are expected to cost the industry more than $4 billion annually.

Despite all these cost pressures, motor carriers continue to post record profits because they are capitalizing on the constrained environment without chasing volume.

To continue profit growth, many carriers are instituting customer allocation models to grow capacity in high-margin lanes while constraining low-margin lanes. Gone are the days of buying volume to increase revenue. With more of the carrier market controlled by publicly traded companies, Wall Street increasingly influences carrier behavior, driving an emphasis on meeting stock-impacting margin goals.

Why can' t shippers reduce the impact? In many cases, organizational structures, not industry pressure, limit cost-reduction opportunities. Organizational divisions, which drive fleet managers to focus on maximizing dedicated asset utilization—and not on reducing overall costs—makes it difficult to leverage available opportunities across common and dedicated capacity such as private fleets and dedicated trucks.

Many shippers don' t integrate the decision process between the procurement team that administers common carrier contracts, and the fleet operators that manage dedicated capacity. Separate goals for dedicated and transportation procurement teams actually lead to increased overall costs.

When fleet operations focus on maximizing asset utilization, they often overlook common carrier alternatives. So a shipper can improve utilization and still increase overall cost.

The Master Plan

In today' s capacity-constrained truckload environment, shippers need to find creative ways to work more collaboratively with their core carriers to achieve the greatest efficiencies possible. Just managing freight rates from Point A to Point B is not enough.

Companies need to take a more strategic approach to better align core carrier relationships with their own internal capabilities.

One way is by applying master-planned transportation procurement to leverage all carrier rate and relationship structures, inject master planning into the bidding process, and work with core carriers to achieve creative solutions.

By moving traditional common carriage lanes that operate high-cost freight to dedicated capacity, shippers may increase fleet spending but avoid increased common carriage rates and therefore reduce overall transportation costs. This requires firms to continually evaluate dedicated capacity opportunities as carrier rates change, instead of basing dedicated decisions on historical information.

Start Collaborating

But doing so means taking a collaborative approach with carriers. Master-planned procurement requires a company to engineer its portfolio of carriers and lanes to its most efficient level.

Because this is a collaborative process, shippers can' t work with hundreds of carriers—or even 10—to achieve this engineered approach. Working with only a few core carriers makes it easier to innovate and develop truly creative solutions.

To leverage dedicated capacity, shippers must build shipments and factor backhauls against common contracts. In a large network, however, shippers must evaluate millions of combinations of lanes, trips, and locations. Analytical tools come to the rescue, helping users evaluate alternatives while considering real-world constraints such as facility operating hours and hours-of-service limitations.

By injecting master planning into transportation bid optimization, shippers are able to:

  • Accurately price dedicated options.
  • Compare common and dedicated alternatives.
  • Leverage fleet assets.
  • Work with core carriers to identify creative solutions that maximize cost reduction.

To accurately compare the cost of both methods, shippers need to understand private fleets' trip-by-trip operational costs. They should also schedule annual or bi-annual procurement meetings with carriers to secure lane-level point-to-point pricing.

A multi-round bid process that first signals carrier intent, then identifies market price will yield the best results. After identifying acceptable alternatives, a detailed model will help evaluate them holistically.

As shippers choose the best lane for dedicated capacity, they can re-optimize point-to-point lanes to ensure operational effectiveness. In this what-if scenario phase, shippers can consider limiting the number of carriers, set a minimum award amount, ensure sufficient minority coverage, and limit broker involvement.

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