Trucking Alert: Steep Grade Ahead

Tags: Trucking, Supply Chain Management, Partnership, Transportation Management

A capacity shortage and a driver deficit that's likely to grow worse are putting the squeeze on companies that ship by truck. Times like these call for shifting gears and trying new tactics.

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Shipping by truck has become an uphill battle during the past year. As the economy starts to recover, shippers are moving more freight, but trucking companies have less equipment available to handle the volume. That makes it harder to find trucks to carry loads, and it gives carriers greater leverage to raise rates.

“So much capacity has left the industry that it doesn’t take a large increase in tonnage before it gets tight,” says Lana Batts, managing partner, Transport Capital Partners, an Arlington, Va.-based trucking industry consultancy.

The tight supply of power units isn’t the only factor driving up freight rates. Add the ongoing driver shortage, and new safety regulations coming from the U.S. Department of Transportation that could push even more drivers out of the market, requiring carriers to hike salaries to attract qualified employees. Changes in steamship lines’ ocean-crossing schedules are making it harder for shippers to schedule domestic transportation for imports arriving in the United States. And evolving environmental standards have forced carriers to purchase new, costlier equipment.

What’s a shipper to do? First, slow down and observe the obstacles that trucking companies are navigating today, and how those issues affect you. Then, drive some new strategies and tactics for maneuvering around those challenges.

More Freight, Less Space

The roots of the current capacity squeeze date back to the start of the recession in 2008. As demand for products dropped across nearly all industries, so did demand for transportation. Tonnage fell, rates fell, and many carriers went out of business. By December 2009, for example, 405 trucking firms had shut down in the year’s third quarter, pulling 14,135 trucks off the road, according to investment banking firm Avondale Partners.

Among the motor carriers that hung in there, many took a portion of their fleets out of service. “A capacity shortage is sometimes triggered by carriers pulling trucks off the road because they’re too expensive to maintain when there’s not enough freight,” says Alec Gizzi, president of JBS Logistics, an asset-based transportation broker in Glendale Heights, Ill.

Moreover, carriers stopped replacing older equipment. In a typical year, manufacturers produce about 200,000 trucks to replace the equipment that carriers scrap, says Batts. But due to lack of demand, manufacturers built only about 90,000 trucks last year. The nation’s truck fleet simply got smaller.

More recently, the dynamics have been changing, at least on the demand side. “As the economy has started to turn, tonnage has picked up,” Batts says. “That leaves shippers scrambling for space in the smaller national fleet. So rates go up. It’s simply supply and demand.”

Carriers aren’t rushing to meet that demand by putting parked trucks back on the road or buying new equipment. “Trucking companies can make more money raising rates than adding trucks,” Batts says. Carriers probably won’t start to ramp up capacity until late 2011 or 2012, she adds.

Trucking companies that now want to expand don’t find it easy. “Financing for equipment is difficult to come by,” notes Derek Leathers, chief operating officer at Werner Enterprises, a major truckload carrier based in Omaha, Neb. “Fleets that decide they want to grow and support their shipper-partners will have a hard time doing so.”

With more freight competing for scarce space, the capacity crunch certainly won’t ease during the next few months. “There has been an uptick in the economy, and the third quarter is traditionally busy for the trucking industry, in preparation for the holidays,” says Gizzi. Agricultural commodities harvested in the North and Midwest also compete for trucks in the second half of the year, he adds.

Driver Exodus

If the economy continues to recover, and demand continues to rise, carriers eventually will add more trucks. But finding people to drive those rigs won’t be easy.

Two-thirds of respondents to a survey of trucking companies conducted by Transport Capital Partners earlier this year said they were seeing a return of the driver shortage.

Driver turnover dropped during the recession, but carriers that need new drivers today are having a hard time finding them, even though the national jobless rate remains at nearly 10 percent.

“It’s more attractive to collect unemployment than to drive a truck,” Batts says. “Until Congress stops extending unemployment benefits when there are jobs going begging in the trucking industry, we will not get drivers.”

Many drivers left the industry during the recession as carriers laid off employees or, in some cases, cut pay. “Those drivers found opportunities that they may feel are better than trucking. If the economy picks up, it will be difficult to get them back,” says Leathers. “That will constrain capacity for years to come.”

GOVERNMENT safety rules

Observers expect the driver shortage to grow even more acute when the federal government implements Comprehensive Safety Analysis (CSA) 2010, a program of the Federal Motor Carrier Administration (FMCA) that will alter how the federal government rates carriers and drivers on safety.

One major provision in CSA 2010 involves drivers’ safety records. In the past, if a carrier fired a driver for safety violations, and the driver then applied to another company, that second company didn’t need to worry about the driver’s past performance. Every time drivers changed jobs, they started with a clean slate, Batts explains.

That will change under CSA 2010. “The driving record will travel with that driver, for the new employer to see,” Batts says. “In fact, that past driving record will impact the motor carrier’s safety rating.”

Because they can hurt the rating of any carrier that hires them, drivers with less-than-stellar safety records will become virtually unemployable.

“The current proposal will eliminate five to eight percent of drivers from the workforce,” Leathers says. “At a time when drivers are already hard to come by, eliminating that many makes it difficult to fill the truck and could lead to cost pressures on the driver side.”

Wayne Johnson, director of logistics at American Gypsum, a Dallas-based wallboard manufacturer, agrees. “Salaries have to go up in order to attract new drivers to the industry,” he says. “Shippers can expect eight- to 12-percent increases in transportation rates next year if that happens.”

ocean carriers slow down

Another reason trucking capacity is tight concerns the steamship lines that bring containers to U.S. ports. Ocean carriers also have limited space to offer these days, so freight sometimes gets bumped, says Tommy Barnes, director of transportation procurement at third-party logistics provider Menlo Worldwide Logistics, San Mateo, Calif.

In addition, ocean carriers are taking special measures to conserve fuel. “They’re ’slow steaming,’ which is further impacting lead time into North America,” Barnes says.

To stay on schedule once their goods hit the West Coast, more shippers are seeking expedited transportation, driving increased competition for limited truck capacity and pushing up costs.

Slow steaming renders shipping schedules less reliable, says Mike Segal, director of logistics at Sappi Fine Paper North America, South Portland, Maine. “A ship that is expected to arrive Thursday, but doesn’t arrive until the following Tuesday, creates problems with managing capacity and could impact our performance,” he explains.

To make sure it honors its service commitments, Sappi monitors shipments in real time and stays in continual contact with customers, updating them frequently on their orders and devising action plans should the need arise.

getting a green light

Ongoing efforts to reduce carbon emissions also increase costs for carriers and their customers. Motor carriers that operate in California have had to retrofit equipment to meet state emissions standards, while federal requirements have increased the cost of new equipment.

“The federal government’s requirements have a bigger impact, with the mandates on new engines, and the three-phased approach to engine changes to reduce emissions,” says Kirk Altrichter, vice president of maintenance at Gordon Trucking Inc. (GTI), Pacific, Wash. “The new engines are more expensive.”

power surge

One more change that could cause shippers some discomfort lies in the fact that tight capacity gives carriers greater power in contract negotiations. Along with higher rates, trucking companies can demand more stringent payment terms. In the days of slack demand, some shippers insisted on taking as long as 90 days to pay invoices. That’s not possible today. “Motor carriers are saying to shippers: ’You can’t find any trucks? Fine. You’ve got to pay me within 20 days,’” Batts says.

Taken together, all these factors mean that companies buying transportation services must work harder to find trucks to move their loads and to keep transportation costs at a level they can afford.

How to respond to these challenges? In some cases, shippers simply have to accept that they’ll pay more for the capacity they need. That’s what happened last spring when American Gypsum had trouble finding flatbed trucks to haul product from its plants to customer locations.

The company approached the shortage by meeting with carriers. “We discussed their requirements for bringing more trucks to our plants, and we negotiated better rates,” Johnson says.

Total costs were still higher than in the past, though. “In order to get those trucks to our plants, the carriers had to deadhead them farther in, and we had to pay for that,” he says.

The capacity crunch in the wallboard industry has eased since June 2010, when demand grew soft, Johnson says. But in many other sectors, shippers are still struggling to get all the trucks they need. And, like Johnson, other transportation buyers and their carriers agree that good communication is key to maintaining sufficient capacity.

“I recommend that shippers hold detailed meetings with their carriers to understand what their needs are, and how they may affect them positively and negatively,” says Leathers. “I also suggest they establish rules of engagement going forward with their partners, so there are no surprises.”

Transportation buyers who have been holding these conversations all alongnot just since capacity grew scarceprobably are in the best position today. A sense of partnership helps a great deal.

“We try to develop strategic relationships with our carriers,” says Segal. “We also try to make it attractive for them to want to support our customers. In part, that means meeting often to discuss performance and expectations.”

Nurturing long-term relationships has helped Menlo Worldwide hang on to much of its capacity for scheduled freight runs, says Barnes. The 3PL’s efforts have included staying loyal to good carriers when the economy turned sour. “We did our best, and we could always do better,” he says. “But we feel that the partners we had at that point are still with us today.”

Multiyear contracts also help buyers ride out fluctuations in supply and demand. “Typically we build in the necessary escalators and apply some element of cost-checking sanity to ensure that both organizations are protected for the long run,” Barnes says. “A long-term agreement also makes it easier to forecast, taking away much of the volatility that many companies experience.”

GTI tries to develop relationships with customers that don’t focus solely on rates. “Relationships are about long-term goals and commitments,” Altrichter says. “Some customers appreciate that, but others are all about how many pennies per mile they’re paying.”

Beyond creating a sense of mutual loyalty, transportation purchasers and carriers offer several other strategies shippers might use to get the trucks they require and keep costs under control:

Give carriers what they need. Segal and his team try to streamline the loading and unloading of trailers so drivers can get back on the road as soon as possible. “We try to be a ’carrier-friendly’ facility,” he says.

Leathers agrees that shippers save money if carriers can operate more efficiently. By expanding the hours available for drivers to pick up and drop off loads, for example, or loading trailers before drivers arrive, shippers can help carriers control their costs, partially offsetting the need to increase rates.

Contract for dedicated capacity. Shippers that signed up for dedicated fleets, then stuck with them even when freight volume decreased, are having a much better experience as capacity tightens. “Having those dedicated trucks in place as a risk management strategy was a very smart move,” Leathers says.

Barnes agrees that it’s sometimes wise to pay for assured capacity, even when volume drops temporarily. In some cases, Menlo allocates a certain number of trucks to a particular customer location even if it doesn’t need each truck every day. “It’s a kind of guaranteed truck model to ensure that we are matching capacity to the applicable demand,” Barnes says.

Consider shifting modes. “Shippers can look to intermodal or rail as an alternative to truck transport in some cases to address a capacity shortage,” Segal advises.

At Sappi, considering modal alternatives isn’t a tactic to try when trucks grow scarce; it’s an ongoing strategy. “A standard part of our portfolio is trying to optimize modes to ensure we deliver product most effectively,” Segal says.

Mode shifting is important at Menlo Worldwide as well. “Capacity on the railways has been pretty tight, but they are still operating at a decent level of efficiency,” Barnes says.

Improve visibility and forecasting. The more you know about exactly when your freight will be ready to move, the easier it becomes to secure capacity when you need it, and the less you’ll have to rely on more expensive expedited services. “Forecasting is the key because it gives us visibility to apply some less conventional strategies such as mode conversion and load consolidation,” Barnes says.

Plan for future regulatory changes. To prepare for the adoption of CSA, Johnson and his team at American Gypsum plan to canvass all their carriers about driver safety scores. “If we find carriers with less-than-adequate scores, we will probably have to replace them,” he says. “All smart shippers will be doing that at some point this year.”

But shippers shouldn’t start canvassing too soon, Johnson cautions, because plans for CSA 2010 are still in flux. Pressure from the shipper, carrier, and driver communities could persuade FMCA to change some terms that will affect drivers’ scores.

One big point of contention is a provision that would penalize drivers any time they are stopped by police, even if they receive only a warning rather than a ticket. “A warning is a minor infraction, and it should be treated as a minor infraction. It shouldn’t go against the driver’s record,” Johnson says.

Johnson, who chairs the highway transportation committee at the National Industrial Transportation League, is also keeping an eye on the Safe and Efficient Transportation Act of 2009, a bill currently in the House of Representatives that would allow states to increase size and weight limits on tractor trailers.

“We support the bill,” he says. The increase would give the industry more capacity without having to boost the total number of trucks or drivers.

While it’s not clear what exactly will happen in Washington, it is clear that buying trucking services won’t get easier very soon. Shippers need to pay attention, think creatively, and rely on the goodwill they have built up with their carriers over time.