Buying Trucking Services: Managing the New “Normal”

While guaranteed capacity to haul freight was once a sure thing, times have changed. How are shippers and carriers dealing with today’s tight transportation environment? It’s all about collaboration—to mitigate capacity constraints, the driver shortage, and tough new federal regulations.


Number Crunching

“For a long time, manufacturers have taken three things for granted: energy would be cheap, we’d have an abundant supply of warehouse labor at low rates, and we would always find carriers to haul our freight.

“None of these three is true today,” says Dee Biggs, director of customer logistics for Welch’s, the Concord, Mass.-based food manufacturer famous for its juices and jellies.

While each of these issues is cause for concern, carrier capacity is the most troublesome for Welch’s.

“It’s difficult to get carriers to haul our freight, especially during the fourth quarter of the year, when the driver shortage really comes to bear,” Biggs says. “Capacity constraints significantly impact retail by increasing out-of-stock levels. It’s one reason why on-time delivery in the grocery industry has dropped 15 percent in the last few years.

“Our customers ask us to take time out of the supply chain, reduce inventory, and improve cash flow,” Biggs adds. “But these requests run right into the eye of the carrier capacity storm. Our inability to find enough capacity creates ripple effects throughout the supply chain.”

“Gone are the days when corporate executives can take efficient, low-cost, reliable freight transport for granted,” agrees Leonard Sahling, first vice president, ProLogis Global Research.

“None of these transportation problems will be fixed overnight. This is the new normal. Let’s just get used to it and figure out what options are available for dealing with the problems,” wrote Sahling in an August 2006 report titled Moving Freight Today—How Shippers are Creating Greater Capacity, Reliability, and Rate Stability.

Figuring out options and solutions is exactly what leading manufacturers, carriers, retailers, and distributors are doing. They are working collaboratively and individually to develop strategies for dealing with U.S. trucking’s current state of affairs.

Burning Issues

Trucking is the lifeblood of the U.S. economy, representing nearly 70 percent of the tonnage—including manufactured and retail goods—carried by all domestic freight transportation modes. Trucks are projected to haul 13 billion tons of freight in this country by 2016, up from 9.8 billion tons in 2004.

While debate continues as to whether 2007 will be a recessionary period or a mid-cycle correction, “through the balance of this year into the early part of next year, we expect demand to continue exceeding capacity,” says Todd Jadin, senior vice president of operations for Schneider National, Green Bay, Wis., one of the nation’s largest truckload carriers with 11,000 trucks and 15,500 drivers.

Other truckers also predict gains next year.

“The marketplace is not as strong as it was during the past year or two, but we are experiencing some capacity growth,” notes David McClimon, senior vice president of Con-way Inc. and president of Con-way Freight Inc., Ann Arbor, Mich., its $2.8-billion transportation and supply chain services subsidiary.

Two burning issues that carry long-term implications for the trucking industry are labor demographics and driver availability. “We’re faced with an aging driver pool,” admits Jadin.

The average U.S. truck drivers is 57 years old, which means the shortage will get worse in the near term as these drivers retire.

In addition, the traditional driver candidate doesn’t necessarily exist today. “When families sit down to discuss what their children will choose as a profession, not many say, ‘I’m going to be a truck driver,'” says Jadin.

A Disappearing Breed

“The driver who gets in a cab and drives 120,000 to 130,000 miles a year is a disappearing breed,” says Brooks Bentz, a partner with supply chain consultancy Accenture. And the demographics show that the population making up most of the driving pool is not growing nearly enough to meet rising demand.

Today’s truck drivers want predictable schedules and they want to be home on weekends. But retailers want deliveries seven days a week. They want to reduce order cycle times and carry less inventory. “These priorities don’t mesh well with what the drivers want,” Biggs notes.

The aging driver pool and changing work-life preferences aren’t the only dynamics affecting labor pool capacity. Recently adopted driver hours-of-service federal regulations factor heavily into this labor mix.

The new 2005 rules, among other things, reduce the amount of time a driver can work in any given shift to 14 hours total. This 14-hour period includes pre-trip inspections, meal breaks, and dwell time at delivery sites.

“The hours-of-service rules, and particularly the 14-hour consecutive clock, have been a big adjustment for carriers,” Jadin says. “Once a duty day starts, it’s critical to maximize driver productivity and minimize down time. We need to get that equipment back on the road because we only have a 14-hour window of revenue-producing opportunity.”

Rise and Shine

The new hours of service regulations have had other significant effects on trucking. Because of the new rules, for example, the industry has moved to an early morning schedule—5 a.m. to 7 p.m., 6 a.m. to 8 p.m., or 7 a.m. to 9 p.m.

This makes it more difficult for drivers to find a wayside parking location because all carriers are working the same hours. “And, drivers have experienced a noticeable rise in congestion,” says Jadin.

The hours-of-service rules also have a substantial impact on capacity.

“We’ve seen a 4 percent to 5 percent annual reduction just in the ability to put miles on the tractors in our private fleet. This translates into more trucks needed to move the same amount of cargo,” reports Mark Whittaker, vice president of transportation for food and beverage manufacturer PepsiCo Inc., Purchase, N.Y.

These pressures naturally filter down to shippers. “The hours-of-service regulations have clearly slowed transportation down,” Biggs says. “And because the rules were enacted during a driver shortage, the balance of power between manufacturers and carriers has shifted, driving rates up across the board.”

Despite their impact, the new hours- of-service rules are accomplishing what federal regulators set out to do—improve safety. Industry safety statistics indicate that the hours-of-service changes are creating a safer driving environment.

“The science behind the change is solid, and the new rules are dealing with the driver fatigue problem,” says Jadin.

The Clean Air Mandate

Another federal regulation recently went into effect, one that will have a profound impact on trucking between now and 2010—the U.S. trucking industry began transitioning to ultra low sulfur diesel (ULSD) fuel.

The Environmental Protection Agency (EPA) mandated that by June 1, 2006, 80 percent of the on-road diesel fuel refined or imported in this country be ULSD. Outlets selling fuel to truckers have until Oct. 15, 2006, to comply with the new rules.

The new fuel standard reduces the amount of sulfur in on-road diesel by 97 percent and supports smokeless diesel engine technologies due to hit the market in 2007.

The American Trucking Associations (ATA), however, expresses concern about the combined impact of ULSD and progressively stricter EPA engine emission requirements on motor carrier cost structures.

“ULSD will force the trucking industry to spend more money on fuel that is less efficient at a time when current fuel prices already are hitting historic levels,” the ATA says. “ULSD, for example, is expected to add about 5 cents to the production and distribution of every gallon of fuel, reducing fuel economy by up to 1 percent.”

Motor carriers will spend $98.3 billion on fuel in 2006, a $10.6-billion increase over the $87.7 billion the industry spent on diesel fuel in 2005, the ATA projects.

The new cleaner truck engines are more expensive—approximately $7,000 to $8,000 per tractor in the heavy-duty market. They may also cost more to maintain.

“The new restrictions create a scenario where carriers have to pay more for fuel that operates less efficiently and costs more to maintain,” notes Con-way’s McClimon. “For carriers driving 600 million miles a year, a change as small as one- or two-tenths of a gallon makes a huge difference.”

Aware that its stricter emissions standards will impact motor carrier operations and costs, the EPA is encouraging shippers and carriers to participate in its SmartWay Transport Partnership program. This voluntary partnership between various freight industry sectors and the EPA establishes incentives for fuel efficiency improvements and greenhouse gas emission reductions.

This initiative aims to reduce between 33 million and 66 million metric tons of carbon dioxide emissions and up to 200,000 tons of nitrogen oxide emissions per year by 2012. At the same time, the initiative will result in fuel savings of up to 150 million barrels of oil annually.

PepsiCo participates in the SmartWay program, which encourages shippers and carriers to work together to reduce tractor idling, utilize equipment more effectively, and increase use of rail intermodal.

“SmartWay is a great opportunity to remove waste from the system,” PepsiCo’s Whittaker says. “It helps shippers and carriers put together a plan to reduce their environmental footprint.”

Motor carriers are taking a number of steps to address the myriad business challenges they currently face. To help mitigate the driver shortage, for instance, some carriers are looking to non-traditional demographic groups, such as the Hispanic American community, for candidates.

“This is the fastest-growing demographic in the United States, but there are very few Hispanic American drivers right now,” notes Jadin of Schneider, which is actively working to recruit Hispanic drivers.

To help attract Hispanic Americans to the industry, Schneider recruits in Spanish, employs Spanish-speaking instructors and dispatchers, and provides training material written in Spanish.

Schneider also is looking to draw more women to the profession. “Women currently represent a very small portion of the total driver population,” Jadin notes.

In addition, Schneider is rethinking its operations to make the work more attractive to drivers. “Our challenge is to configure the driver’s work activity so it is more in line with a predictable lifestyle,” Jadin says. “We’re working to engineer long-haul routes so they offer drivers more predictability than purely random routes.”

For example, the carrier recently instituted a “home run” program, where a long-haul driver is on the road for three weeks, then gets one week off at home.

Keeping it Private

Private fleets also are attracting new drivers by offering predictable work schedules.

“We attract and retain good drivers by adding predictability to their schedules,” says Whittaker. “PepsiCo’s dedicated fleet has 5 percent to 10 percent turnover, versus 136 percent in the for-hire truckload sector.”

Many manufacturers are going back to operating private fleets in markets where truck capacity is particularly tight and where service performance is critical. This is especially true for companies that need or want control of transportation assets to guarantee capacity and service.

“But these are not the private fleets of old—which were typically company-owned assets with low productivity and high-cost operations,” Bentz says. “In many instances, today’s fleets are more efficient dedicated contract carriage operations run by companies such as Penske, Ryder, and Schneider.”

Shippers are also working to address industry challenges. Welch’s, for example, is working to make its freight more appealing to carriers and their drivers.

“Our freight was not always attractive to carriers, so we’ve tried to improve,” acknowledges Biggs. “That means getting drivers home on weekends, tendering loads that can be delivered in one day, and helping carriers improve revenues.”

Juicing Up the Network

Welch’s is also working with key customers to adapt delivery practices that help carriers maximize equipment and labor.

For example, Welch’s has a few customers that received frozen-food deliveries at one time of day and dry goods at another.

“If we wanted to do a combination dry/frozen delivery, the driver would run out of hours and the carrier would have to hold part of the load overnight,” says Biggs. “We’ve been working with these retailers to convince them to do both types of receiving at one time. We’ve even offered to split the fee we would have paid the carrier for the overnight service.”

In some areas of the country, Welch’s has had to re-think its distribution network, establishing new regional locations to offset the impact of tight capacity. “In some cases, this may increase our costs, but it allows us to offset the capacity shortage,” Biggs says.

PepsiCo also is taking a different look at how it manages transportation in light of the capacity crunch. Typically shippers present their freight volumes to carriers via a yearly bid process, and carriers rationalize their networks in response to these bids. Carriers look for shippers that match to their operating model.

“The problem with this process is it just swaps capacity from one shipper to another; it doesn’t create new capacity,” Whittaker notes.

However, a tremendous untapped opportunity exists to create capacity—not by adding more trucks, but by reducing waste in the network, says Whittaker.

“Collaborating with other shippers uncovers synergies in freight flows,” he explains. “Until a few years ago, shippers didn’t want to discuss joining forces to fill truck routes. They held their transportation cards close. The capacity shortage is changing that.”

PepsiCo is working to create a captive network that finds backhaul opportunities for carriers so they have a reason to return to its original location.

“We work with other shippers that have freight volumes coming back on the return route,” Whittaker says. “We have put a strong effort into developing these ‘power lanes’—where large volumes of freight move between two points.”

Companies are adopting other measures to eliminate waste and streamline transportation operations, according to the ProLogis study. These include:

  • Reconfiguring distribution networks. Adding consolidation or deconsolidation centers ensures that freight gets moved as full containerloads and full truckloads.
  • Taking responsibility for their own freight bills. This includes creating the most efficient freight lanes, leveraging aggregated transportation spending to negotiate better rates and capacity, and ensuring daily execution that realizes the best negotiated rates.
  • Forging collaborative ties with carriers. Many companies are also striving to become their carriers’ preferred customer.
  • Extracting greater capacity from existing fleets and facilities. Companies can maximize capacity by improving truck trailer cube utilization, eliminating empty trucks and dead-head miles, and extending their hours of operation.

From Victim to Victor

Shippers must get serious about becoming better customers for their motor carriers, and work collaboratively to solve these trucking issues.

“We have to ask ourselves, ‘how can we become more efficient shippers?'” Biggs suggests. “What can we do to provide carriers with shipping information ahead of time so they can do a better job of planning and moving that freight? What can we do to reduce empty miles and unnecessary handling? How can we reduce loading and unloading time?”

“We’re trying to move from being a victim of the environment to a victor by creating capacity,” Whittaker says. “Eliminating waste is one way to do this.

“Carriers and shippers must unite to fight this battle,” he adds. “The bottom line is, I have to move my products from point A to point B in such a way that my customers think everything is fine, and I have to do that cost effectively.

“In the long run,” Whittaker says, “we can’t accomplish these objectives unless carriers and shippers work together to take waste out of the system and free up capacity.”

Number Crunching

Trucking companies—both public and private—and warehouses employ an estimated 9 million Americans.

How many trucks operate in the U.S.?
An estimated 15.5 million trucks operate in the United States, 1.9 million of which are tractor-trailers.

How many truckers are there?
More than 3.3 million truck drivers work in the United States. One in 10 are independent, and the majority are owner-operators. Canada employs more than 250,000 truck drivers.

How many trucking companies operate in the U.S.?
An estimated 360,000 motor carriers operate in the United States. Ninety-six percent operate 28 or fewer trucks; 82 percent operate six or fewer trucks.

How much revenue does the trucking industry produce?
Total revenue estimates are $255.5 billion. For-hire, or common carriers, generate an estimated $97.9 billion, more than air transportation, which generates about $18 billion. Private fleets generate revenue estimated at $121 billion.

What is the average operating ratio for trucking companies?
The average operating ratio is 95.2. This means for every dollar it produces in revenue, the trucking company has a cost of 95.2 cents, netting a profit of 4.8 cents on the dollar.

How much do truck drivers earn?
Drivers earn an average of 30.3 cents per mile. Average yearly income for drivers is $32,000. Owner-operators make slightly more, on average.

How much does the trucking industry pay to operate on U.S. roads?
The trucking industry pays an estimated $21.4 billion annually.

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