Supply Chain Finance:
Capitalizing on Growth Trends
The business case for capitalizing on record freight volumes is clear. Hereâ€™s how to unlock immense sums of money in the supply chain.
Freight volume is at an all-time high and shares of many large trucking firms are trading at record levels. The race to add capacity is on but a huge roadblock stands in the way. Due to the national shortage of truck drivers, carriers can’t add capacity fast enough to take advantage of the flood of new shipping business.
As a result, shippers are stuck in second gear, with loads vastly outnumbering trucks as freight volumes climb to record heights. A shortage of trucks is forcing companies to pay higher shipping rates, delay nonessential shipments, or cancel loads completely.
Fueled by strong demand and the tax overhaul, trucking companies in January 2018 ordered the most big rigs in almost 12 years, but many are not expanding fleets. For the most part, they’re only replacing aging equipment.
Worse, tractor trailers require drivers and truckers are scarce as produce season gets underway. The American Trucking Associations (ATA) reports that the industry is short 50,000 drivers, a figure that could reach 175,000 by 2024 as current truckers retire. Autonomous driving trucks may offer a solution but mass adoption is many years away. Further, even as fleets add capacity, it can take months and even years to catch up with shipper demand.
While there’s many disruptors crimping capacity—rising diesel prices, extreme weather, and new safety regulations—combating the driver shortage is top priority.
Doing so requires a new mindset, along with a different type of investment model, to ensure long-term success. The U.S. truck driver population is aging rapidly and heading for retirement. According to the ATA, the average age of a private fleet trucker is 52, followed by 50 at less-than-truckload (LTL) carriers, 49 at full truckload (FTL), and 47 at drayage operators. Replacing them with younger drivers as the workforce nears full employment will require drastic new approaches to recruiting and retention, including higher wages and reducing over-the-road stress.
Leveraging Growth Trends
Preparing for the future is expensive, but the business case for capitalizing on record freight volumes is clear. Trucks carry 70 percent of goods shipped across the United States, and many companies, such as Tractor Supply Co, Prestige Brands, Clorox, and Sysco, blamed rising freight costs during their fourth quarter earnings calls for falling profits. Specifically, as the poultry industry prepares for record growth, Tom Hayes, president and CEO of Tyson Foods, recently told analysts that rising freight costs would impact the company by more than $200 million in 2018, resulting in increased prices for consumers.
Traditionally, firms capitalizing on growth trends raise capital by selling equity, issuing debt, or selling a lesser performing unit of the business. These strategies work, but they’re not innovative—and they’re costly.
A better way to generate capital is to unlock the potentially millions of dollars stranded in the supply chain. Implementing a supply chain finance (SCF) program allows carriers to extend payment terms with suppliers, decelerating cash outflow and providing access to available funds without negatively affecting the balance sheet. At the same time, suppliers can leverage an SCF program to control timing of payment, including accelerating payments dramatically in return for a small finance fee.
Both sides win, because both sides have increased access to working capital, making SCF a game-changing strategy for boosting trucking capacity.
To thrive, supply chain stakeholders must speed toward the road ahead. Freight volume is at its highest levels in years due to rising manufacturing output, housing and construction, and consumer spending, but truckers are required to drive the American economy. SCF is the best way to unlock immense sums of money in the supply chain, allowing it to work for the company’s future without the negative effects of traditional financing options.