Truckload Carriers and E-commerce: Serving the Middle Mile
E-commerce is redrawing the landscape for freight transportation. Do truckload carriers have a place in this new world of high-velocity supply chains, especially as shipments get smaller and delivery windows shrink?
As consumers buy more and more goods of all types online, the explosive growth of e-commerce sales foreshadows not only good news but also dramatic challenges for the nation's supply chain networks and the freight transportation companies that provide the backbone of those networks.
E-commerce sales between 2012 and 2019 will grow at an annual rate of 14.9 percent, which is more than five times the rate of growth for traditional brick-and-mortar retail sales (minus gasoline and groceries), according to a U.S. Department of Commerce report. At this rate, by 2019, e-commerce will account for nearly 20 percent of all retail sales.
Rising e-commerce volumes are fueling a trend toward smaller, more frequent shipments delivered under increasingly shorter timelines, which generally benefits parcel and less-than-truckload providers.
But what about truckload carriers? The truckload industry is projected to generate some $358.6 billion in revenue in 2018, according to industry reports. Approximately 540,000 motor carriers are registered in the Federal Motor Carrier Safety Administration's database—everything from one-truck operators to 20,000-truck fleets.
Where does the nation's largest trucking segment play in an environment where virtually every business that sells or makes a product is adjusting its supply chain strategies to compete and win in an e-commerce-driven world? As this new landscape continues to unfold, who will be the winners?
"Truckload today already has a huge business in e-commerce," says Satish Jindel, president of SJ Consulting Group in Pittsburgh. "Truckload carriers are moving lots of loads between Amazon distribution centers, as well as from manufacturing sites into fulfillment warehouses. It's the middle-mile piece."
Traveling the Middle Mile
"Regardless of where the product is being consumed, from online or a brick-and-mortar store, it still has to travel that middle mile," agrees Rachal Snider, a former Kraft-Heinz supply chain executive who recently joined Niles, Illinois-based third-party logistics (3PL) provider AFN Logistics as vice president, customer supply chain. "Full truckload will continue to thrive there."
Truckload service options such as expedited, dedicated, multi-stop, pooling, or consolidation opportunities offer flexibility and should be part of an overall transportation strategy for managing e-commerce-generated freight. "We will see more collaboration with shippers as we get more innovative," Snider adds.
As a 3PL, AFN's goal is "working with the carrier and the shipper, trying to keep landed cost as low as possible, and doing whatever we can to increase velocity. Velocity is the value," she says.
E-commerce is fueling growth at most of CRST International's divisions, but particularly in its expedited business, which deploys some 2,000 trucks with team drivers. "We are seeing huge demand out of the ports, mostly California," says David Rusch, president and chief executive of the Cedar Rapids, Iowa-based provider of truckload and logistics services. "It's heavily e-commerce-driven, going to fulfillment centers across the country."
Keeping up with that demand is proving a challenge. "For every truck running expedited, we have three loads to choose from," Rusch notes. The choke point is qualified drivers. Recruiting and retaining drivers, especially for teams, "is the toughest I've seen in 40 years," he adds..
He also sees supply chain velocity as the sweet spot, the critical performance factor most shippers say is paramount. Meeting the demands of high-velocity supply chains requires dedicated personnel and resources, operational discipline, constant communication and predictable service.
Little Room for Error
"Speed and consistency are the top priorities with e-commerce freight," says Rusch. "There is little room for error, and when a problem comes up, you have to be prepared and act quickly. It is much more intense and demanding than traditional, commoditized truckload freight."
It's clear that e-commerce is disrupting traditional retail sales mediums, with convenience, selection, and price being the key drivers of changing consumer-buying behaviors.
"If we accept that as the objective function in the growth of e-commerce, we can apply that to freight delivery," says James Reed, chief executive of USA Truck, a $430-million truckload carrier based in Van Buren, Arkansas. "How do we make it convenient, offer choices such as variable service levels, and be price-competitive?
"It's generally by offering time-critical, flexible options," he adds. "That's where it lands for shippers. They need flexibility and consumer choice, and it can't be price-prohibitive. There is a classic utility curve to think about here. When the benefits of flexibility and choice exceed the price, people will change."
As shippers work to get closer to their customers, and carriers adjust to evolving demands, "we have to be totally linked in with them and able to change our networks to align with where they are headed," says Reed. "The demands of e-commerce are just as new to shippers as they are to us. Everyone is trying to figure it out."
The E-Commerce Challenge
SOURCE: US Department of Commerce, BofA Merrill Lynch Estimates
Finding the Sweet Spot
Feedback and collaboration are critical. "When we talk with customers, they are intrigued, excited, and a little enlightened," says Reed. "They want to share ideas. They want open dialog. They don't have preconceived notions of what the solution should be."
The sweet spot, Reed says, "is having a voice, helping customers find out what's best for them, and then delivering on that."
Shippers can incorporate truckload services in three primary areas of their strategies for e-commerce generated freight. "First, shippers can move truckloads of high-volume items direct to distribution centers," says John Larkin, managing director of transportation and logistics for Stifel Equity Research. "Second, truckloads of multiple SKUs can be used to reallocate inventories between distribution centers, or, third, to deliver multiple SKU loads to smaller footprint urban fulfillment centers."
One challenge is for carriers to find some regularity in shipment patterns to ensure network balance isn't thrown out of kilter. "This is not a trivial challenge," Larkin adds.
Truckload carriers clearly have a place in this market, however. "Truckload carriers can deal directly with e-commerce shippers, or can provide alternative line-haul service for LTL carriers and parcel carriers," Larkin notes. The LTL and parcel business often can be easier to manage as it's less volume- and lane-variable than traffic hauled directly for an e-commerce shipper.
How has e-commerce changed the game? "Given customers e-commerce service expectations, and continually evolving e-commerce freight patterns, truckload carriers need to deliver higher service levels," Larkin explains. "And they need to be more flexible with respect to operating plans. Not all carriers will be up to the task."
How do truckload carriers identify the opportunities, risks, and challenges of e-commerce freight, and then find the service and value proposition that resonates with the shipper?
It requires taking a step back, finding a different approach, and understanding why this market is different. "Carriers have to be able to innovate and create—provide a solution, not just a truck," says Michael S. McClelland, senior vice president and head of $1.1-billion Knight Transportation's supply chain solutions group.
He sees three areas of opportunity. First are the traditional "big DC to big DC" moves, which typically are longer length-of-haul yet require stringent service and visibility.
Second is moving goods from big DCs to a growing number of smaller regional or metro-focused fulfillment centers, where the length of haul is much shorter and on-time delivery just as critical.
Third is helping e-commerce shippers "connect the dots."
"What has emerged is more use of truckload carriers between major metro areas, repositioning fast-moving inventory between multiple fulfillment centers," says McClelland. "We're also seeing more opportunity for pool distribution, multi-pick or multi-drop operations, and pick-and-run strategies where one truck and driver makes en-route pickups from multiple suppliers and delivers to a warehouse or retail store."
Optimizing for e-Commerce
With the technologies available today, all these strategies have come into play. "Those who are more agile are using data and advanced analytics to identify trends and then optimize for them," notes McClelland. "Whether it's commingling freight from multiple e-commerce customers, or building dynamic, dedicated routes, that's opportunity for truckload—helping customers manage through the ups and downs of their business."
McClelland also echoes a common theme from many carrier executives: E-commerce freight requires a focused team with specific skills, tools, and resources. "Because of the high customer expectations and service sensitivity, carriers cannot mix e-commerce freight with regular business," he says. "They need a team that is trained for and dedicated to that business."
Overall, shippers need to recognize how e-commerce is changing not only their business, but that of their truckload carriers. It's a shift that has implications for both parties.
"Truckload carriers should not panic and think they have business at risk just because of e-commerce," says SJ Consulting's Jindel. "Especially in light of the capacity imbalance we see today, truckload carriers should use the opportunity to bring more discipline to how they allocate capacity and how customers use it."
Jindel cites as an example the time and money a driver and carrier lose when the driver has to wait hours at the customer's dock to load or unload.
"This has to change," he says. "When the market is tight, that is the best time to bring better pricing and operating disciplines to the market."