Freight Management Today:

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1 Freight Management Today: More Freight, Fewer Trucks and Drivers Small and mid-sized companies must take aggressive steps to lock in capacity or risk losing market share The numbers don t lie. The economy is returning to pre-recession levels and freight volumes are rising. At the same time, carrier failures, fleet reductions, and the ongoing exodus of drivers from the industry have drained the freight market of much of its capacity. This combination of rising demand and diminished capacity is creating a dangerous imbalance to which shippers have been slow to respond. The risk is greatest for small and mid-sized companies, who lack the leverage to ensure available carrier capacity at a reasonable price. But there are steps you can take now to manage freight requirements during the coming capacity crunch to avoid supply chain disruptions and protect your market share. REV

2 The capacity shortfall: how we got here What a difference a year makes. In 2009, even small companies had carriers at their doorsteps clamoring for any freight they had to offer. But with the economy rebounding, the market is shifting in favor of the seller. The Morgan Stanley truckload freight index tracks the relationship between freight demand and capacity the lower the number, the less the demand. Figure 1 illustrates the index in 2004, when demand far outstripped capacity, in 2009, when demand was soft, and in The recent economic downturn resulted in capacity leaving the market as carriers either went out of business or reduced their fleet sizes. But as the economy rebounds in 2010, capacity is not keeping pace with freight volume, driving the index up toward 2004 levels and driving traffic managers to adjust to a seller s market. The following numbers suggest a gloomy forecast for carrier capacity: Among carriers with five or more trucks in their fleets, close to 5,000 business failures were reported in 2008 and 2009, combined (Avondale Partners, LLC). Carrier failures are expected to continue in 2010 as smaller trucking firms in need of capital struggle to meet banks stricter lending requirements. Truck sales have plummeted as retired trucks and units sold offshore are not replaced. In 2009, the ATA reports that 94,778 class 8 trucks were sold the weakest annual reading since 1983 and just one-third the number of class 8 trucks purchased in Another issue clouding the outlook for improved capacity is the chronic driver shortage, which will worsen in Drivers leave the industry for several reasons: Figure 1 Retirement. The average age of a truck driver is 43.1, but a large percent are approaching retirement age. Lifestyle. Younger generations are less inclined to sacrifice family life for a trucker s income. For them, the lure of the road is simply not as strong as the lure of weekends at home. Alternate jobs. The construction industry is on the upswing, thanks in part to the influx of federal stimulus dollars into highway and other infrastructure projects. More and more drivers are trading in their GPS units for hard hats.

3 A dirty little secret that does not get discussed is that some drivers are not pursuing re-hire offers, electing to stay on unemployment. Many have off-the-book work that, when added to unemployment benefits, brings their income to about where it was when they were hauling. One element of the freight capacity challenge that has yet to hit, but will hit hard beginning in 2010, is Comprehensive Safety Analysis 2010 (CSA-2010), the Federal Motor Carrier Safety Administration s new safety rating program. The program will target unsafe carriers and drivers by raising the bar on safety performance. As a result, another 10 percent of the current driver force could be rooted out of the industry. How are shippers reacting to clear signs of a capacity shortage? Through bankruptcies, shutdowns and consolidations, 14% (or 223,000 trucks) of the national truckload fleet has been liquidated and sold offshore (source: BB&T Capital Markets). Shippers are underestimating the potential impact of diminished capacity on their businesses. Figure 2 illustrates the relationship between U.S. gross domestic product (GDP) and dry van capacity since As the recession hit in 2009, freight volumes plummeted and capacity declined sharply. But as the economy turns, capacity continues to lag. Predictions are for the gap between demand and capacity to widen as we enter Shippers have been slow to adapt their freight planning and sourcing strategies for different reasons. Some question whether the current economic recovery is real and sustainable. Others see the capacity crunch as a short-term challenge. Make no mistake, aligning demand and capacity will be a decade-long readjustment. For small and mid-sized shippers who are most vulnerable to capacity shortages, now is the time to reevaluate your transportation program. Figure 2 What s at stake if you don t? At worst, you risk losing market share. Companies typically need many reasons to choose your product over your competitor s, but just one reason to leave. You can t afford supply chain disruptions linked to lack of freight capacity. Nor can you afford the hit to your company s profitability if you re forced to overpay for capacity in a tight market due to lack of planning.

4 What can you do to help lock in capacity at reasonable rates? There are three strategies you can pursue to protect your business and actually turn freight management into a competitive advantage. None are silver bullets, but together they provide a hedge against tightening capacity and will help ensure service to your customers at a reasonable rate. Strategy 1 Make your freight more attractive to carriers through your own network or through a third-party logistics company The simplest path to increased buying power is your own freight network. If you have multiple locations that manage their own freight moves, centralizing these freight purchases can yield improved rates and greater carrier attention. For smaller shippers who buy freight direct, creating an attractive freight network is difficult to achieve without outside help. In these cases, the best strategy may be to collaborate with like shippers through a consortium or by partnering with a third-party logistics company (3PL) to manage your freight. When capacity is tight, you need to make your freight more attractive to carriers. One way is the promise of more freight volume, which can be achieved by combining your volume with that of other companies via a 3PL. Another is to become part of a dense freight network that can offer carriers continuous runs so they don t have to look for freight elsewhere. Again, the right 3PL will have such a freight network in place, along with the systems needed to manage continuous moves. Other advantages of partnering with a 3PL include: Surge capacity. In a tight freight market, lanes that were once easy to cover become problems, particularly for smaller companies who buy freight direct. 3PLs can provide peace of mind that capacity will be available when and where you need it, including holidays and heavy shipping seasons. Variable cost structure. A 3PL can provide interim dedicated capacity to support short-term volume surges. This pop-up fleet costs slightly more but eliminates any business risk linked to capacity shortages. Technology platform. When you partner with a 3PL to manage your freight, you leverage a multi-million dollar technology investment that supports broad visibility by carriers to all the freight in the 3PL s system. With the touch of a button, your loads are seen via the web by thousands of carriers who compete for your business.

5 Strategy 2 Get good at demand and capacity planning. Sales forecasts are notoriously inaccurate, so few companies are good at predicting future capacity requirements. Becoming the exception sets you apart and gives you a distinct advantage with carriers, who will commit capacity if they are confident that goods will flow as planned. If you know your sales forecast several months out, you can convert this volume into a shipment requirement, by lane and by facility, and communicate these requirements to your carriers. This early request for capacity increases your chances of getting a carrier s commitment to haul the freight. Carriers appreciate advance notice because it s good for their business and allows them to: Redeploy sales resources to untapped markets Plan driver schedules to maximize drive time and productivity Get a head-start on scheduling backhauls to reduce empty miles No doubt, there s time, effort and some angst involved in melding the cross-functional resources required to create an accurate freight forecast. But as the competition for capacity intensifies, so too must your efforts to create collaborative partnerships with carriers. Strategy 3 Create Driver-Friendly Locations. Take a hard look at your facilities from a driver s point of view. Ask yourself, Is this a location a driver would want to return to? This question is becoming even more important given the changing make-up of the driver base. A significant and growing portion of the freight market is made up of owner-operators who, unlike company drivers, have a choice about whether to return to your location. If freight is available from multiple companies in your area, drivers will choose locations that provide rapid check-ins, have clean and safe facilities, and get them back on the road quickly. Of course, being driver friendly won t make up for a poor location. If your plant or distribution center is in an area with little freight, carriers may choose to haul in higher traffic lanes with less risk of profit-draining deadhead miles.

6 Take proactive steps to protect your business The trend lines for freight volume and freight capacity are moving in opposite directions, creating a strain on available capacity that will last for years if the economy continues to rebound. What s at stake is your continued ability to deliver product to your customers at a price your business can afford. It s time to act, not wait for the next freight forecast. What s the number one thing you can do today to protect your business from future supply chain disruptions? Close your door, hold your calls, log off , and just THINK. For at least an hour, think about these three questions and whether you are well-positioned to compete for diminishing freight capacity: Should I buy freight direct, or would partnering with a 3PL increase my flexibility and leverage with carriers? Is my company good at long-term demand and capacity planning and are we proactively sharing that data with carriers to ensure future capacity? Are all my locations driver friendly? If your answers suggest you are ill-prepared for the coming capacity crunch, meet with right people, including your carrier partners, to discuss what actions could be taken at your company in the next quarter to create a more carrier-friendly climate. The future health of your supply chain depends on it About PLS Logistics Services PLS Logistics Services is one of America s largest freight brokers and the largest third-party logistics provider to the industrial sector. The company s 8,000 pre-qualified carrier partners give shippers access to 150,000 trucks, including the largest network of flatbeds in North America.