Fear, Uncertainty, and Doubt in Transportation Markets

| By Mike Eaton | Principal, Transportation | Chainalytics |

It’s no secret that the volatility surrounding transportation costs can quickly bust an operating budget and have profound negative impacts on an organization’s earnings. As many are aware, we’ve entered another cycle of tightening over-the-road (OTR) transportation capacity and the associated pressure on rates, which several major companies are blaming for recent reports concerning missed earning targets. Industry pundits cite favorable economic trends, the chronic shortage of truck drivers, and imminent enforcement of new ELD (electronic logging devices for drivers) standards as contributing factors.

Our recent observations at Chainalytics with our Freight Market Intelligence Consortium and in assisting clients with transportation procurement events confirm rate pressure and capacity concerns are very real. With organizations experiencing falling profits, expect shareholder pressure to cascade through the board and C-level executives, ultimately falling upon logistics and supply chain teams to find solutions which diminish the impact of higher transportation rates and operating costs.

Most tend to view truckload transport as a nearly perfect market. Supply and demand are real drivers as are uncertainty, fear, and doubt around real and perceived constraints. I recall my first meeting with a carrier representative as a young transportation analyst 30+ years ago as I was lectured on the imminent crisis related to driver availability. I’ve heard the same message for most of my years in the industry and continue to nearly every day today.

So what to do in the face of these pressures? Generally speaking, transportation markets are highly fragmented among shippers and carriers. Neither holds long term leverage over the other, and individual shippers can’t do much about where the market is going. However, there are several short-term and ongoing tactics and strategies firms may employ to mitigate what’s occurring in the marketplace:

Transportation procurement – during periods of transportation inflation, the natural reaction of many shippers is to avoid going to market in their regular cycle. However, the market is going to move with or without your participation. Failing to address rate relief in the face of real market inflation simply results in increased tender rejection, increased use of spot markets, and typically decreased service levels. The best course is to continue your procurement rigor and ensure the organization has the optimal mix of carrier/lane/volume commitments it can under current circumstances.
Fleet redeployment or growth – many of our clients use private or dedicated fleets as part of their transportation services portfolio. I’ve written repeatedly over the years that fleet cost structures tend to move up and down more slowly than the contract OTR market. In many instances the rate and capacity pressure in the contract OTR sector is not homogenous across your lanes. Seek opportunities to cost effectively “swap” lanes between the fleet and contract carriage. This can be done at a very rigorous level through transportation modeling or more rapid evaluation through rigorous fleet costing and spreadsheet based evaluation. In some instances it may make sense to add fleet assets or start new fleet operations. While fleet operations have some of the same challenges associated with driver hiring and retention – where those operations are short haul or regional, they are typically more attractive to drivers desiring to be home more frequently.
Transportation process and technology – this covers a range of areas. The gist being, is load building and mode selection as effective as it can be? How does this help?
- Better multi-stop TL load building may reduce the total number of loads/routes that need to run
- Better decision making may enable more lanes/loads to be serviced via intermodal providers, reducing the stress on truck capacity
- Process and lead-time – are loads released in a manner that allows adequate time for load planning and tendering to carriers? In tightening markets, late load planning and release invariably result in the need to go deeper into the organization’s carrier routing guide, or worse, to the spot market – almost always a more costly alternative.

There are also a number of areas that are not purely within control of the transportation department’s functional leadership but may impact the ease or difficulty in mitigating rate and capacity pressure.

Shipper of choice – carriers are more likely to provide competitive rates and capacity to shippers who help make their jobs easier. Making freight attractive to their drivers and allowing efficient utilization of their tractors and trailers prove even more critical during these times. Some attributes that will help in this arena:
- Ease and availability of securing appointments – is there the capacity/need to add additional shift receiving and shipping hours to accommodate current realities?
- Where live load/unloads are required, facilities addressing in a time effective manner.
- Drop yards are often attractive to carriers and efficient for shipping/receiving facilities as long as they don’t result in using the carrier’s trailers as a broad extension of warehousing. Be cognizant of load to trailer ratios.
Sales Policy – do your customer sales policies help to ensure that TL orders (as an example) are really full and well utilized loads? Anything that can be done to incrementally reduce the total number of loads to be shipped helps.
Inventory Policy – in the ongoing desire to generally reduce inventory positions, an organization sometimes incents its supply chain to purchase in less than optimal quantities from a transportation perspective. While this is always an area where balance between competing objectives is important, during periods of truly constrained capacity, it may be beneficial to consider alternative inventory strategies to minimize total load requirements. This may pertain to inbound raw materials, finished goods stock transfer orders, and customer order fulfillment.
Packaging – is the organization’s packaging optimized to maximize the amount of freight/load thus potentially reducing the total load requirements of the organization?
Network Design – is the organization’s supply chain network optimally located to minimize distance for final mile fulfillment, potentially creating/allowing for fleet opportunities, minimizing total OTR assets needed for customer fulfillment?

While organizations should be embracing these opportunities at all times as part of continuous improvement programs, some may be reviewed and implemented in short order for quicker results. Others will better position your organization on an ongoing basis and provide you with a leg up during the next constrained cycle and help reduce the fear, uncertainty, and demand currently impacting the market.

Mike Eaton is a Principal in the Transportation competency at Chainalytics where he focuses on transportation management improvement initiatives and the application of transportation technology.

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Fear, Uncertainty, and Doubt in Transportation Markets – What to Consider

| By Mike Eaton | Principal, Transportation | Chainalytics |

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