Date: Jul 14, 2021
Magazine:
July/August 2021

By Laurence Stern, Stern Consulting

Since 1973, I have been in involved in transportation management for the produce industry. Transportation is a commodity and commodity pricing is subject to the laws of supply and demand. During my career, I’ve seen a lot of transportation markets with short equipment supplies, high rates and resulting lost sales. But this market is different.

Equipment is really tight, rates are really high and it has lasted a long time—much longer than any in my memory. To illustrate the point, consider what has been happening on load boards, which are online sites where shippers and transportation brokers can post available freight and carriers can post equipment available for loading. A tight transportation market is commonly defined as having a load board ratio of 6 or 7 loads for every truck. For the past 3 months, the load board ratio has been 30 loads or more for every truck. There is no equipment being posted for loading. Another market measurement is Active Truck Utilization. That is defined as the percentage of in-operation trucks engaged in hauling freight. The average percentage is about 92%; since early 2021 that percentage has hovered around 100%. That means there is no excess capacity in the market. The equipment shortage has translated into rates previously unseen; the per-mile rate for refrigerated freight in June 2020 was $2.00 – $2.30. Recent per-mile rates have been higher than $3 per mile.

What is the Cause?

Recovery from the COVID-19 pandemic is the principal cause. As vaccinations become widespread and infections substantially decrease, hiring is increasing and consumer confidence is building, which has resulted in three trends:

•  Retail sales are up. This means that inventories are being replenished and industrial output is increasing. Modification or removal of limits on in-person gatherings means restaurants and entertainment venues are opening or doing more business, meaning increased demand for food and supplies.

•  Low-interest rates have spurred new housing starts and remodeling activity. This has pushed up demand for construction materials, appliances and furnishings. Imports—particularly from Asia—are at record levels. The vast majority of these products move by motor carrier. Adding to the pressure on the equipment supply is that when construction jobs are plentiful, truck drivers often prefer to swing a hammer and sleep at home rather than put up with life on the road. Refrigerated trucks are also being used to haul dry freight because those loads may pay more than a load of fresh produce.

•  The excess demand for truck supply is not being absorbed. In a protracted profitable market caused by a shortage of supply, the usual response has been for new entries to begin absorbing the excess demand. That has not been the case thus far. While there have been new trucks added to the overall for-hire fleet, those trucks are mostly being added in small numbers by owner-operators. Those additions have not been sufficient to substantially impact the equipment supply.

How Long is This Situation Expected to Last?

There is a lot of pent-up demand for goods and services, and it is going to take a while to satisfy that demand. The current transportation market will probably last until Q1, 2022. While there may be some declines in rates, they will be short term and the overall trend line will continue upward. Since contract rates are generally confidential, the spot market forecast is the best available indicator. C. H. Robinson is predicting an 8% increase over present levels by year’s end. The only dampening effect on demand would be rising interest rates to stem inflation and slow demand for goods. There are inflation indicators in our economy, but those have been generally explained as the result of the slow ramp-up of production of various key goods.

What Can Shippers Do to Mitigate the Effects of the Market and Ensure Access to Transportation Capacity?

Unfortunately, under present circumstances, there is no silver bullet. In the current market, carriers are going to allocate scarce equipment to their regular customers. Any excess equipment will probably go to the highest bidder offering the easiest freight to handle—meaning one pickup, one drop to a destination that has ample backhaul freight. So, the question shippers have to answer is whether they want to establish working relationships with carriers or continue to take their chances in the transactional transportation market in the future.

My experience says that a shipper would be foolish not to explore creating one or more relationships with transportation providers. While those relationships are not going to be solidified in the current market, it would be worthwhile to initiate discussions now.

Essential elements of a shipper-carrier relationship are:

•  An appointment-based load system, including loading after normal hours if necessary

•  Driver-friendly facilities at loading docks (clean restrooms, lounge or waiting area with soft drinks and coffee)

•  Regular freight volume to carrier preferred destinations

•  An understanding with a carrier that loads to non-preferred destinations will be handled as a tradeoff

•  Order lead time

•  Flexibility regarding pickup and delivery dates when possible

•  Specified rates within agreed-upon time parameters (monthly, seasonal, etc.)

•  Understanding that when spot market rates are substantially out of alignment with contract rates then adjustments up or down as necessary will be made

•  Establishment of protocols regarding in-transit reporting, emergency or accident communication, delivery status, accounting and claims

•  Use of software dispatch and communications systems to create operational efficiencies

•  Establishment of performance standards and equipment requirements

•  Regular dialogue and meetings with carrier management to review mutual expectations and performance and make necessary adjustments

As I write this, I know that eventually equipment will become plentiful, rates will decline and the transportation world will return to normal. I also know that the stress shippers are experiencing today regarding finding transportation resources to move orders will probably be forgotten when that occurs. But I also know that the market will turn again and the stress will also return. My advice is to avoid the stress and damage to your business and convert at least part of your shipment volume to a relationship base. 

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