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As baby boomer logistics leaders move into retirement, their successors are tasked with directing the company’s distribution operations. Informed business leaders realize that we are in a period of profound changes. Companies such as Amazon and Uber are disrupting current business models. Technology and automation are altering manufacturing processes. Ecommerce and omni-channel distribution are upsetting existing retail processes. As my colleagues and I meet with shippers, we find many companies are exploring their options. Should they try to manage these changes in house or should they enlist the support of outside resources?

In-House or Outsource?

It is important to understand that business leaders do not face a binary choice. The field of Logistics is more complex than it has ever been. Senior logistics professionals must possess a variety of business skills and possess a depth of knowledge in a range of areas such as supply chain design and management, warehouse and inventory control, customer service, transportation and information management. These leaders must then be able to adapt and apply their skills and knowledge to specific companies in the manufacturing, distribution and retail sectors, including bricks and mortar and eCommerce organizations. This leads to a fundamental question for every organization. Does the company have a set of leaders who possess this range of skills and knowledge?

While it is unlikely that one senior executive will possess all of these attributes, the broader question is does the company possess these skills across its logistics management team. If not, what skills and knowledge does it need to import from external sources? This article outlines how to create a leadership plan (http://www.supplychainquarterly.com/news/20170428-how-to-plan-for-future-supply-chain-leadership/?utm_medium=email&utm_campaign=Executive%20Insight%20 ).

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As we enter a New Year, many people create a set of resolutions to burn off a few pounds, to quit smoking or to achieve whatever goals are meaningful to them. On a professional level, this is a time for smart shippers to set in motion a series of resolutions to improve their company’s freight operations and their personal career trajectory. Here are a few to consider.

1. Follow the Donald . . . closely

President-elect Trump has promised to make a number of changes to both the domestic economic situation in the United States and to the current world order. As an individual who campaigned as an “outsider,” Donald Trump threatens to upend a range of current business practices. Keep a close eye on his trade policies, his efforts to boost manufacturing jobs in America, his government spending programs, his policies on climate change and on infrastructure spending. Initiatives in these areas would have an impact the flow of goods and services, on economic growth and on freight transportation.

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This will likely be an eventful year in Freight Transportation. As I look ahead to the coming year, there will be two sets of forces at play. The President-Elect of the United States, Donald Trump, has made some bold promises. This blog will look at the potential impacts of his presidency. The next blog will examine some of the other major forces at play.

Infrastructure

Donald Trump has spoken repeatedly about improving America’s highways, bridges, and airports. The Transportation industry has bemoaned the lack of investment in infrastructure for several years. It is likely that at least some elements of whatever plan President Trump’s team puts forth will receive bi-partisan support from the other branches of government. 

It typically takes time to plan significant infrastructure projects so they reach “shovel ready” status. In addition to improving the nation’s infrastructure, these projects also create jobs, albeit over a specific timeline. Watch for some infrastructure projects to be launched in 2017 with the balance moving forward in the coming years. These projects should be a net positive for the transportation industry. However, keep in mind that some of these projects, such as toll roads, may receive some funding from private industry (if permitted by congress) and may result in higher costs for shippers and transport companies.

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The past year started with some solid tailwinds as the economies of the United States and Canada appeared to be in a growth mode. Then a number of unexpected events took place that changed the trajectory of the year. Here is our synopsis of the major freight transportation stories of 2015.

The Collapse in Energy Prices

The rout in oil prices began in late 2014 as Saudi Arabia stood firm in its insistence not to cut production quotas. The downturn in China’s economy produced less demand as oil supply remained at pre-downturn levels, a recipe for low oil prices and other challenges throughout the year. This had a huge impact on Canada’s oil sands companies, producing significant layoffs. There were also spillover effects in other energy sectors such as coal mining. The latter experienced very large price drops and decreased shipping volumes.

The steep decline in fuel and oil prices has, in turn, been a boon to freight transportation and logistics services providers primarily in the form of lower operating costs, while at the same time tremendously aiding carriers and providers serving retail-based customers, as lower fuel prices have dramatically impacted the amount of discretionary income consumers have.

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Some companies have strong leaders with good strategies and good systems. Unfortunately, they don’t put the pieces together and therefore deliver less than stellar freight management results. In other words, the execution isn’t there.  Projects are identified but they don’t produce the desired results.

Some companies seem to adopt a “flavour” or “mission” of the month approach. They hire a consultant to adopt lean manufacturing, lean logistics or balanced scorecards. The tools to make these systems work are never put into place properly and before you know it, they criticize the consultant, move on to the next consultant and don’t accomplish much of value.

While these companies may be able to generate pretty reports, the programs were ill conceived in the first place. They don’t produce results. This can lead to the “blame game.”

Achieving operational excellence is not about sexy slogans and programs. It is about teamwork, communication and commitment. There has to be an identification of the root causes of the problems. There has to be a commitment from the leadership to fix the problems. The company leaders must stay the course to fix the problems. They cannot assume that since a program has been put in place, the results will come automatically.

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Throughout this series of blogs, the focus has been on how Best in Class shippers ensure their freight is delivered at the right place, at the right time and intact. The beauty of freight management is that so much about transportation is measurable. Over the years we have observed how Best in Class shippers pull away from mediocre performers and industry laggards in the area of measuring performance. They tend to have better data and more robust and relevant tools and reports. These are some of the Key Performance Indicators (KPIs) and Reports that they utilize.

Macro Financial Indicators

The first set of financial ratios helps identify trends in supply chain costs and their impact on the business over time. Key ratios include:

Supply chain costs as a % of Revenue

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One can view a supply chain as a series of processes. From inbound freight management, the process of picking up raw materials, to last mile delivery, freight management is a group of practices and procedures that, when performed well, are seamlessly integrated to ensure a company’s goods, arrive on time, at the right place, damage free. Best in Class shippers have tight processes that perform each of the following activities in a highly effective manner.

• Inbound Freight Management

Often overlooked and underappreciated, strong inbound freight management processes allow shippers to leverage the full volume of their shipping activities in their carrier rate negotiations. They ensure shippers treat this as effective means of expense management rather than as a profit center for their vendors. When done well, inbound freight management permits shippers to create round trips and continuous moves to improve network optimization and reduce costs. They ensure inbound materials arrive in the right qualities at the right time at the lowest cost possible.

• Shipment Planning

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 Best in Class shippers possess an understanding of the following subjects.

 Modal options and trade-offs (e.g. Air, Road, Rail, Marine)

 Carrier selection and management in each mode of transport

 Routing guide preparation and compliance tracking

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Monitoring carrier performance is an ongoing process. Some trucking companies will track performance for new shippers with a heightened level of intensity for a designated period of time and then revert back to old habits or standard service levels when the shipper’s focus is no longer there.

Every shipper should understand that there is no start or finish date to monitoring carrier performance. During the bid process, shippers need to outline the service performance that they expect and set up processes and reports to receive actual performance data on an ongoing basis. A web-based dashboard can allow shippers to monitor key KPIs (e.g. missed pick-ups, on-time deliveries) in real time. Monthly scorecards can provide the shipper with detailed reports and highlight any service failures that may have occurred. For new carriers, weekly reports and meetings may be necessary to ensure a smooth implementation.

As the carriers come up the learning and performance curves, these meetings can be cut back to monthly, quarterly or semi-annual, as needed. Success from freight bids is a result of a high level of attention to detail. Dashboards and scorecards that provide information on service, billing accuracy, missing or lost freight, are invaluable tools. These tools coupled with ongoing meetings will help keep the carriers’ “feet to the fire” and maintain the levels of savings achieved.

 

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Omni-Channel Retailing is a subject we are go to be hearing a lot about in the coming years. This is the first of two blogs on this topic.  In the first blog I will provide an oveview of what the term means and then outline the implications for shippers, retailers and consumers.  In the next blog I will outline the implications for freight transportation companies and logistics service providers.

It is helpful to define some terms to understand what is taking place.  The chart below and some of the content in this blog are taken from an article entitled Omni-Channel Supply Chains Designed for a Retail World without Boundaries by Randy Stang, Vice President of Customer Solutions for the Retail Industry team at UPS.  The chart captures the various retail models visually.

Over the past decade, retailers have been migrating from the basic Single Channel model of store to consumer retailing to the utilization of multiple modes (e.g. store and e commerce).  Multichannel retailing is the use of a variety of channels in a customer’s shopping experience.  Such channels include: retail stores, online stores, mobile stores, mobile app stores, telephone sales and any other method of transacting with a customer. Transacting includes browsing, buying, returning as well as pre and post-sale service.

As the name implies, Multichannel retailing involves serving customers through a discrete set of distribution options.   Pioneers of multichannel retailing include Macy's, Next PLC, John Lewis and Neiman Marcus. The pioneers of multichannel retail built their businesses from a customer centric perspective and served the customer via multiple channels before the term 'multichannel' was used.

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In my previous blog, I tried to capture some of the Major Freight Transportation Stories of 2013 (http://www.dantranscon.com/index.php/blog/entry/the-top-freight-transportation-stories-of-2013).  In this blog I will look ahead to 2014 and beyond.  Here are some of the emerging trends that transportation professionals should monitor closely in the coming years.

1. The 10 Miles Per Gallon Truck

Heavy-duty trucks consume 1/5th of the fuel consumed in the United States.  The world’s freight transportation requirements are expected to consume 70 percent more energy in 2040 than they did in 2010.  As demands for freight transportation rise in developing countries, this is also increasing the level of fuel consumption.

A recent HOS study suggests that the changes made in 2013 in the USA are having an impact on driver productivity.  New measures may further erode productivity.  An electronic on-board recorder (EOBR) mandate is also slated to be rolled out in the next year or two. It will likely eliminate log book falsification across the board and could easily clip another 2% to 5% of industry productivity. Mandatory speed limiters would be next and would eliminate some additional productivity.  New drug testing procedures are also being considered and would eliminate those drivers who are able to pass the current urine-based test despite habitual drug use. Taken together, this influx of regulations will reduce the number of drivers in the overall pool and will reduce the productivity of those remaining in the pool.

At a time when most truckers are striving to operate their fleets at 6 miles per gallon, talk of 10 MPG may seem like science fiction.  The good news is that fifteen industry manufacturers have joined together in the 21st Century Truck Partnership.  Led by Daimler, Navistar and Peterbilt and a joint venture with Cummins and Peterbilt, they plan to have working prototypes within two years.  The four projects that fall within this initiative are experimenting with engines and heavy duty hybrids, vehicle power demands, idle reducing technology and new lightweight materials such as carbon fibre and high strength steel.  With driver recruitment being such a major challenge, improved vehicle productivity would be of major benefit to the trucking industry.

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As the year 2013 winds down, it is time to reflect on the major transportation trends of the past year.  While I saw and read about a wide range of developments, these are the ones that resonated most with me.

1.Technology Comes to Freight Transportation

Last year I predicted that we would see a flurry of new technologies come to freight transportation.  They did and I wrote about some of these new companies on several occasions during the year.  Technology was successfully applied to the freight brokerage business, freight portals, LTL density calculations and to other segments of the industry.  Buytruckload.com, PostBidShip, Freightopolis, QuoteMyTruckload,  and Freightsnap were featured in various blogs during the year.  They are changing the way business is done in freight transportation.  Watch for more of these companies to surface in 2014.

2013 has been called the Year of the Network by numerous supply chain and transportation industry thought leaders.  Companies that built a successful supply chain trading partner network focused on three elements:

Connectivity— unite disparate systems and trading partners

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If your trucking company hasn’t been purchased or doesn’t get purchased by TransForce, will it be in business in five years?  That is the question that came up in a recent discussion with a long time industry colleague.  The response I received was that he didn’t think his company would survive.  I was a bit surprised by the response and asked him for an explanation.  This led to an interesting discussion on what it is going to take to make it in the trucking industry in 2014 and beyond.

We both agreed that while the trucking industry has changed in some ways over the past decade (e.g. more use of technology, better cost controls after the Great Recession, LNG vehicles, greater use of 3PLs as customers), the industry is not that much different from ten years ago.  The slow economic turnaround since 2008 has created a challenging environment and there is little reason to expect a major improvement in the short term.  Rate increases are hard to come by, even with a tight driver situation.  Even more of a concern is the lack of innovation in the industry and the threat that such changes could wreak on so many complacent companies.

The warning signs are there.  As a Canadian, you don’t have to look much further than Nortel and Blackberry to see what can happen to industry leaders that were not able to keep up with changing consumer needs and quality competitors.  At the same time, one can observe what companies such as Amazon and Apple have been able to do to change the paradigm of some long established industries. 

Some of the large trucking industry players are making investments in technology and people.  They are integrating back offices and focusing on achieving economies of scale.  They are thoughtfully expanding their service portfolios and geographic footprints. 

Some of the small players are offering solutions that are very tailored to certain industry verticals and geographic areas.  Companies that are focused on same day delivery, refrigerated intermodal service, pooled LTL service, energy distribution and other emerging capabilities are creating a space for themselves in the industry.

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Intermodal Continues to Deliver Results

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The Intermodal Association of North America (IANA) reported an increase of 4.7 percent in total intermodal traffic in the third quarter of 2013 compared to the same time period in 2012. Continuing to lead intermodal growth, domestic container volume increased for the 2013 third quarter by 9.4 percent when compared to third quarter 2012 volume. All domestic equipment experienced a 7.6-percent gain in the 2013 third quarter, including a 1.2-percent boost in intermodal trailer volume for the same period.

The increase in total intermodal traffic for the 2013 third quarter was also caused by a slight rise in international volume by 2 percent over 2012 third quarter volume. A slow but steady growth trend may be expected for the international market if jobs, consumer spending and/or the broader economy accelerate, according to IANA.

The third quarter of 2013 marked the first time that international shipments were outpaced by seasonally adjusted domestic shipments. Joni Casey, president and CEO of IANA, said, “For the tenth quarter in a row, domestic container volume flexed its muscles and has outpaced international shipments driving the gains in total intermodal traffic. It is also worth noting that the trailer segment grew in all three months of the third quarter, reversing three years of decline and contributed to domestic growth.” 

What are the factors contributing to the sustained growth in intermodal business?

The U.S. is still a major manufacturing centre

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At the end of each year, I like to take stock of the major freight transportation stories of the past twelve months and look ahead to the trends that will drive the industry in the coming year.  The two blogs that I write are prepared from my perspective as a consultant to shippers and carriers.

This year I would like to hear from you.  Those of you who follow this blog observe trends in your segment of the industry.  Please take a minute to share them with me.  Please post them on this blog or send a private e mail to dan@dantranscon.com

Please feel free to select any major trend or trends that are having or will have a major impact on our industry, whether regulatory, economic, technological, demographic, consumer behavior, environmental, modal shifts or business strategy.

To broaden the range of inputs and perspectives, I will also post this request on Facebook, LinkedIn and Twitter.  In the coming weeks I will be preparing my two lists.  The lists will include a blend of my observations and yours.  Look for these two blogs in mid-December.  Thank you to those of you who take the time to share your observations with me.

 

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If you haven’t been watching, you may be missing one of the most interesting and important battles in retailing and freight transportation - - - the clash to deliver shipments to consumers on the day they are ordered.  Here is how the battle is shaping up. 

At this point, the names of some of the key players are pretty familiar to most residents of North America.  Amazon, Wal-Mart, Google, Target, FedEx, Walgreen, eBay and Best Buy are moving forward with same-day delivery services in the United States.  In Canada, four major retail brands and Canada Post are launching a same-day delivery service for online orders in the Toronto area.  The Delivered Tonight e-commerce service is a pilot project with Best Buy, Future Shop, Indigo and Wal-Mart. 

For now, the strategy seems to be more about creating a customer expectation of same-day service than answering consumer demand. As Amazon has done before, it is working to create that demand with same-day shipping in 10 cities, while it also builds warehouses near major metro areas, paving the way for same-day delivery service on a much broader scale.  Currently, Amazon is able to reach 15% of the market in America’s top 20 metropolitan areas.  It is making a major to push to add warehouses close to these markets that would allow it to reach 50 percent of Americans.

 

Another feature of same-day delivery is convenience. The major retailers are testing various same-day delivery models.  Wal-Mart is offering in-store, same-day pickup for online orders.  Amazon is exploring the “pick-up” model as well with its new Amazon Lockers in convenience stores, grocery stores and drug stores in selected cities.  eBay is testing an “eBay now” mobile app, available in San Francisco and New York City, that relies on couriers for same-day delivery of products ordered online from existing partner stores.

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The major business news story in Canada this past week was the planned acquisition of Shoppers Drug Mart by Loblaw Companies Limited for $12.4 billion.  Loblaw Companies Limited, a subsidiary of George Weston Limited, is Canada's largest food retailer and a leading provider of drugstore, general merchandise and financial products and services. Loblaw is one of the largest private sector employers in Canada with more than 1,000 corporate and franchised stores from coast to coast.

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It supplies more than 5,000 private label products that provide customers with healthy, organic, environmentally friendly and high-value alternatives. Introduced in 2006, its Joe Fresh brand is now available in more than 300 Loblaw banner stores across the country. This line includes the Joe Fresh collection (apparel and accessories), Joe Fresh beauty products (cosmetics) and Joe Fresh bath products (a range of bath and body products). 

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Shoppers Drug Mart Corporation is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec).  With 1,242 Shoppers Drug Mart and Pharmaprix stores operating in prime locations in each province and two territories, the Company is one of the most prominent retailers in Canada.  The Company also licenses or owns 57 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and six luxury beauty destinations operating as Murale.  As well, the Company owns and operates 62 Shoppers Home Health Care stores, making it the largest Canadian retailer of home health care products and services.  In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services; and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities.

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The tragic accident in the Quebec town of Lac-Mégantic was the major transportation story of the past week.  As of tonight, the death count is at 33 but it will likely reach 50 people when all the bodies are found.  In addition, much of the downtown of that town area was destroyed as 72 tanker cars of the Montreal, Maine and Atlantic Railway Ltd., carrying crude oil, caught fire as they came off the tracks.

Rail transportation in Quebec, Canada dates back over a century.  The rails have been a key element in the history of commerce in this Canadian province.  The railway has been hauling iron ore, pulp and paper and other commodities for many years.   But the sharp decline in the United States housing market, as a result of the Great Recession, reduced the demand for Quebec’s lumber.  This motivated the MM&A Railroad and others to shift their focus to the movement of crude oil via rail.

The transportation of crude oil via tanker car goes back to the days of John D. Rockefeller.  The rail industry is now hauling more crude oil than it did in those days.  Trains transported a record 97,135 carloads of crude in the first quarter of 2013.  That’s 166 percent more than during the first quarter of 2012 and 922 percent more than the rails handled during all of 2008.

Union Pacific, the largest US railroad, tripled the amount of crude it moved the previous year.  BNSF, America’s second largest railroad, is now transporting 650,000 barrels a day versus almost none five years ago.  Canadian Pacific Railway expects to haul 70,000 carloads of crude in 2013, up from 500 in 2009.

While moving crude oil by pipeline still costs about half to one-third of what it costs to move it by rail, trains don’t require long term contracts or need to wait for pipelines to be built.  While pipes stretch only from point A to point B, refiners can access nearly any market in the United States or Canada by rail.  Flexibility and the ability to easily shift delivery markets to maximize revenue, has been encouraging oil companies to increase the leasing of rail cars.

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Dr. Richard Mikes, Managing Partner of Transport Capital Partners (TCP) recently spoke on the subject of the Truckload Market on a conference call hosted by Stifel Nicolaus & Company.  Here are some excerpts from the survey results presented by Mr. Mikes. 

“The freight rate market as a whole started switching directions about a year ago. In other words, the share of the carriers reporting that their freight rates are increasing has just dropped from a high of about 80% to a low of about 10% this past month. Accordingly, we would classify rates as being stuck in neutral. Three quarters of the firms are now reporting that rates have remained the same, certainly a massive change from a year ago.”

The survey segmented carriers into two groups, those under $25 million and those over $25 million in revenue.  “Interestingly, the … (data) . . .  presents “a real divergence in rate changes. Though both large and small carriers are largely keeping rates the same, there is a spattering of smaller carriers reporting rate decreases of 5%, 10%, or even 15%. Those numbers total only 18%, but they still tell the story. The pressure is on the smaller carriers.”

The FTR survey asked carriers to indicate their expectations with respect to volume.  “After a nice bounce this quarter, about 52% of carriers expect volumes to increase over the next 12 months and a similar number expect them to remain the same. Very few say volumes will actually decrease.

The survey then looked at what carriers plan to do with respect to adding capacity in this predicted environment. “The number of carriers saying they will not add capacity remained largely constant with a temporary spike around the . . . (U.S.) . . . election. It jumped up to almost 50% around election time. Those were the feelings in the moment.

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Last week the Council of Supply Chain Management Professionals released its 24th annual State of Logistics Report. Last year, business logistics costs were once again 8.5 percent of U.S. Gross Domestic Product (GDP), the same level they hit in 2011, the new report says. That means freight logistics was growing at about the same rate as the GDP. Inventory carrying costs and transportation costs rose "quite modestly" in 2012, said the report's author Rosalyn Wilson. Year-over-year, inventory carrying costs (interest, taxes/obsolescence/depreciation/insurance, and warehousing) increased 4% y/y as inventory levels climbed to a new peak. Meanwhile, transportation costs were up 3% y/y predominantly from an increase of 2.9% in overall truck transportation costs.

This "new normal" is characterized by slow growth (GDP growth of 2.5% to 4.0%), higher unemployment, slower job creation (which will primarily be filled by part-time workers due to higher healthcare costs), increased productivity of the current workforce from investment in machinery/technology (and not human capital), and a less reliable or predictable freight service (as volumes rise but capacity does not increase fast enough to meet demand). Wilson noted that slow growth and lackluster job creation has caused the global economy to wallow in mixed levels of recovery. "This month will mark the fourth year of recovery after the Great Recession, and you're probably thinking that here has not been much to celebrate," said Wilson. "Is it time to ask, 'Is this the new normal?'"

For logisticians, the "new normal" means less predictable and less reliable freight services as volumes rise but capacity does not. In areas such as ocean transport, Wilson said, this can mean slower transit times. "I do believe the economy and logistics sector will slowly regain sustainable momentum, but that we'll still experience unevenness in growth rates," Wilson predicted.

For cutting-edge logistics managers, however, the current environment also means great opportunities to secure increasingly tight capacity in an era of shrewd rate bargaining. This is partly because the trucking industry, in particular, is facing a lid on capacity because of higher qualifications for drivers while top carriers are becoming increasingly selective in their choice of customers and in the allocation of their assets.

"Truck capacity is still walking a fine line—few shortages, but industry-high utilization rates," Wilson explained. Truckload capacity continues to remain stagnant (with the majority of new equipment orders for replacement or dedicated fleets and the copious amount of truckload capacity sapping regulations coming down the pipeline) and the assumption that freight demand will continue to modestly increase (as the economy continues to muddle along at low single digit GDP growth in combination with population growth), a less predictable and less reliable freight market is developing (as described in the "new normal").

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