On October 11, my company co-hosted the 2017 Surface Transportation Summit with my partners at Newcom Business Media. I am very pleased to report that we had another packed house for what has become the premier educational and networking event in Freight Transportation in Canada.
The day was again kicked off by one of Canada’s leading economists, Carlos Gomes of Scotiabank and by two investment analysts, Walter Spracklin, CFA, Equity Research Analyst - Transportation Sector, RBC Capital Markets and John Larkin, CFA, Managing Director and Head, Transportation Capital Markets Research, Stifel Financial Corp., who provided an American perspective. These gentlemen highlighted that 2018 will be a year of economic growth. This economic growth, coupled with the ELD mandate and the limited supply of quality drivers in the United States, will translate into tight capacity and higher freight rates.
One of the slides that caught my eye was the one inserted above from the John Larkin presentation. John’s views are consistent with what one of the largest US trucking operators, J.B. Hunt Transport Services, is telling its shipper customers. They are advising them to budget for transportation cost increases as high as “10 percent or more” as the peak fall distribution season and electronic logging mandate intensify a driver shortage. “This is one of the highest periods of turbulence and volatility in supply we have ever experienced, and we don’t think it will abate any time soon,” John Roberts, president and CEO, and Shelley Simpson, chief commercial officer, said in a letter to J.B. Hunt customers.
Capacity is limited, even with contracted core carriers. The subject of shipper-carrier collaboration was the focus of one of the afternoon breakout sessions. One of the issues that was highlighted is that even carriers with contracted rates, that have committed to supply capacity to their core customers, are not able to provide the required number of drivers, tractors and trailers this fall. In Canada, this has become a problem on cross-border truckload traffic out of Quebec and Ontario.
The Basic Options for Securing Capacity
This led into a discussion of the available options to obtain capacity. The option of adding more backup carriers was seen as of limited value. Backup carriers may be able to supply capacity on specific days, on specific lanes, when their volumes are soft. However, at the end of the month, they need to make their capacity available to their primary customers; shippers may not be able to rely on extra equipment from these carriers during their peak periods. Backup carriers will become more dependable if they receive consistent volumes, not a couple of extra loads at the end of the month or quarter.
Using load brokers is an option, but not necessarily an entirely reliable one. Load brokers work with their group of core carriers. These carriers have their own base of customers, of which brokers rank somewhere on the pecking order. They can be an option at times but they may not always be able to meet the specific needs of the shipper (i.e. performing trailer drops rather than live loading). Using the so-called “spot market” may work in times of excess capacity but when capacity tightens, rates can spike as they are now in some areas.
Another option is to establish a private fleet to move freight for certain customers and/or specific geographic areas. Running a private fleet is a significant undertaking, even if a company only runs a small fleet. Driver recruitment is an industrywide problem. Setting up a private fleet will require the shipper to address issues such as finding back haul traffic to ensure the economic viability of the fleet, buying or leasing equipment, fleet maintenance, insurance, fleet management and other concerns. Creating a private fleet is not for everyone.
Some shippers are trying to “throw money at the problem.” Certainly, carriers like shippers that pay premium rates and that pay their invoices quickly (i.e. within 15 days). But shippers must watch their bottom lines. Paying top dollar for freight and/or going on the “spot market” are costly solutions. With freight rates already on the rise, there is a limit to how much shippers can afford to pay for the assurance of capacity.
Other Options to Consider
During our discussion at the Summit, certain options came up for discussion. They included the following:
Dedicated Transportation
Shippers that are having trouble managing this problem can explore the possibility of outsourcing their freight operations to a dedicated contract carrier. While this may address the capacity issue, in some markets, the shipper must carefully compare the financial implications of this option against the status quo.
Freight Management Companies
Another choice is an extension of the freight broker option. Using a large freight management company provides the shipper access to a much broader range of carriers. This option can be particularly attractive on some of the harder to cover lanes. The top freight management companies may be aware of the small, less well-known carriers that may be just what a shipper needs in some situations. Since freight management companies add a markup to the costs of their carriers, this can be an expensive option for some shippers.
The Best Option
As our discussion ended, the attendees seem to agree on one of the most desirable paths forward. This is the idea that in this era of tight capacity, there is a great need for shippers and carriers to be frank on how they can best work together. As one of the attendees stated, it is better for a carrier to be forthright and tell the shipper on certain days that they simply don’t have the capacity rather than over-committing or lying to customers, and then failing to meet their needs.
As “partners,” it is essential to be open and honest with each other so each side can plan accordingly. Shippers can help themselves by giving their carriers as much lead time as possible on upcoming promotions and special offers that may create equipment challenges down the road. Clearly there is no easy solution to the truck capacity issue and rising freight rates but reverting to good communication with key partners is probably the best starting point.
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