Fostering Long-Term Carrier Partnerships

The Law of Supply and Demand
It is no surprise that fundamental supply/demand principles apply to freight transportation pricing just as they do to any other product or service.

As supply tightens, either capacity must increase or higher prices will result. The key factors that are driving this in domestic TL transportation have been well documented, but nuanced thoughts identifying the potential consequences of the changing demographic, economic and regulatory landscape were raised by the event participants.

• Lost TL capacity due to bankruptcy: A study by Avondale Partners was quoted that states that 12% of total TL capacity has been eliminated in the past few years due to the economic downturn. Many of these vehicles were shipped overseas and will be lost forever from the US inventory.

• Driver Shortage: Carriers discussed the difficulty they are having in finding and retaining qualified long-haul drivers. This is all the more remarkable given that nationwide employment exceeds 9% and the US economy continues to sputter along with sub 2% growth. The feeling amongst the carrier community is that if they cannot find drivers now, the only recourse will be to increase driver pay until supply returns to equilibrium with demand.

• CSA 2010: While the participants agreed that the objectives of CSA are laudable, the net impact will be a reduction in the driver pool. They noted that shippers are monitoring carriers and that the threat of litigation may preclude poor carriers, as defined by their BASIC scores, from being utilized. The participants also noted that a lack of consistency in enforcement across states may make transportation service providers leery to haul freight in certain geographic regions where the probability of being cited for an infraction is high. This could lead to regional shortages or significantly higher rates when carriers are traversing these regions.

• Potential Changes to Hours of Service: In contrast to CSA 2010, the participants viewed the changes to HoS rules much more disdainfully. The general feeling was that the proposed HoS rules are a   solution looking for a problem. It was noted that safety is at or near all time historic highs and the proposed changes under consideration will simply reduce overall trucking productivity with little in the way of benefits to the trucking industry or society in general. Additionally, it was noted that the required midnight to 6:00 am driver reset will lead to a heavy influx of trucks just as rush hour begins each day.

So what’s a shipper to do?
Truly meaningful shipper/carrier partnerships remain elusive. The feeling amongst the attendees was that there is often times a lack of trust and willingness to share information because in doing so, an advantage is given to the other party. In many shipper / carrier relationships, the concept of “win-win” is dubiously looked upon as an overly naive concept most likely developed by a consultant.

However, the forward thinking shippers and carriers at this event see things differently. As the supply / demand pendulum swings back to the carriers, three areas were discussed as means for shippers to lock in capacity without breaking the bank.

1. Ensure Network Alignment: A quick glance at a carrier’s quarterly report tells you all you need to know about the importance of network alignment. High empty miles lead to high operating ratios. Requiring carriers to haul freight which is not aligned with their internal network reduces their profitability. Also, keep in mind that economies of scope are the driving factor in enabling carriers to reduce cost and thereby provide better rates. There is no such thing as economies of scale in TL transportation.
2. Focus on Operational Efficiency: Carriers generate revenue by moving freight, not by sitting in a yard. Shippers that have inefficient yard operations are eating away at the productivity and profitability of the carrier. Shippers that get the reputation for poor receiving or loading processes will pay through detention charges, higher rates and/or lost capacity. Focusing on efficiently flowing carriers into and out of facilities will enable carriers to do more with less, which will drive savings that can be passed back to the shipper.
3. Implement “Carrier-Centric” Policies: Dr. Chris Caplice, Executive Director at the Center for Transportation and Logistics at MIT, shared the results of a recent study he conducted. Based on a “market basket” of policies that determine whether a shipper is carrier-centric or not, Dr. Caplice showed that those shippers that implement policies more favorable to carriers have rates that are on average 2-3% lower than those shippers who have less “friendly” policies.

Unlike musical chairs, where the kid left without a seat is randomly determined, the pending TL capacity shortage will target shippers that are the least profitable for carriers to serve. Understanding the factors that make your carrier partners successful is the best way to ensure you have a seat when the music stops.