Logistics Management Group News Editor recently caught up with Ben Cubbitt, SVP, Consulting, for Frisco, Texas-based Transplace, a non-asset-based third-party logistics services provider. The two discussed a recent blog penned by Cubbit, entitled “How to Navigate Rising Fuel Costs,” as well as other topics. Their conversation follows below.
LM: In light of the run-up in gasoline prices, what has shipper feedback, or reaction to it, been like?
Cubbit: When you look at the complete view, it is more than just gas prices. We have been in this situation, where there is tight capacity and shippers’ costs are going up and modal disruptions. Shippers were already dealing with plenty of things. A Gartner study showed that 97% of shippers have had a disruptive event in the last two years. I have been on some panels with some large shippers, and the common theme, for all of us, was that we have never seen a time in our careers when every mode was disrupted. LTL, truckload, intermodal, ocean, and parcel have all had these disruptions and everybody is way above budget. We are seeing the impact of that in our consulting business at Transplace?
LM: In what ways?
Cubbit: There are a few different ways. In these challenging times, for both rates and capacity, business conditions, for most shippers, are pretty strong and they are trying to get capacity. And they are so busy fighting a day-to-day battle and they need help. Things have changed so much—and it is such a dynamic and challenging market—that the individual shipper really lacks the ability and knowledge to deal with it. And there are labor shortages, especially in plants and warehouses. There is also churn, Covid, and retirement, too. When looking at the manager, director, and VP level positions, shippers are seeing shortages in those roles, too. The reasons for that are things like maternity leave, surgery, people out on leave, or someone leaves the company. When that happens, it is hard to replace them. And shippers are already challenged to meet budget, and the C-team, I would say, has been less tolerant in 2022 than prior years.
LM: Why is that the case?
Cubbit: Because there is a sense that Covid is finally over, or easing, and things need to be fixed. Going back to fuel, it really bottomed out in March 2022, at $2.30 a gallon (for diesel). So, the way we looked at it was going into the third quarter, people budgeted it for around $3.40 per gallon. And now, even if everything else in their budget is OK, and rates were neutral, they would have this big increase in fuel costs, because while shippers were doing fine with freight, fuel then starts to blow their budget. It ends up being multipart. One part is that there is still tight capacity and rates are still inflationary. There is a network inefficiency penalty that we talk about a lot, in that besides all of the challenges with freight, there is a labor shortage and that results in trailers not getting unloaded as quickly. As an industry, we have lost efficiency. As an example, the average truckload weight is down, because people just don’t have the inventory and have to ship trucks light. So, imagine shipping on an unbelievably expensive truck half or three-quarters full…coupled with this fuel run-up. The fuel run-up has kind of been like a frog in hot water, in that they would be focused on that but there are all these other challenges.
LM: In your blog, you mentioned how shippers need to assess their network model to reduce miles and to evaluate adding distribution centers (DC) and cross-dock facilities. When you add DC, does that become a major challenge for shippers, given that available space for DC and warehouses is so tight, with that space badly needed for inventory?
Cubbit: Network optimization is a high priority, to be sure, and people are focusing on it. We are working on five-to-seven of these types of projects, at a time, for a total of 40 overall. It was already a hot topic, because while, as a shipper, you cannot do anything about rates or mode [in certain instances], cannot move freight from truckload to intermodal as much as I want, because intermodal is challenged, and LTL is inflationary. Space is tight, but people in the past were able to make some of these warehouse and plant decisions with not enough regard to transportation costs. If you could put it in a place that did not have the best access to transportation or maybe you could exit California, and think about doing different things, and the penalty for transportation was there but transportation costs were kind of OK and people were able to save money in transportation annually, for a number of years. Now, the penalty in having a distribution center in a bad place, or moving it, is a big deal, as is serving customers non-optimally.
LM: Can you provide an example?
Cubbit: Take a customer’s network in Dallas, for customers’ networks that should be serviced out of Dallas. Well, 20% or 30% might need to be served out of Chicago or Atlanta, because there was not enough space in Dallas. You can live with that and maybe your network was 80% efficient instead of 100% efficient. We are doing a lot of network projects right now, with shippers saying they are tight on space in different places and looking to solve that and looking for options. They are looking to make the best decisions, with some that may be optimal and some that may be suboptimal and are some now so suboptimal, with penalties so high that I need to do something. There are a lot of projects like that. Shippers are looking at their networks and if they are overcapacity and have leases coming up, they don’t want to make those one-off decisions anymore. We are doing multiple projects that have that component. And we are seeing them focused on certain regions, like single-region projects. A shipper, for example, may not like what it is doing on the West Coast and look at some other options. Another part is expanding into new regions, like adding a Florida-based facility. The toughest places to serve that we see are typically in the Pacific Northwest and Florida. For some customers, those are very big markets.
LM: The blog looked at observing minimum order quantities with customers. It seems logical with all of the supply chain and related inventory issues. Are you seeing shippers struggle with trying to meet these requirements or is more of a case-by-case situation?
Cubbit: The entire supply chain has been influenced by the e-commerce world, in that consumers want to receive their orders soon after placing them, and they want to return orders that they don’t like. That is something which has really influenced supply chains. A lot of businesses in a very competitive business world have made orders two or three times a week [to meet this consumer demand] via LTL and have made it work. That is two-fold, in that people have been reluctant to enforce sufficient order quantities. That is changing, but it depends on the customer. But this recent fuel spike is so severe, and some shippers did not realize it was happening. In fact, they were so focused on a lot of other things.
LM: What are some of those other things?
Cubbit: We pointed out that truckload weights were an issue, and some customers went back into their networks and said “wow, I did not realize how much lighter my trucks have gotten.” So, this will put some things back on the table that have left the table. That enforcement of minimum order quantities and penalizing shippers ordering inefficiently is really driving it. Another thing is a lot of shippers have minimum order quantities and want to order a full truckload but they have these inventory issues. So, the customer orders a full truckload and can only fill it 37%, for example. They have seen that and struggled with it, because that order process has become so rigid and now are going back to those same customers and saying “if you send me orders, I need to hold your order or you need to give me some multiple orders.” If a full truckload is 44,000 pounds and the customer only has 37,000 pounds, it is very difficult to add to it to fill it out. Those discussions are ongoing right now, and shippers are agonizing over it. For the large CPG shippers, that is a challenge. They realize that all of the challenges need to be put on the table, because, as an industry, we cannot ship 35,000-to-37,000-pound truckloads, especially when a full truckload weighs out at around 44,00-45,000 pounds.
LM: How do you view the need for shippers to be utilizing dedicated fleets when possible, and backhauls within their extended network, as well as collaborating with other shippers and partners? Are those things happening on a meaningful level?
Cubbit: I have been doing this for 30 years, and it seems like those were some of the most overhyped things for a long time. Now, I think a lot of shippers, carriers, and 3PLs have gotten good at it, because they now have the mindset that it is an option they should pursue and can pursue. Let’s say a shipper has 100 loads and can link up 100 times. And off of a sudden you can only link up 60 times, then that is not worth the trouble. But now, if you can link up 60 times out of 100, that is a win, and I can find the other 40. That is what we are seeing at Transplace. One is with our acquisition of Lanehub, and that is all Lanehub does. A shipper comes in and enters all of its lanes into the Lanehub tool, with the tool then matching it up with every other shipper. They have done a lot with private fleet backhaul, with Home Depot, Sherwin Williams, and others with these large fleets and lots of capacity. They know that four times a week they are going from point A to point B, and we identify that and made it a core part of the process. For example, when a shipper customer goes out to bid, LaneHub is in their bid in that capacity, sees all the lanes out for bid, and put it in there. We call that plan continuous moves, with them having 40 moves a week and we can fill ten. A lot of shippers still won’t mess with it, but more and more a lot of progressive shippers go in and look at that and say “if I can fill four of the 10, that is a tremendous win.” It is green and sustainable and the best capacity I have and can get dedicated with over-the-road pricing commitment. And we have dynamic continuous moves, which we do and carriers do it for fleet backhaul. We work with two large CPG shippers to help fill their backhauls, and we have a team at Transplace that looks at the network every day and they know they need these lanes. There may be a potential match today, which may not be there tomorrow…and we just dynamically fill that. We are looking at our shipments every day and we are looking at certain targeted people. What that does is let you extend the reach of your fleet. So, there may be a 600-mile move that does not make sense to run dedicated, but if I get a backhaul, then it makes sense.
LM: How should shippers be thinking about optimizing mode selection, from, for example, parcel to LTL and LTL to pool and pool to truckload, and so on, as you wrote in your blog?
Cubbit: Let’s look at going from LTL to pooling. If you can match LTL up with pool points and all of that, it can be a good one. It can be a great option for shippers, because one of the main drivers is service, because there is so much freight and so much disruption, and sometimes in an LTL network your freight does not move. With a pool, you can control that a little bit more. There is also a lot more load matching going on, too. If I am a shipper and have done everything I can and have a 20,000-pound shipment going from Ohio to California and another company has a 10,000-pound shipment, rather than that going via LTL, we can put those two truckloads together and run as a two-customer load. We do that every day for hundreds of loads.
LM: With the current run-up in fuel, what are the most challenging parts of it?
Cubbit: It is really the fuel surcharge lags that make it painful for carriers. They are not getting paid in a steep rise like this. They are really taking a penalty and then not getting reimbursed for 45-to-60 days based on terms. So, in terms of how shippers think about this, is these carriers are coming to shippers asking for a supplemental fuel surcharge, and there are different ways of doing that. That is the big thing going on right now, in that “Do I accept it? What program do I put in place? Do I do it short-term? What process do I go through?” That is probably one of the biggest things going on in transportation right now.
LM: How does the supplemental fuel surcharge work?
Cubbit: There are a few different examples of how it can happen. Before Transplace, I worked for a large shipper as VP of Transportation back when fuel had a big run-up in 2008-2009. One of my biggest carrier partners came in and noted how the fuel surcharge gap widens. We had gone to a $0.06-cent-per mile fuel surcharge after I got there. It had been at $0.05, with $0.06 sort of being the industry standard. But the carrier said that when it gets above $3.50-to-$4.00 per gallon, the gap widens. It is really a challenge when you get above $4.00 per gallon, in that you are just not being compensated. We agreed, as a shipper, that when fuel goes above $4.00 per gallon, we would pay a penny for every $0.05 gain versus $0.06. What a lot of carriers are doing right now is asking for an extra $0.20-per mile. They would like $0.20 but are going for anywhere from $0.10-to-$0.20-per mile. Some carriers are asking for a flat fee per load, like an extra $19-to-$22 per load. It is a separate accessorial as soon as prices go above, say $4.00-to-$4.20 per gallon. Freight payment is so difficult, for shippers and carriers, that you want to find a way to make it temporary and also a way to do it where you can automate it. That way, people are not doing all these calculations. If you can just make an amendment to your fuel surcharge, then the carrier and the shipper can hopefully, to some extent, automate it.