How Can Shippers Deal with the Capacity Crunch?

ARC was briefed by Mike Mulqueen of Manhattan Associates on their transportation management (TMS) product. Mike is a Senior Director for Product Management at Manhattan. What I found most interesting was a short conversation we had about the carrier capacity crunch and the role various supply chain software solutions can play in improving matters for shippers.

I wanted to dig deeper on Mike’s thoughts around the capacity crunch so I asked Mike if he would be open to being interviewed. He was.

Steve: When I talk to transportation professionals that work for shippers, the capacity crunch is what they say is keeping them up at night. I gather you are hearing the same thing.

Mike: Absolutely. The capacity issues that we are seeing are most prevalent in the long-haul, truckload segment of the market. Like any market, trucking will respond to the realities of supply and demand, but today, the asset based trucking companies are not yet convinced that they can profitably add capacity, even as demand for their services increase. Trucking executives I hear from are concerned about an active regulatory environment that has reduced productivity of their operations and promises/threatens to do more. They continue to have great difficulty in recruiting and retaining qualified drivers, and the cost of tractors and trailers continues to rise for those companies that even have access to the capital necessary to expand their businesses.

Therefore, we are in a situation where trucking companies are in a position to be much more selective for whom they haul freight. For shippers, this means that they must understand the levers that impact the profitability of their transportation service providers. If you don’t, it can be an expensive proposition. A recent study from MIT’s Center for Transportation and Logistics showed that freight rates can increase by nearly 15 percent when shippers have to purchase service outside of their primary carriers. This became apparent earlier this year to shippers when spot market rates hit all-time highs.

Steve: So what is the solution?

Mike: One way for shippers to ensure they have capacity is to pay higher rates, but as you can imagine, that is not a shipper’s first choice. Instead, we see a lot of shippers focusing on how to change their business processes in order to be “carrier-friendly.” This means the development and implementation of process improvements that make carriers want to haul their freight.

Some of these process changes can be pretty simple. One of our shipper customers has developed a program to ensure that driver facilities are clean, comfortable and well-maintained while also allowing drivers to use their yard if they are out of hours. Driver attrition approaches nearly 100% for long-haul trucking firms and the cost of hiring and training new drivers typically exceeds $5000 / driver. Therefore, shippers that treat their carriers’ drivers respectfully are given preferential treatment.

Additionally, we are seeing shippers look to alternative methods to transport freight that are less reliant on long-haul trucking. Intermodal has grown dramatically over the past decade as service has become much more reliable. We are also seeing a heightened interest in converting one-way truckload freight to dedicated contract services. A dedicated fleet is a good way for shippers to lock in capacity, but it comes with the risk of paying substantially more for transportation if the dedicated assets are not well utilized. Often times both intermodal and dedicated services are provided by the same transport providers that are providing one-way services, so shippers should work with their carriers to understand the full breadth of offerings and align their shipping needs accordingly.

Finally, we are seeing shippers and carriers moving much more aggressively to “drop-trailer” programs. These programs enable carriers to simply drop trailers at a shipper’s yard and have them loaded or unloaded by the shipper company. This enables the carrier’s driver to quickly return to revenue generating activities (i.e. hauling freight) without having to wait for warehouse operations to process the trailer. While the carrier does have to increase their trailer inventories to support these programs, the cost of drivers waiting to be loaded or unloaded, especially considering the new HOS rules, far exceeds the cost of the extra trailers.

Steve: How can transportation management software help shippers cope with the capacity situation?

Mike: Shippers are exploring different ways to move their freight. Therefore, a TMS must make the most efficient use of all transport options at the shipper’s disposal, be they full truckload, intermodal, LTL or fleet. As long-haul truckload rates rise and capacity tightens, a TMS with strong optimization capabilities will naturally flow more shipments to alternative modes of transport where possible.

However, once the mode decision is made, a TMS offers other capabilities valued by carriers. It will automate and standardize communication flows between shippers and carriers. This reduces both data errors as well as labor costs for both the shipper and carrier. The TMS also ensures that carriers are assigned loads based on agreed upon commitments and given the necessary latitude, will balance those commitments so as to not overwhelm a carrier on any given day. Advanced TMS systems also have the ability to send short-term volume forecasts to carriers so that they have time to react when surges or lulls in demand become evident.

Finally, a TMS becomes a repository for a great deal of information that can be used by shippers to identify opportunities to improve their operations. For instance, by integrating with a yard management system, the TMS gains visibility into driver dwell times (i.e the amount of time the driver is at the shipper’s facility). Inefficient yard operations are a significant drain on driver and asset productivity and those shippers that are unable to turn around drivers quickly are going to have great difficulty getting carriers to haul their freight or will be able to do so only at premium rates.

Steve: The shipper-carrier relationships tend to be very cyclical. One year the shipper is up, the next the carrier. Is there any reason to think that the current capacity crunch will continue for an extended length of time?

Mike: I believe there is. The last big capacity crunch we had was in 2004-2005. To your point, it was short lived and we quickly moved back to a period of excess capacity.   However, all signs point to this capacity situation being fundamentally different. There just is no quick and easy way to solve the driver shortage problem. Long-haul truck driving is a demanding job and there are just not enough people willing to do it, given the compensation levels in place today. The over-capacity situation of 2006-2008 was remedied by the Great Recession, which culled a great deal of capacity from the system. The subsequent weak recovery has given shippers a false sense of security, even as more capacity has been drained from the system as an increasing number of trucking companies have shuttered their operations. However, as we begin to see signs of stronger economic growth, the demand for capacity will intensify. Ultimately, higher rates are inevitable, but shippers can mute the impact by implementing carrier friendly processes that are designed with an understanding of basic trucking economics.

Steve: Thank you very much for taking the time to talk to me.

Mike: Always a pleasure Steve, thank you for the opportunity.

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