Thom Williams, of Amherst Alpha Advisors, claims, “The present trucking industry remains … a broken model, one which cries out for industry leadership” [“Supply Chain Guru Predictions for 2010: Full Comments,” Supply Chain Digest, 2 February 2010]. Williams believes that over the next few years truckload trucking firms will compete less and cooperate more in order to bring greater stability to the industry. He predicts that truckload carriers “will band together, formally or informally, … to collaborate (legally, that is) on much needed market, lane density, shipping and delivery schedules, and pricing issues.” He continues:
“When … properly organized, these truckload trucker alliances, together with much-needed mergers and consolidations (most likely, all post 2010) will continue to change not just basic North American [truckload] trucking but, even more so, contract logistics and 3PL [third party logistics] activities, worldwide.”
Supply chain analyst Bob Ferrari agrees that the transportation system could find itself in trouble as the global economy slowly emerges from the current downturn [“The State of U.S. Logistics is Not Good,” Supply Chain Matters, 21 June 2010]. He writes:
“The Council of Supply Chain Management Professionals (CSCMP) released its 21st Annual State of Logistics Report on June 9th with the sub-title The Great Freight Recession. That is an appropriate title since many of the messages brought out in this well anticipated annual report point to 2009 as a year of dramatic transport capacity decreases and a sobering message that there will be difficulty in ramping-up some U.S. transport capacity in 2010. Overall, the report identified that U.S. logistics costs declined 18.2 percent in 2009, the largest drop since this report series began, Logistics costs, as a percent of nominal GDP, hit a historic low of 7.7 percent. The bottom line: Supply chain logistics and transportation professionals under pressures to reduce costs in 2009 had the opportunity to take advantage of massive structural changes in reduced transport activity and consequent surpluses in capacity.”
Ferrari reviewed the CSCMP report and pulled from it what he thought to be the three most important conclusions. He continues:
“Contrary to 2008, the key inventory-to-sales ratio returned to a reasonable level, but the resulting actions brought whiplash to the overall system. The report noted that ‘businesses cleared inventory at a rate not seen for thirty years, but were unable to keep ahead of the (precipitous) drop in sales. Both manufacturers and retailers were reluctant to order new goods and materials until late in 2009, when warehouses and distribution centers were very low of stock.’ As we have noted in our predictions and ongoing commentary, sudden unexpected ramp-ups in sales levels have now run into this structural problem. While certain carriers such as air freight can more easily bring on former idled capacity, others such as surface trucking and ocean container are experiencing difficulty.”
Just to underscore Ferrari’s point, Robert Wright reports that “container shipping demand is rebounding so fast that there might be too few containers available for Asia’s exporters during the coming busy season” [“Shippers facing container shortage,” Financial Times, 18 June 2010]. Wright continues:
“Denmark’s Maersk Line, the market leader, Hong Kong’s OOCL, one of the most admired operators, and another significant line have all said soaring growth – running at about 23 per cent year-on-year in Asia-Europe trade – has wrong-footed them. Partly because they had expected only single-digit growth, none has ordered enough containers to cope with this year’s peak season, which traditionally runs from June to October.”
Wright notes that the 10 percent slump in container trade that hit the shipping industry in 2009 was the worst slump that sector had suffered in 54 years. Ferrari adds:
“The issue was even more compounded by the delivery of new ships ordered years before. Routes have been curtailed and shipping times have been lengthened as ocean carriers attempt to save on operational and fuel costs. We all suspected that transportation was hit hard in 2009, but the statistics added a more sobering impact.”
Ferrari reports that surface trucking in the United States suffered an even worse slump than the shipping industry. He writes:
“The structural changes of 2008 continued into 2009 with long lasting effect, even in the months to come. Surface trucking, the largest component of the transportation sector, dropped 20.3 percent on a volume basis in 2009, with another 2000 trucking companies going out of business in 2009. Once more, the report predicted that yet another 2000 firms will fail in 2010. More sobering was the statement that many shippers abandoned long standing relationships with carriers in favor of spot-market rates.”
Rail transportation was not immune to the downturn either. Ferrari reports that “rail carload traffic was down 16.1 percent and the Association of American Railroads estimated that the rail industry had $43 billion tied-up in idle assets.” The good news is that with “over 500,000 rail cars and several thousand locomotives … in idle storage in 2009, … the railroad industry can readily ramp-up idle capacity if demand returns to a sustainable level.” U.S. farmers believe that rail carriers are deliberately manipulating capacity so that they can boost freight rates as Asian demand for agricultural products rise [“Farmers Fight With Railroads Over Rates,” by Liam Plevin, Wall Street Journal, 14 June 2010]. Plevin reports:
“The race to profit from Asia’s growing appetite for corn, soybeans and other crops is resurrecting once-dormant disputes between two mainstays of the nation’s economy: Farmers and railroads. Farmers and their allies contend that railroads are taking advantage of their dominance to boost rates for carrying goods to shipping ports. Railroads counter that they have increased rates because of rising fuel and other costs, and say they needed to restore the nation’s rail network to financial health. … At stake are billions of dollars in potential revenue to be earned from an anticipated jump in U.S. crop exports to Asian nations, particularly China. U.S. farmers already send about $20 billion of corn, soybeans and wheat to Asia annually, up from $6 billion a decade ago. Railroads are well-positioned because in many parts of the country they are the sole mode of transport for getting grains from certain farmland states to coastal ports. It isn’t just grains shippers—coal customers and chemical makers also are pushing for changes.”
When looking at the overall transportation system, Ferrari reports that the recession did result decreasing costs to carry inventory in 2009, which was helped by extremely low interest rates. He also notes that other costs decreased:
“Taxes, obsolescence, depreciation and insurance were down 6 percent and the cost of warehousing fell 2 percent, the first decline in over three years. CFO’s can no longer adhere to a belief that the cost of carrying inventory is expensive since the numbers reflected otherwise. In fact, astute safety stock planning may be advisable at this point.”
As the economy recovers, however, costs associated with the supply chain will inevitably begin rising. Ferrari recommends that supply chain managers start planning for these cost increases. He concludes:
“Transportation carriers who survived the debacle of 2009 in a serious weakened state would be wise to capitalize on business recovery opportunities and improved services to shippers. Shippers themselves should note that as capacity tightens even more, rates are going to rise. ‘Shippers would be wise to be first at the table in negotiating rates and capacity-guarantee a minimum level of business in return for guaranteed carriage of limited rate hikes two or three years out.’ Translation in clearer language: It is time to hug your most favored carriers before a new suitor comes along.”
In order to remove some of the volatility in capacity, better medium- and long-term predictive systems need to be created. Such systems will inevitably require better information sharing among shareholders. No predictive system will ever be prophetic, however, and some volatility in capacity, shipping rates, and inventory levels has to be expected. Wise supply chain managers will do a lot of “what if” analysis and then do all that they can to make their supply chains resilient.
