Is the Freight Market Slowing Down your Business?
If you have noticed an increase in delayed shipments, rising transportation prices, or truck cancellations, you are not alone. Adverse market conditions are causing price increases and restricted capacity in full-truckload (TL), less-than truckload (LTL), and intermodal markets, especially for those last minute expedited and emergency orders. Basic economics says that an increase in demand with stagnant supply causes prices to increase. In Q1 of 2018, freight margins remained the same from 2017 – at 12% margin. By the end of 2018, prices are forecasted to increase 4-8% and increase an additional 1-4% in 2019-2022 (data from ProcureAbility market Intelligence report). Let’s look at the economic factors driving these price increases:
Demand continues to grow
- Domestic manufacturing has surged due to trade tariffs. Manufacturing requires transportation of large quantities of inbound material and outbound finished product.
- Increasing oil prices due to economic sanctions on Iran and OPEC production restrictions have caused a reactionary increase in onshore fracking. Trucks transport oil to pipelines if production sites are not nearby as well as equipment to rig sites.
- An improving economy means people buy more, resulting elevated freight needs for delivery from vendors to Distribution Centers (DC’s) and from DC’s to stores.
Supply remains stagnant
- Manufacturing a new truck takes about 1 year, so new supply will not hit the market until next year.
- Trucking companies currently face an historic driver shortage. Millennials do not want to be truck drivers. Wages will continue to rise as the shortage persists
- Electronic Logging Device (ELD) Mandate has taken trucks off the road
- Many owner-operators have been slow to comply and install ELD’s, making it unlawful for them to carry shipments.
- ELD’s allow stricter government enforcement of hours-of-service rules thereby decreasing potential hours on the road.
- Many old trucks were sold overseas due to low demand from 2011-2016 in the wake of the recession due to China’s shifting economy, Brexit, and low oil prices.
5 suggestions for your Procurement team
- Lock in agreement pricing and terms with Freight Carriers as soon as possible, especially for any contracts expiring this year. Be sure to include local / regional carriers along with national carriers to diversify your trucking options.
- Develop / Monitor an On-Time Delivery metric and discuss the results periodically in Supplier Business Reviews. Create action plans in order to improve the metric and hit your target goal.
- Evaluate adding in a buffer for delivery in planning lead times for those critical items needed in order keep operations running
- Remind your team of your Emergency Purchase Procedure and Procurement Card Policy to keep your maverick spend in check
- Remind your team that communication is key between Suppliers, Freight Carriers, Transportation Groups, Buyers, Planners, Receiving, and Operations
Reacting strategically to this trend in the freight industry can help minimize the negative effects of late shipments and increased prices. If you manage agreements, develop metrics, and evaluate operations, you can maintain a successful and best-in-class organization.