More Than Pallets

Economic Improvement Through Government Intervention Uncertain

The trucking industry is an economic indicator that signals the condition of commerce in the U.S.  Following a two month increase in industrial sales, May’s performance dropped 9.3 percent.  Truck sales were up the first quarter of 2010 indicating that the trucking industry is reacting to increased market activity.  It is estimated that 15 percent of small to medium size carriers have closed their doors and many large trucking companies have sold equipment assets.  The increase of capital expenditures in the trucking industry shows that the market is preparing for the economic upswing, but it is not here yet. 

Other variables that affect freight levels and truck sales will be government policy when it comes to over the road transportation.  The Department of Transportation and the Obama administration is implementing a “last-mile” policy that will direct freight to alternative modes other than trucks.  Rail and waterways will receive more funding for infrastructure enhancements to increase freight through government intervention.  Without proper implementation of this policy the supply chain could experience challenges that will affect all areas of commerce.  Currently, rail and waterways do not have the capability to handle that much freight without creating a bottleneck within the supply chain.  Companies that have implemented Six Sigma, Kiazen and other lean manufacturing philosophies will be the victims of government intervention. 

Food safety is another government mandated policy that will require the transport company to ensure food safety at every point of the supply chain.  The transporter will be required to monitor the loading and unloading of products, pallet quality, equipment is working properly and ensure no pest have contaminated the product during transport.  This policy will require hours of training to recognize and understand quality protocols.  An overreaction of a driver or carrier and a load of perishable items can be lost. 

Economic indicators are not the only factors that will affect freight and truck sales.  Required equipment and pending government policy will dictate how commerce will move products to market.  The indicators that will affect commerce are trucking, packaging, raw materials and pallets.  These are industries that allow a process to go from raw material to finished product to market and will be the first sign of improved economic health.  All other industries will benefit or suffer accordingly. 

Transportation: Deal Now or Die

The transportation industry has been hard hit during the economic downturn.  Over the past two years the transportation industry has been controlled by market demand pricing caused by shrinking sales and the slow industry reaction.  According to an industry insider, this slow reaction caused many smaller carriers to close their doors.  The carriers that did survive reduced capacity significantly to match the reduction of revenue.  These conditions have been beneficial to companies that have over-the road (OTR) movements as prices are so low, back-haul rates have been negotiated just to offset to cost of fuel and driver. 

Of all modes of transportation trucking is the largest in both shipments handled and tonnage.  According the Bureau of Transportation Statistics trucking handled 71 percent of the total value of all merchandise transported.  The total is approximately $8.4 trillion dollars. (Table 1)  However, the ton-miles are almost equal between truck and rail, 40 percent and 37 percent. 

Rail has had a different set of issues than their OTR counter-parts.  Rail companies have capital and assets in the form of land rights, tracks, and equipment that cannot be sold off during lean times.  The perception of rail transport is that you sacrifice service for cost.  Savings are obtained at the expense longer transit times and increased damage rates. 

An industry insider said, “I think where rail providers really felt a difference was in the age old cost vs service comparison. The cost savings on rail rates are usually offset by longer transit times and increased damage rates to product. Rail providers have come a long way towards improving these areas through express trains and specialty equipment engineered for the type of rough and tumble transit they provide. However, customer perceptions take a long time to change. If you are a shipper and the rate between rail and OTR is relatively close, which mode will you choose? The pressures on shippers these days are customers want lower inventory carrying costs, which means more just in time like transits so suppliers carry the bulk of inventory costs. If OTR can offer faster transit and less damage for a slightly higher rate, you are most likely going to choose that option.” 

Rail has made some strategic changes offering companies producing high volumes closed loops between locations.  Companies like Railex offers produce companies on the West Coast 5 day coast to coast delivery to New York.  Railcars are temperature controlled and monitored via satellite.  This has offered a viable alternative to OTR transportation in the produce sector.  With $1.9 billion tons of goods and 1.3 trillion ton-miles transported by rail every year and growing the rail industry must become more flexible to compete when the economy rebounds.   Jarnig and I agree that if they are going to sustain or grow market share the rail industry will have to break old stereotypes regarding cost verses service.

As the saying goes, the worm is turning, and the economy is starting to show signs of recovery.  Right now, transportation cost is controlled by the marketplace.  As consumer purchasing increases, so will the need for carriers and many carriers no longer have capacity to meet pre-recession levels or have closed their doors.   Our industry insider adds, “As freight volumes increase and capacity lags behind, providers will take control via higher rates. I would predict that in the next 12-18 months we will begin to see this change. Now is a critical time for shippers to forge critical relationships with transportation providers. If at all possible, I would suggest returning to the bargaining table now and trying to solidify multi-year tiered contracts that will provide some stability when the economy regains strength. Those shippers that do not prepare could face dramatic increases in transportation spends that will be hard for some transportation managers to grasp given how they have had their way in the past 2 years. Those that have taken advantage of providers during the economic downturn will find themselves on the receiving end before long.”   

I worked for a large transportation company that managed transportation at a large Distribution Center in the Central Valley of California.  This DC delivered to stores in the western region of the United States.  One would think that a large DC would get priority, but as with many things Wal-mart is king.  During what we called high level, September through December, capacity was always an issue.  To offset the lack of equipment we contracted third party carriers to haul products.  This is a common practice with all large carriers.  As we discussed, many smaller carriers have closed their doors completely.  So when the business picks up the companies that have secured contracts will get priority.  In this article, we have discussed the state of the transportation industry and the upcoming changes.  Our industry insider believe changes are coming.  The advice I would give is shop now for your preferred carrier and secure your freight.