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Logistics Report Warns of Pending Trucking Capacity Concerns
Trucking Shortage: Annual logistics report identifies trends including looming truck capacity shortage, 3PL growth, the rise of intermodal transport, and rising inventory levels. Overall, the logistics sector grew at a modest clip last year and has yet to rebound to pre-recession rates.
By Chaille Brindley
Date Posted: 7/1/2012
Ensuring you can find a truck to ship products may get much tougher in the near future suggests Rosalyn Wilson, the author behind the 23rd Annual State of Logistics Report®. This yearly report has become a major barometer to measure the current logistics landscape in the United States. Rosalyn Wilson said, “Every component of the trucking is compressing...We don’t have the trucking capacity that we had before the recession.”
When asked if this supply issue would lead to significant price increases she responded, “Rates are not as big of a concern as not being able to move the freight.”
The current warning about looming truck capacity concerns is nothing new. Wilson and others in the logistics industry have been making similar predictions for a few years. But market conditions seem to suggest that capacity concerns will become a reality sooner rather than later in some areas of the country.
“We are starting to see on-time delivery rate failures increasing,” said Rick Sather, vice president – customer supply chain for Kimberly Clark. Rick Jackson, executive vice president of Mast Global Logistics echoed those comments explaining that delivery rate failures had more than doubled over the last year pointing to a lack of truck capacity in some regions.
The annual logistics reported is put on by the Council of Supply Chain Management Professionals (CSCMP) at a big media event every year held at the National Press Club in Washington, D.C. Overall, business logistics expenditures rose 6.6% in 2011 to $1.28 trillion, the industry has yet to rebound to its 2007 pre-recession levels ($1.39 trillion). Wilson stated, “In truth, we may not get back there for quite some time.” Overall, the logistics industry remained fairly steady although there are several hot spots to watch. Transportation costs were up by 6.2% in 2011 because of higher rates, not increased volumes.
Some sectors experienced lower revenues although rail, trucking and third party logistics providers (3PL) were able to increase rates and revenues. Rail saw the largest rate increase up 15.3% for rail transport costs. This was driven by higher rates not a significant growth in volume.
Overall Economic Picture
The overall U.S. economy continues on a trajectory of marginal growth for 2012 and likely 2013 (below 3%). Some signs are positive while others are not. U.S. exports of goods and services increased by 14.5% in 2011 to $2.10 trillion; some sectors set records. For example, the U.S. became a net exporter of oil for the first time since 1949. The U.S. automotive exports grew by 17.7%. Manufacturing and business spending have carried the economy throughout the recession and recovery, but they were not as strong in 2011. Industrial production was up 3.9%, but it grew at a slower clip compared to the 6.3% experienced the previous year.
Wilson explained, “It’s a process of two steps forward, maybe a half step back.”
One of the big question marks hanging over the whole global economy is the fate of the Europe zone. Wilson said, “Our recovery is dependent on our trading partners and their immediate prognosis is not good…Our exports have slowed in the last several months and probably will not pick up again soon.”
Trucking Capacity Concerns
As already stated, trucking capacity concerns loom in the horizon. Multiple factors are contributing to the potential problem including rising costs making it harder to stay in business, driver shortages, regulatory burden increasing as new safety regulations are implemented, total reduction in the number of new trucks on the road compared to those older vehicles being retired, more carriers considering exiting the market and selling off fleets at attractive prices thanks to a surging used truck prices. All of these and other factors are forming a perfect storm scenario that could lead some shippers scrambling to find available trucking capacity in the future.
Despite much needed rates hikes ranging from 5-15%, many trucking companies continue to be challenged by higher costs including driver pay, rising insurance premiums, diesel fuel prices and new equipment prices.
Government regulations are reducing capacity, especially the Hours of Service Rule and the Compliance, Safety and Accountability (CSA) program. These regulations are weeding out some trucking firms and putting tougher requirements on all companies while limiting the number of hours that a driver can be behind the wheel. See the article on page 48 for more information on pending trucking safety regulations.
Another factor is the higher cost of new vehicles with better fuel efficiency and safety features. Carriers have to trade in more old trucks for each new truck they buy. Donald Broughton of Avondale Partners reports that “a fleet that trades in ten older trucks now can afford only seven or eight new ones.”
Probably the greatest driver is the potential for even more trucking companies to exit the market. A shortage of good late-model used trucks has driven up the price of used equipment. This means that some companies are eyeing the prospect of selling its fleet at a substantial markup and getting out while the window of opportunity is open. A recent survey by Transport Capital Partners indicated that 28% of respondents are considering selling out in the next 18 months if conditions don’t improve. Nearly 40% of smaller carriers are weighing an exit compared with 23% of the larger carriers. If a mass exodus were to occur, this could result in a major realignment in the trucking sector.
Other Key Logistics Trends
Beyond just trucking capacity, a number of other logistics trends emerged during the CSCMP report and press conference. The potential for a longshoreman strike on the East Coast later this year could force shippers to reroute goods to the West Coast. Labor disputes are compounded by the fact that demand for ocean carriers fell off last year after a strong recovery in 2010. Peak seasonal demand did not materialize, and a lack of business led to greater price competition and lower rates. During the slack winter months, several carriers in the Transpacific trade suspended some services or left markets entirely.
Retailers continued to push inventory carrying responsibilities further down the supply chain, a trend that began before the recession started and has gained steam. Wilson said, “All business inventories increased in all quarters. Inventory levels are now close to the levels that were experienced at the height of the recession, ending the year at the highest point since the third quarter 2008.” Thus, don’t look for a major inventory run up to fuel the economy this year.
The emergence of intermodal transport has become the biggest story for the railroad industry over the last few years. Intermodal is the use of multiple modes of transport (rail, ship and truck) without any handling of the freight itself when changing modes. This method is becoming more cost effective all the time as intermodal facilities are coming online. It also reduces cargo handling, improves security, reduces damages and losses, and allows freight to be transported faster.
John Lanigan, executive vice president and chief marketing officer for BNSF Rail, said, “Domestic intermodal growth is up near double digits this year for BNSF.” He added that major retailers and shippers are co-locating facilities near intermodal terminals. He pointed to the BNSF facility planned for the Kansas City area as an example of this trend. In general, the railroads have been investing heavily in their infrastructure over the last few years adding track, cars and intermodal capabilities. Lanigan said, “Over time the viability of the network will be a good play.”
Jackson of Mast Global Logistics explained how the attitudes are shifting in the retail sector to intermodal transport. He said, “We are very excited about how intermodal has stepped in (void left by trucking capacity issues)…In past years, many retailers have been reluctant to use intermodal but rail has become reliable for time sensitive goods, such as clothes.”
Look for continued intermodal growth as even truck companies have begun partnering with rail to alleviate delivery issues. Wilson said, “More trucking companies are partnering with rail for intermodal services to avoid problems caused by the driver shortage and to avoid the cost of acquiring new equipment or to put off replacing older equipment. In fact, many carriers are investing in new intermodal chassis and trailers, rather than full rigs.”
The sector of the logistics industry that appears to be doing the best in terms of growth is third party logistics (3PL). Revenues for the 3PL sector rose 10.9% in 2011. Wilson stated, “The 3PL sector has completely recovered and has now surpassed its pre-recession levels substantially.” The primary driver toward 3PL is its ability to scale up and down depending on the need. Functions include warehousing, transportation, distribution, order fulfillment, packaging, recycling, consulting, etc. This is a sector that pallet companies should consider for expansion. If you have empty warehouse space, unused trucks or trailers, or other resources, you can turn this into a wide variety of 3PL services.
For more information on the report or the CSCMP, visit http://www.cscmp.com.
Key Logistics Trends from the State of Logistics Report®
• Trucking industry has had capacity issues even in this lower volume environment and will have difficulty meeting demand – the railroad industry is well positioned to take up the slack with intermodal.
• Ocean carriers will continue to be plagued with over capacity and rate problems.
• Inventory management techniques are improving and these practices are likely to be some of the major lessons learned coming out of the very trying period the country has endured for almost five years.