Shippers may not be enjoying the turbulent times they've been thrust into, but they're learning to deal with them. After nearly 25 years of calling the shots in what basically amounted to a buyer's market for trucking service, they're having to adjust to a new reality. In recent months, industry consolidation and a severe driver shortage have conspired to limit, if not shrink, truck capacity nationwide. As a result, shippers report that it's not only getting tougher to find a truck, but if they do find one, it's costing them a lot more to hire it.
How much more does it cost? Freight rates rose by an average of 7.5 percent last year, according to a recent survey conducted by DC VELOCITY and the Warehousing Education and Research Council (WERC). And it appears that few have been left untouched by the trend. Nearly nine out of 10 of the respondents reported that their rates had risen; only about 13 percent said that they had been able to hold freight rates in check.
The outlook for 2005 isn't materially better. Although it appears that the rate of growth may be slackening a bit, freight rates continue to climb. On average, those polled expect that rates will rise by just under 7.0 percent this year.
But there's more to rising trucking costs than just higher rates. Carriers are also taking the opportunity to impose added fees, like chargeback penalties on shippers that fail to meet requirements and accessorial fees for added services. Four out of nine shippers who responded to the survey reported an increase in the chargebacks they paid. And nearly 60 percent said that accessorial billings by carriers had gone up—typically by double-digit amounts.
Defensive maneuvers
Cost issues aside, the most immediate problem for shippers these days remains finding a truck. Desperate to keep goods from piling up on their shipping docks, they're doing whatever it takes to secure service, even if it sometimes means reserving capacity they don't end up using. For example, a respondent who works for a large manufacturer (respondents were guaranteed anonymity) said he had even paid deadhead miles during peak periods in order to guarantee he'd have trucks available when he needed them. A manager for a third-party logistics service provider reported that he'd been able to secure service by guaranteeing carriers a backhaul in the destination city.
Shippers are also learning to lower their expectations. "Yes, we accepted lower service in exchange for rate and capacity," wrote one manager for a large manufacturer. That, of course, has strategic implications for shippers' operations as well. A full 43 percent of those polled said they had increased inventory as a hedge against reduced service levels.
And in a reversal of a longtime trend, shippers that once consolidated their business with a few core carriers are now actively seeking new haulers. Some 74 percent said they had added carriers in an effort to keep goods moving out of their DCs, and 61 percent said they had made some changes in the carriers they used. But that strategy appears to carry some risks. One shipper wrote, "Some of the new carriers did not live up to their [commitments] and increased service failures."
Shippers, however, are doing more than just re-evaluating carriers. Many have also made changes in their own operations as they try to keep costs in check. Under pressure from carriers (who themselves are grappling with a driver shortage, skyrocketing fuel and insurance costs, and driver hours-of-service regulations), some have taken steps to improve turn times at their DCs. One mid-sized manufacturer boasts of cutting turn times on live loads from three hours to 1.5 hours. Of course, those efforts sometimes carry costs of their own. One respondent reported that the pressure to shorten turn times had increased his unloading costs, especially the fees for lumpers. (Lumpers are casual laborers who are hired as needed.)
Still other shippers said they were working to tighten up their forecasting and scheduling to reduce their carriers' costs—and by extension, their own. "We're giving more timely projections of upcoming loads to truckload carriers," said a manager for one mid-sized retailer. More than half have changed their shipping schedules, 45 percent have extended their hours, 37 percent have increased the use of drop-and-hook operations, and 30 percent have added drop-and-hook operations.
A few are even enlisting their suppliers and consignees in their cost-cutting efforts. A mid-sized retailer described shifting some value-added services to vendors in an attempt to expedite the flow of goods through his own DC. A manager for a large manufacturer said he was actively working with customers to improve unloading times.
The study made at least one thing clear: no one's immune from the capacity crunch. The squeeze has affected shippers of all sizes. Forty-two percent of the more than 500 shippers who responded to the survey described their businesses as mid-sized, while another 33 percent said they worked for large companies. In total, the respondents operated more than 400 million square feet of warehouse space.
Editor's note: Clifford Lynch, principal of consultancy C.F. Lynch & Associates and a DC VELOCITY columnist, is preparing a detailed report on the study. Watch for those study results in an upcoming issue of DC VELOCITY.
