There is no shortage of unsettling trends confronting U.S. truckers. Qualified drivers are in short supply, and those being seated are getting paid much more than before. The electronic logging device (ELD) mandate has curbed fleet productivity as runs that in the past could be completed in one workday can now take two days. As of mid-June, nationwide on-highway diesel fuel prices were up 75 cents a gallon from the same period in 2017, according to government reports. Road congestion, and the delays that accompany it, is worsening. The cost of everything from trucks to tires continues to escalate. Insurance premiums rise as insurers terrified by so-called "nuclear verdicts" in the many millions of dollars ratchet up rates or leave the business. Then there is the ever-present and formidable competition from railroads, with their more economical and fuel-efficient services.
Thus, it might seem odd to think trucking firms would be in a commanding competitive position as the decade winds down. But that is what the authors of the 29th annual "State of Logistics Report," released June 19 in Washington, D.C., have predicted. The report, prepared by consultancy A.T. Kearney Inc. for the Council of Supply Chain Management Professionals (CSCMP) and presented by third-party logistics service provider (3PL) Penske Logistics, found that favorable supply-demand dynamics combined with information technology adoption will enable truckers to generate solid profits and take market share from a railroad industry struggling to keep pace with innovation.
Advanced technologies ranging from autonomous vehicles and truck platooning—which could be widely available to shippers over the next three to seven years—to enhanced route optimization tools will narrow the cost differential between the two modes and put railroads under increasing pressure, according to the report. That's because rail suppliers have not been as aggressive as their trucking counterparts have in embedding performance-enhancing technology into their products, the authors said.
Using sophisticated analytics, truckers can assess the profitability of each route and shift assets to higher-margin lanes while rejecting more loads on low-density lanes, the report said. By tracking how much time trucks spend at each stop, carriers can purge "sluggish" shippers that take up too much driver time and generate little profit, according to the authors. In the current cycle, which could last several years, shippers stuck in the transactional rate-driven mindset that paid short shrift to the needs of fleets and drivers will be marginalized.
That's not to say railroads still can't make hay. It's just that they have to do it while the sun shines. Based on the report's data, it's shining right now. Intermodal costs climbed 10.5 percent in 2017 over the prior-year totals, the biggest gain among across-the-board leaps in freight rates as a better economy met up with tighter capacity, according to the report. Strong demand gave railroads pricing power—especially in intermodal—while productivity improvements boosted their profit margins and the newly enacted corporate tax cuts increased their cash flows, the report found. Intermodal gained a powerful tailwind from traffic conversions by shippers struggling to find over-the-road capacity.
How long intermodal's good times last will not only depend on the traction of truckers' improvements, but also on the rails' ability to keep their own operational house in order. Events of the past few months haven't been encouraging. In March, the Surface Transportation Board (STB), the nation's rail regulator, concerned about unreliable and inconsistent service, ordered all Class I railroads to submit to the agency their service plans for the rest of 2018. Service complaints in 2017 spiked 144 percent from 2016 levels, the STB said.
Erik Hansen, vice president, intermodal for Kansas City Southern, the Kansas City, Mo.-based railroad that operates north-south routes within the U.S. and in and out of Mexico, said at a June 19 news conference following the report's release that the company is closely watching developments in linehaul technology. Hansen shared the view held by many that it could be years before such technologies become mainstream and that their impact on all supply chains, including the railroads, is "uncertain."
STEEP GRADE AHEAD
The exceptional pricing leverage enjoyed by asset-based carriers was the central narrative of this year's report, titled "A Steep Grade Ahead." Last year's report, which analyzed 2016's performance, described an uncertain future for the industry and posited various scenarios for its direction. By contrast, this year's report had a single message: Assets are where it's at.
"Carriers are in control as demand outstrips supply, while shippers try to 'create capacity' by improving efficiency whenever possible," according to the authors. For shippers, the biggest challenge won't be fighting the upward rate trend, but rather, finding creative ways to secure adequate capacity at prices they can live with.
Shippers are digging deeper into their routing guides than ever before and are increasing their reliance on freight brokers, which continue to show healthy demand increases. Broker volumes rose 40 percent in 2018, a period of ultra-tight capacity that forced many shippers onto the "spot," or non-contract, market, said the report, citing data from loadboard operator DAT Solutions.
Shippers who avoided putting their freight out to bid in an effort to wait out the upward rate trend often found themselves facing load rejections that disrupted their operations, the report found. Those who re-bid their freight, although they absorbed "painful" rate hikes, managed to preserve service levels and to keep disruptions at bay, the authors wrote.
LOGISTICS COSTS RISE
Overall, after declining in 2016 for the first time since 2009, U.S. business logistics costs climbed 6.2 percent in 2017. Logistics costs as a percentage of gross domestic product (GDP) rose to 7.7 percent last year from 7.6 percent the prior year. The report's three main components—transportation, inventory-carrying costs, and so-called "other" expenses, such as administration—rose substantially.
Transportation costs increased 7 percent, led by intermodal. That was followed by dedicated contract carriage, which spiked by 9.5 percent as more shippers demanded capacity assurance, and parcel and express, which rose 7 percent. Truckload and less-than-truckload (LTL) costs rose 6.4 percent and 6.6 percent year over year, respectively, according to the report. Only waterborne freight, with an increase of just 1.1 percent, came in below the 3-percent threshold for year-over-year gains.
Inventory-carrying costs climbed 4.6 percent over 2017 figures, paced by a 5-percent gain in borrowing costs as interest rates climbed, according to the report. Physical storage costs rose 4.2 percent as demand for facilities to support e-commerce fulfillment and distribution continued apace, the report said. The driver shortage has forced many shippers to push goods closer to end customers in order to meet fulfillment and delivery commitments, according to the report. This, in turn, has increased inventory levels and reduced warehouse capacity, thus driving up inventory and storage rates.
In a sober assessment of the long-running problems between shippers and their 3PLs, the focus between the two still remains on cost cutting rather than on building mutually beneficial relationships, according to the report. Blame can be found on both sides: Shippers expect 3PLs to meet unrealistic implementation milestones and performance standards, while 3PLs avoid the risk of developing premium-priced and customized solutions for fear of losing price-sensitive customers, and then wonder why shippers dissatisfied with 3PL cookie-cutter solutions regularly rethink the idea of bringing logistics activities in-house.
In a climate of ever-increasing end user demands, shipper and 3PL executives can't afford to give up on collaboration, the report said. For their part, shipper and 3PL executives at the June 19 event said the problem isn't grounded in mutual distrust but in the failure to have the right conversations. As Joe Carlier, Penske Logistics' senior vice president of global sales, put it, the dialogue shouldn't focus on "here is the rate for this," but on "here's what I can do" for your spending.