September, 2005 |

Truckers, Shippers & The Capacity Crunch: Shared Pain, Shared Gain            

By: Joseph O'Reilly

Tightening capacity, rising fuel surcharges, and an ongoing driver shortage threaten timely deliveries nationwide. How are motor carriers and shippers responding? By crunching numbers and working together to create innovative solutions that alleviate stress and improve reliability.

Two recent news items shed light on the tough climate truckers face today: Motor freight industry reports indicate that the current labor shortage could surpass 50,000 drivers by the end of the year. And in August, the price of crude oil surged to another record high in the United States, topping $66 a barrel; more recently, Hurricane Katrina's disruption of U.S. oil production pushed costs even higher.

  Now consider that trucks carry three-fourths of the total value, and two-thirds of the weight of freight shipped in the United States, according to recent U.S. Department of Transportation statistics.

These are heady numbers for shippers who carefully calculate and weigh service demands against costs to ensure they can meet their customers' needs and remain profitable, as costs rise with every touchpoint across the supply chain. For many, this fine balance has been inexorably tilted by the burden of fuel and insurance overheads and the lack of available capacity.

Capacity constraints strike at the very heart of global supply chain management. The trend toward leaner supply chains has challenged carriers, shippers,  and consignees to maximize equipment and asset utilization, keep core carriers at the lowest common denominator, and streamline inventories in an effort to reduce operating costs and expenses.

But without available transport space, let alone drivers to move product, these efforts run counter to shippers' needs.

The reality for global shippers has become all too clear, reports Bear Stearns' 2005 Supply-Chain Indicator survey.

"In the first quarter of 2005, shippers viewed truckload (TL) capacity as much tighter than less-than-truckload (LTL) capacity, with 52 percent of respondents describing TL capacity as 'tight' or 'extremely tight,' 13 percent as 'modest or extreme overcapacity,' and 34 percent as 'balanced'.

"This compares to a year ago when 57 percent of respondents described TL capacity as 'tight' or 'extremely tight,' 2 percent as 'overcapacity,' and 41 percent as 'balanced,'" says the survey.

While the majority of shippers polled still expect a tight marketplace, the 11-percent increase among respondents who say an abundance of capacity existed in 2005 is telling.

This suggests several possibilities: demand in some markets is down; shippers have found ways to access trucks, or have leveraged the laws of supply and demand to their full advantage; capacity is not as tight as has been reported; or the economy is slowing down. The truth is likely a combination of these elements.

Working Collaboratively  
Available capacity will continue to fluctuate with seasonality, as supply and demand shifts in different markets. Regardless, over-the-road shippers, carriers, and intermediaries are making a concerted effort to work collaboratively on innovative transportation solutions to improve reliability and alleviate stress in the supply chain  --  especially at critical chokepoints near ports and urban areas.

Truckers are partnering with railroads and other carriers to expand their service portfolios, while shippers look to broaden their reach, embrace innovative solutions, and rearrange their supply chain networks to accommodate longer lead times in capacity-constrained areas.

The first two quarters of 2005 offered shippers some reprieve as the market has softened with economic conditions.

"The capacity issues we face this year have been less magnified due to the dip in the economy," reports Steve Feliccia, corporate director of logistics for PolyOne, a plastics manufacturer based in Cleveland, Ohio. "Business volume in 2004 was much higher than it has been so far in 2005, which means there has been less demand."

"More trucks are available this year versus last year," notes Jeff Tucker, CEO of Tucker Company, a truck brokerage/third-party logistics provider located in Cherry Hill, N.J. "Carriers are calling to say they need to move more trucks. Last year many shippers were forced to book trucks one to three days in advance."

Many carriers agree with Tucker. "Since February of this year, there have been opportunities to procure more capacity, which has continued through the second quarter," says Todd Jadin, vice president of van operations for Schneider National. "It has tightened up a bit now, but we attribute that growth to construction industry demand."

Aside from fiscal changes, a more indicative trend is appearing: the growth of small, regional carriers that are adding capacity to fill niche demand. Small carriers are able to concentrate their resources in specific regions and are conceivably more efficient at meeting customer demand because of their strong service capabilities.

Freight transport buyers are, at the very least, considering the possibility of distributing more cargo among small operators, suggests the Bear Stearns survey.

"Shippers are continuing to diversify their exposure to carrier-specific issues and to gain access to greater capacity," the study reports. "Thirty-five percent of shippers polled feel large carriers are more focused on enforcing accessorial increases versus 2 percent who think small carriers are more focused.

"Although 52 percent will not change the size of their carrier selection, 33 percent will target a greater number of small carriers to distribute their freight," according to the survey. "Directionally, this shows that shippers are continuing to seek capacity from small operators and are diversifying their shipper pool, bucking the long-term secular trend toward freight consolidation with a few core carriers."

Small LTL carriers face their own obstacles: rising fuel and insurance costs are ubiquitous, as are difficulties in recruiting labor  -- though to a lesser degree than the TL industry. That's because regional carriers are on a more predictable schedule and "can get their drivers home at night," Tucker says.

Congestion also continues to threaten timely distribution, especially for next-day delivery carriers.

As TL carriers struggle with driver shortages and an inability to expand and capture market share, acquisitions aside,  shippers recognize that small operators can bring value to their enterprise.

"Regional transport companies have better opportunities for managing capacity versus national carriers. They can extend their coverage to another state, for example," says Bill Huff, spokesperson for Estes Express, a Richmond, Va.-based LTL provider. "National carriers don't have the same opportunity to grow geographically, aside from spotting more import opportunities."

The LTL segment has also skirted the capacity challenges truckload carriers face. "It is easier for an LTL carrier to distribute 100 extra shipments across a number of trucks. TL carriers don't have that flexibility," adds Huff.

LTL companies also have a better package to offer drivers  --  shorter runs, fewer overnights, and in some cases, better pay.
Large carriers may lack the elasticity to scale growth and add capacity, but they do have the resources to augment their service portfolios and align themselves with other carriers and modes to provide integrated solutions for shippers.

 PolyOne for the Road     
As costs continue to run rampant, shippers such as PolyOne Corporation, a $3.5-billion global polymer services firm, are increasingly looking for more value from their carrier partnerships.

PolyOne manufactures and distributes thermoplastic compounds, specialty resins, specialty polymer formulations, engineered films, and color and additive systems, among other products. It operates more than 80 manufacturing sites in North America, Europe, Asia, and Australia.

In North America alone, PolyOne has 35 manufacturing sites as well as 30 warehouse and distribution facilities. Approximately 50 percent of its shipments are TL; dedicated and LTL account for 15 percent each; and rail and bulk trucking round out the remaining 20 percent.

Given its reliance on long-haul trucking to move product between its plants and warehouses, and to end customers, PolyOne has been particularly impacted by rising fuel costs and reduced capacity.

To counter some of these challenges, the manufacturer has made a concerted effort to streamline internal processes, and has aligned with carrier and broker partners such as Wisconsin-based Schneider National.

"We have increased lead time visibility to our carriers by one to three days, giving them advanced notice of our capacity needs," notes Feliccia. This requires seamless communication and visibility between PolyOne's manufacturing plants and suppliers to be able to forecast capacity needs.

Through its relationship with Schneider National and its logistics and brokerage arms, PolyOne has also expanded intermodal use to relieve capacity in some markets.

"We rely on Schneider for rate contracting and lane analysis," says Feliccia. "Intermodal requires increased transit time, so Schneider lets us know what lanes are 'intermodal eligible.'"

Intermodal, however, carries its own constraints. Similar capacity and infrastructure issues have impacted the railroads, especially as more shippers trend that way.

"We are very selective about transitioning to intermodal  --  we have increased our use of multimodal options by only five percent," Feliccia says. "Intermodal is an alternative when TL capacity is constrained and we treat it as such."

PolyOne has also grown capacity by expanding its dedicated fleet to 80 vehicles  --  all contracted from Schneider. "It's more expensive to contract a dedicated fleet, but the costs balance out," says Feliccia. "We are able to offer an increased level of customer service and the drivers are more diligent in their ability to meet customer needs."

These benefits filter through PolyOne's supply chain, particularly in its ability to track and forecast shipments and communicate changes to suppliers, manufacturing plants, and customers. Unlike many shippers, PolyOne has been able to keep its inventory down, despite tight market conditions.

"We are focused on capacity control on our inventory levels," says Feliccia. "By building reliability into our supply chain and making sure product is available from our suppliers and manufacturers when they say it will be available, we are able to more effectively manage our inventory levels." 

Carriers, in turn, have realized they need to expand their service offerings to enhance their value proposition, especially as shippers face increased fuel surcharges.

Acquisitions are another way carriers are finding additional capacity to serve shippers. In June, Schneider's logistics division acquired American Port Services, a port transloading/deconsolidation, warehousing, and distribution services provider based at the Port of Savannah.

"Linking the inland truckload/deconsolidation, intermodal, and third-party capacity of Schneider National with American Port Services' transloading and port dray operation will create a unique 'port-to-door' import logistics service," says Chris Lofgren, Schneider National president and CEO.

Acquisitions such as this help carriers fill in supply chain links and conceivably access greater backhaul opportunities, while offering shippers end-to-end transportation solutions with complete visibility. They also put carriers in a position to help customers gain greater control of transportation closer to the point of origin.

Not all shippers are taking the traditional approach of directly partnering with freight brokers and carriers to secure capacity. One shipper using a non-traditional method is Stora Enso Timber, the North American subsidiary of its Finnish parent company, which imports and distributes a wide variety of sawn and processed softwood from Europe to customers around the world.

Stora Enso's North American arm aligned with Getloaded.com, an online freight-matching portal, to help meet its U.S. domestic transportation needs. It ships 600 to 700 flatbed and bulk loads monthly from its U.S. warehouses to end consumers. Most of its lumber is used in home construction and the maximum range for deliveries is about 400 miles, says Julie Semer, Stora Enso's transportation manager.

Dedicated carriers deliver approximately 30 percent of Stora Enso's shipments, and the remaining loads are posted on Getloaded.com.
The Midlothian, Va.-based virtual freight broker has capitalized on the Internet's accessibility and ease of use to create a portal where shippers and freight transport companies come together and match available capacity with loads that need to be moved.

More than 20,000 trucking companies, with a total of more than 500,000 trucks, are registered with the web site. Approximately 120,000 loads hit the portal on a given day, estimates Bryan Jones, vice president of operations, Getloaded.com. He compares the freight brokerage process to an online dating service.

"Trucks and loads meet based on specific criteria such as date, location, and type of shipment," he says.

The portal gives shippers such as Stora Enso greater flexibility and control in finding capacity when they need it.

Seasonal constraints, however, are one difficulty Stora Enso encounters. "From May until October, space is tight and rates go up," Semer says.

Generally, as summer tapers off, prices drop and capacity becomes less constrained. With fuel prices eclipsing all-time highs this year, however, Semer expects costs to remain static even into winter.

No Guarantees  
Cutting out the middleman and dealing directly with carriers  --  which eliminates costly brokerage fees  --  is one advantage of using Getloaded.com, says Semer. It also gives Stora Enso greater control over routing shipments, especially when problems occur.

"There is no guarantee with a freight broker. A carrier may agree to move your freight, but if it finds something closer to home, you're out of luck," says Semer.

In Stora Enso's case, the relationships it has forged with small carriers and service-oriented owner/operators has proven more reliable than outsourcing to a third party.

Industry analysts expect the freight shipping market to soften intermittently over the next few years as demand for space fluctuates with economic conditions. What remains problematic for shippers and carriers is the lack of qualified drivers, especially as imports from Asia continue to flood U.S. ports, and freight loads increase.

Indeed, freight loads grew 2.8 percent between Q1 2004 and Q1 2005, reports trucking industry consultant FTR Associates. At the same time, its Driver Labor Index indicates the number of drivers grew only 0.5 percent during the same period. Many expect this pattern to continue.

A dearth of qualified drivers, compounded by the new Hours of Service rules, presents the greatest obstacle to growth for TL carriers moving forward. The ability to expand fleet size is largely contingent on being able to hire drivers.

"Our focus is on hiring and retaining drivers in order to grow the fleet," says Schneider's Jadin. "We balance our growth desires and expectations with our ability to generate the appropriate return on the hiring and capital investment we make."

Driver shortages have been highly publicized over the past few years and carriers are earnestly looking for ways to attract qualified candidates.

"There isn't a lot of discourse about truck driving as a career," especially compared with 20 years ago, says Jadin. Carriers are looking to tap different demographics, including women and immigrants, and some are lobbying for federal legislation to make 19 the minimum age for commercial driver's licenses.

One challenge is trying to base drivers where the demand is. "We have located some hubs in rural areas where labor availability is better. We try to adjust our road driver pool and domicile them, or route their trips where demand exists," says Huff of Estes Express.

Other businesses have taken a similar approach, locating distribution and warehouse facilities in regions that are transitioning from obsolete industries or where unemployment is high.

Shippers such as PolyOne are also examining how they can realign their corporate logistics and economic development strategies to create a more efficient supply chain network. 

"We are looking closely at manufacturing plant locations in markets that have been capacity constrained, as well as identifying the cost and service impact of relocating our manufacturing points to regions where more capacity exists," says Feliccia.

PolyOne has also considered moving some of these locations closer to its customer bases to create a tighter network of supply to demand.

But labor issues aren't the only concerns carriers and shippers have to deal with. Fuel and insurance costs still remain high and continue to be an added bleed to the bottom line.

The Environmental Protection Agency's 2007 vehicle emissions standards also put pressure on carriers to upgrade and recapitalize dated equipment with newer engines, which might prove prohibitive for small TL operators, notes Jadin. This, in itself, could further reduce available capacity if small operators are forced out of business.

The numbers certainly tell one side of the story and it is increasingly difficult for shippers to come to terms with rising costs and fluctuating capacity. Carriers are doing their part to expand services and drive collaboration, not only between trucking companies and brokers, but other modes as well.

"The only way to properly match freight with partner carriers, regardless of mode, is by offering a variety of services," says Jadin. "It's a matter of building flexibility into the supply chain, creating better flow, and piecing together TL, LTL, and rail to create synergies and backhaul opportunities."

Shippers will continue to see consolidation within the industry as large carriers look at strategic acquisitions as an opportunity to capture greater market share.

"If things don't change with regard to driver pay increases, large carriers will be forced to grow mainly by acquisition," suggests Tucker.

Tucker also envisions large carriers that operate dedicated operations to either raise pricing on the dedicated business or bring those dedicated trucks back under the for-hire division of their businesses. "For-hire fleets are more profitable than the dedicated operations," he adds.

Shippers such as PolyOne and Stora Enso hope these collaborative partnerships and strategies will carry their freight  --  and the day  --  for the motor freight industry. The alternative? U.S. truckers will face an even worse capacity crunch, which could have serious global implications.