Due to the recent announcement from the FED that there will be more purchases of securities, I am reposting an article I wrote a little over a year ago. The FED’s buy will inevitably drop the dollar’s value. The drop in value will likely increase the cost of oil and then diesel…
Ergo:
This environment is “somewhat of a chess game,” noted Eric Starks, President of FTR and Associates, when asked about current capacity concerns in the industry. “Shippers are in a position where they cannot do anything but go back to their carriers and explain that without a break they will look elsewhere, due to pressure from upper management over costs.” This may be true, but many shippers bent on aggressively pushing down costs risk short-term gain for potential long-term disaster.
Now I’m in the business of saving clients money while maintaining service, which makes me a “shipper,” but I also do not want to push carrier partners under by demanding what they can’t deliver while still remaining viable. This is the situation as reported by FTR:
•
Freight indexes are even more sharply negative than they had been o The FTR Monthly Truck Loads Index, calculated from truck freight related economic inputs, is in a three year long downward slide. Falling 25 of the last 36 months, the index shows a freight level not seen since December 2003. December 2008’s y/y decline was the biggest in the 17 years of the index
o The Cass Freight Index is produced by Cass Information Systems from the data for shipments processed for Cass’ 400 shipping clients in a variety of industries who ship through a variety of shipping modes. The Cass Index has fallen ten of the last 15 months, but December was the biggest decline in the current downturn. December’s -12.3% was the biggest one month drop in eight years and dropped the Cass Index to the lowest level since December of 2002
o In December, the ATA (American Trucking Association) Tonnage Index, a measure of truck freight shipping, reflected the huge drop in truck freight shipping with the third largest one month decline in the 35 year history of the index. The December decline gave the index the biggest y/y decline since December of 1995. The ATA Freight Index is calculated from a survey of ATA members
•
Slight increases in freight demand pulled utilization up at the end of 2007, but freight demand fell in 2008 and, despite reductions in fleet sizes, utilization fell gradually until the fourth quarter when utilization suddenly plunged as freight demand fell even more dramatically
o Truck freight carriers continue to cut fleet sizes but freight demand continues to fall, and utilization is not forecast to reach even the 75% range until 2010
o Low utilization results in falling or at least stagnant freight rates and many truck freight carriers will not survive an extended period of utilization in the 70% range
-Total truck trailer loads fell 2.8% y/y in 2008Q3 after four consecutive quarters of growth. The forecast is for a decline of 5.4% y/y to have occurred in 2008Q4,and for further declines of 5.9% y/y in 2009Q1 and 5.6% in 2009Q2-
In addition to the issues above is the perceived diesel situation. In my opinion, it is the primary factor allowing shippers to apply pressure to carriers and regain control of their transportation spend; however, this situation is fragile at best. It is even more shaky in the specialty modes like flatbed in which there are larger numbers of owner-operators and small fleets as a percentage of total capacity. These carriers live today off of money borrowed against receivables. When diesel hit its peak during the summer, depending on payment terms, their then-current costs outpaced receivables. At that point the decision was easy: park the trucks and wait for the storm to clear. I’m sure there are many shippers who still remember how it felt trying to find a truck during those times, especially into the northeast. I’m betting that some of them are still having not-so-great a time presenting the data at annual meetings. It is important to remember that feeling because if shippers aren’t careful they may find themselves in the same situation with no one else to blame.
Looking through different online media this morning, there’s a lot to take in. These are but a few of the headlines:
- Russian General says USA may have planned satellite collision
- Clinton criticizes Israel’s breach of roadmap
- Iran urges world Muslim 'resistance' against Israel...
- China to boost military spending by 15%...
- New terror target: International sport...
My point in sharing these is that the geo-political world in which we live is in flux: don’t count on these low fuel costs forever...not even for a moment. This is critical because given the already tenuous economy with low volumes in addition to dried-up credit, we’re one crisis away from thousands of more trucks coming out of the market. Hence, there is a price one pays for being too aggressive today.
Shipper of choice is a term I’ve heard a lot over the past several years. “How do I get carriers to take my freight over another’s?” Well, here’s for answer:
Develop and maintain a
core carrier program. Don’t throw away carriers who have been with you for years in order to save a few more pennies. I understand that we all have budgets and goals to meet with savings, but if you have a current average linehaul rate of $2 a mile on a lane with an incumbent carrier submitting $1.75 against a new carrier submitting $1.50, think a little before jumping right to the lowest rate. Incumbent carriers have developed a network around your freight and more than likely they view your enterprise, in some respects, as part of their own. These carriers have also probably invested in safety and continuous improvement programs attached to the specifications of your freight. Additionally, if there is a crisis event they will feel more comfortable sticking to their rates and sticking to you. Handing freight to the absolute lowest bidder is like placing your business into the hands of absolute capitalism. In a crisis situation, they will run to the money. Katrina is a great example. How difficult was it to hold onto broker and transactional capacity when the government was paying five dollars a mile? Again, I’m not stating not to take the lowest bidder. If your market-making process is worth anything, you will figure out quickly if your freight fits in well with their network or if it’s just a carrier getting a foot in the door during a soft market with a basement rate. It is a watch-out.
Also, try not to go beyond
30-day payment terms. This is a growing trend currently, but going beyond these terms, especially if you utilize specialty equipment, will place your freight at great risk of falling down in priority if and when the situation changes. In fact, if you maintain a strong core carrier program, make agreements with carriers to decrease payment terms to 15-days in the event of a market change. The Morgan Stanley Freight Index is an accurate and unbiased view of the market, as well as an excellent tool on which to base market changes. If you’re going to carriers requesting an increase in payment terms then you know the dollar savings associated with it. The same is true with carriers. They’ve lived through tremendous surges in the price of fuel over short periods of time. We know these things can and will happen (check headlines), why would you want handicap your carriers’ abilities to survive. If the choice is to take a load for $2.25 a mile to get paid in sixty days or a load for $1.75 and get paid in fifteen, most carriers will take the load that pays in fifteen. In fact, during your bid, let them bid differently based on payment terms if you have that capability. You may be shocked with what you’ll find. You may save more money on rates changing to 15 than you would in cash moving to 45 or 60 days.
In addition to holding frequent meetings with individual carriers, it is just as important to hold a
Core Carrier Conference for all to attend. I’ve been a participant in a number of these and carriers see a great deal of value in attending. The networking with peers is important, but even more important is the psychological impact. Carriers will feel more connected and appreciated by you as a shipper.
Share information (as much as possible) with them on where your company is going and how you want them to be a part of it. Let the carriers give feedback as a group. You may discover something about your process that you never expected.
The actions above are just a few which may save shippers millions during the next upswing. One should never stop growing carrier relationships. Many shippers out there already know this and will be the ones reaping the rewards against the market. As shippers, demographics are against you. Drivers continue to get older and they are being replaced by a different kind of driver from my generation who care more about relationships and loyalty. As shippers, this recession is against you; and the longer it lasts, the more painful it will be during the turnaround. Transport Topics reported that in 2008 alone, 127,000 trucks are gone, representing a 6.5% reduction; 2690 carriers went bankrupt through November. Shippers believe that there is abundant capacity. This is true insofar that there isn’t abundant freight. When the economy turns around, and it always turns more quickly than it slows, shippers will see the true magnitude of the shift in capacity. Plan now. Get close to your carriers and hold on tight: it’s gonna be a ride.
Kimani Jefferson is an experienced Logistics Professional who can be reached at jeffersonk@usafa-grads.com.
to lead business at most corporate juggernauts (actually, some of these have been summarily and ...bureaucratically...put of business). What he did have was a singular vision and the nerve to make it happen. 
