Strategies to Drive Transportation Costs

March 1, 2011
Understanding your options amidst shifting economic conditions may help get you back in the driver’s seat.

So, what’s the deal with transportation costs these days? That’s a question many shippers must be asking themselves as they try to deal with fewer carriers and fewer choices due to the industry consolidation that has resulted in rising prices. The answer, as one might suspect, lies in the rough road the economy has been traveling in recent years. These are challenging times for shippers, but there are ways to solve these challenges and to make sense of today’s transportation picture. As we’ll see, finding the right carriers at the right price is still possible, but it takes a bit of diligence.

The Big Fall

To understand recent trends in the shipping world, we need to start with the economic upheavals our nation, and the world, have been experiencing in recent years. The Great Recession has wrought dramatic changes to virtually every segment of our economy, and transportation is no exception.

As consumers felt the effects of the recession, retail sales plummeted. Falling retail sales meant lower demand for finished goods, which in turn meant lower demand for raw materials. The entire supply chain took an enormous hit, and these pressures reduced the overall demand for the services of carriers, especially truckload (TL) carriers.

As TL carriers fought tooth-and-nail for every scrap of business, the pressure of this competition forced transportation costs down. Prices fell to levels that hadn’t been seen in ten years. In fact, some carriers priced themselves right out of business. What came next was predictable.

The Big Consolidation

The intense competition in the shrinking transportation market led directly to consolidation among TL carriers. Facing the difficult economy, many smaller to mid-sized TL carriers have been forced either to shut down or to sell out to larger companies. Mergers and acquisitions have become commonplace.

Even financially sound carriers suffer due to the tightening of credit prevalent in our economy. Many carriers simply cannot get the loans they need to stay afloat, even if they are profitable. Compounding the problem even further, many independent owner/operators have been forced out of the business.

As if that hasn’t been enough, safety considerations have also affected the reduction in carrier capacity. The U.S. Department of Transportation has started reporting safety violations not only for carriers but for individual drivers as well. The transparency of this information through the Federal Motor Carrier Safety Administration (FMCSA) website allows carriers to examine driver safety records more easily and more thoroughly than ever before, and those records now extend back three years for safety violations and five years for accidents.

Carriers’ newfound ability to research their drivers’ safety records has resulted in a reduction of the number of available drivers. The effects of the driver shortage on top of a reduction in TL carriers are likely to affect supply chains more strongly in the future.

In short, there are now fewer TL carriers chasing less business. The dust has started to settle, however, and a semblance of equilibrium is returning. The law of supply and demand is taking its natural course.

Prices Rebound

The first signs of recovery from the Great Recession have appeared, and are creating higher demand for the reduced supply of transportation services, a result of the consolidation of TL carriers. This is the formula for rising prices, and that’s just what’s happening. After falling to levels not seen in a decade, the cost of transportation is starting to rise. This increase began around the first quarter of 2010, and shipping costs have, in some cases, risen as much as 25 percent since then.

Clearly, the leverage has shifted back to the carriers, and prices reflect that change. In addition, the rising costs of fuel, tires and maintenance are exerting additional upward pressure on prices.

Suddenly, many shippers who have been heavily courted by TL carriers in recent years are now finding that they are too small to get the same attention. Now that TL carriers don’t have to fight for every small piece of the transportation pie, they find themselves in the driver’s seat, so to speak. They are raising prices and deploying their assets to the most profitable lanes, which puts shippers in the difficult situation of having fewer choices among TL carriers as well as higher prices with which to contend.

Answers for Shippers

Despite the higher prices and the reduced choices, many avenues remain open for shippers trying to make sense out of today’s transportation picture. The key is to become flexible, keep an open mind and do the legwork.

One option is to weigh the advantages of TL versus less-than-truckload (LTL) shipments. When prices were falling, TL pricing fell with them, and many shippers who had been using LTL services switched to TL. Now, with TL prices on the rise, shippers are switching back to LTL. Keep in mind that there is a good deal of competition between TL and LTL carriers, and that can work to the shipper’s advantage.

Large TL shipments can be broken down into LTL shipments. By negotiating with both TL and LTL carriers, shippers can often achieve excellent pricing. Many third-party logistics providers (3PLs) are experienced in balancing TL and LTL shipments and, if they offer a full range of services, can often save shippers a good deal of money.

Intermodal services also hold the potential to keep costs down. There has been strong growth in this segment of the industry lately, and it’s surely becoming part of the mainstream. Of course, switching to intermodal transport often requires a change of mindset among shippers. Yes, the transportation times are a bit longer. Yes, the packing requirements may be different. And yes, the locations of points A and B may not be ideal, but minor adjustments to the ways shippers operate can make intermodal work to their benefit, as the cost difference can be significant.

Many shippers find that building an extra day or two into transportation times isn’t too difficult, especially when they see the savings that intermodal can deliver. If shippers are unsure of how to go about changing over to intermodal, transportation experts such as intermodal marketing companies (IMC) can help shippers maximize the cost-efficiency of intermodal channels.

A strategic analysis of a shipper’s total transportation picture can also help control shipping costs. Shippers should look at the origin points of their inbound materials and the destination points of their outbound goods. Many may be able to marry the two together to achieve full-circle rates. Doing this can eliminate the added cost of paying for each individual shipping lane. This may take more time, technology and staff, but it could be well worth the effort.

Shippers can also take greater control of their transportation by examining per-unit costs of their inbound goods. Often, transportation costs are included in those per-unit costs. But it’s perfectly reasonable to ask suppliers to break out the cost of transportation. It is not mandatory to buy transportation from the same companies that sell you products and materials. Oftentimes shippers can arrange for shipping themselves or can ask the supplier to offer alternatives to lower costs. They may even be able to pull volumes together to get deeper discounts on their entire transportation package.

Whatever the transportation situation, simply doing some extra legwork can lead to savings. Pick up the phone. Explore carriers and modes of transport that you haven’t used before. Make carriers and suppliers compete for your business.

The Road Ahead

It seems safe to say that consolidation among carriers will continue, at least for a while. Many companies are still precariously balanced between success and failure. They may have no alternative to shutting down or selling out to another carrier. In addition, the credit crunch is still with us, and some carriers may not be able to get the financing they need to remain viable. Enhanced awareness of driver and carrier safety records is also likely to cut into the supply side of TL transportation.

All of this indicates that higher TL prices will remain in the picture for the foreseeable future. There are many good ways, however, to ameliorate the effects of escalating costs. Whether a shipper chooses to consult a full-service 3PL or roll up their sleeves to do the work themselves, there are alternatives that can help them remain on the road to success.

Chris Cline is president of Corporate Traffic, based in Jacksonville, Fla. Founded in 1992, the company is a third-party provider of logistics and transportation services, including asset- and non-asset-based logistics solutions, truckload and less-than-truckload shipping, ocean services, expedited air freight and intermodal services.