Although it was an unseasonably warm January day in Atlanta, many of the topics addressed at the recent SMC 3 meeting were downright bone-chilling, starting with the capacity situation. While rising fuel prices and a shortage of truck drivers have gotten all the attention as reasons why the cost of shipping freight continues to rise, there's actually a much simpler explanation for the carriers' rate increases in 2006: freight volume growth.
According to Bill Sanderson, president of Golden State Service Industries, the growth of freight volume in recent years — enough to match the 7.5% annual growth in the U.S. GDP (gross domestic product) — has absorbed excess industry capacity. Of course, in years past the carriers would typically react (some would say overreact) by buying more trucks and hiring more drivers. While there's some evidence that the carriers are indeed purchasing more vehicles (January was a record month for truck sales, according to Morgan Stanley), finding people to drive those trucks is turning into a distinct problem.
"Driver recruitment continues to be an overriding challenge that's stifling capacity growth," Sanderson observes, and the demographics don't indicate much immediate hope. The average age of a driver today is 57, and the lifestyle — particularly of a long-haul driver who often spends a week or more away from home — is such that many young men and women are finding other occupations much more to their liking. Until we can improve quality of life issues for drivers, Sanderson notes, companies will have to keep paying more to attract them, and as a result, the carriers' rates will increase even more.
So what is Golden State Foods, Sanderson's parent company and a major supplier to the McDonald's fast food chain, doing to offset rising transportation costs? All the usual things you'd expect: shifting over to multimodal transportation when appropriate; optimizing their logistics network to facilitate continuous moves; utilizing a private fleet in certain situations.
The key to all of these strategies, Sanderson explains, is collaboration, which he stresses is critical to meeting and exceeding customer expectations, especially when you're supplying a customer as big as McDonald's. It's a testament to Golden State Foods' collaborative model that the company has never signed a vendor contract with McDonald's — it's all been done on a handshake — which if nothing else illustrates that mutual trust still goes a long way these days.
Gary Girotti, vice president of transportation with consulting firm Chainalytics, agrees with Sanderson on the reasons why carrier costs are going up, but he has a somewhat different take on what it means for shippers.
Price reductions can be achieved in one of two ways, Girotti notes:
- Reducing the carrier's acceptable margin (there's virtually no chance that's going to happen), or
- Reducing the carrier's cost structure. "So the question I put to shippers is: What can you bring to the table to make your freight more attractive to the carriers?" he says. You can start, he says, by changing the carrier-shipper payment structure to share risk.
Girotti, like Sanderson, believes that collaboration is far more than just a nice-sounding buzzword — when done properly, transportation purchasing should be a collaborative exercise. "The carriers should have the opportunity to leverage their existing network," he says. "And the shippers' procurement and fleet management groups should work together to allocate transportation to the most efficient carriers. That means leveraging all the possible carrier rate and relationship structures."
As a consultant, Girotti not surprisingly promotes the use of a model-based benchmarking tool, but his arguments for such a tool are compelling, not the least of which is, "A benchmarking model helps explain transportation pricing to somebody, i.e., your boss, who doesn't understand transportation."
With 35 years of experience in various supply chain roles, Chuck Taylor, principal with consulting firm Norbridge Inc., certainly understands transportation, which made his predictions all the more alarming. For instance, he thinks the retail price of diesel will hit $4.00 a gallon this year, and oil will reach $100 a barrel.
Worldwide production of oil will peak within the next four years. Trucking costs will be considerably higher, rail will require major infrastructure investment, West Coast ports will face significant capacity and labor challenges, and by 2010 interstate traffic in major cities will exceed capacity.
"We're in a deep hole and we don't even know it," Taylor cautions. "People are living with a false sense of security, but 'business as usual' is not in the cards."
Fortunately, Taylor offers a couple alternatives to the doom-and-gloom scenarios he described. "Shippers and carriers both must take a fresh look at everything," he stresses, and above all, they need to embrace the kind of lean thinking that has brought Toyota to the verge of becoming the world's number one automaker. Lean, he points out, is the absolute enemy of waste.
Some fundamental lean questions every company needs to ask itself are:
- Are we spending enough time in the work environ ment finding out what is really happening?
- How many of these activities are absolutely necessary?
- How many of these activities are adding value to the product, rather than costs?
- How many of these activities are related to things the customer sees and cares about?
Though Taylor did not cite "collaboration," he did emphasize the need for two other "C" words. "The winners," he says, "will be the companies which embrace conservation and cooperation."