Don't look for capacity in your stocking this Christmas

Dec. 8, 2004
Holiday season is upon us, and probably at the top of every logistics manager's wish list is more capacity. You might think that would be an easy gift

Holiday season is upon us, and probably at the top of every logistics manager's wish list is more capacity. You might think that would be an easy gift to grant, but quite frankly, not every carrier is in a giving mood this year. While just about all of them will be as generous as Santa Claus with their best customers, if you're looking for any last-minute deals from carriers desperate for your business this year, you'll more than likely come face to face with Ebenezer Scrooge.

That much-used and dreaded word capacity is merely a short-hand description for a situation where shippers find it increasingly difficult to get the transportation services they need. Not only is it harder to find trains, planes and trucks than it was a year ago, but if you've been living off of short-term transactional relationships with carriers, this year you're facing rate increases in virtually every mode.

"In the past, carriers were viewed by shippers as commodities," notes Jim Latta, vice president business development with A. Duie Pyle Inc., "but in this emerging era of diminishing capacity shippers who haven't worked to build strong bilateral relationships with carriers could become the commodities."

What's more, Latta adds, "we will not assume any new business that compromises our relationships with existing customers."

Latta's words should serve as a wake-up call to any shipper still thinking they're in the driver's seat this year, all the more so since A. Duie Pyle is a regional less-than-truckload (LTL) carrier. According to the Freight Pulse, a semi-annual study conducted by Morgan Stanley and Logistics Today, regional LTLs actually have the most capacity right now, scoring 4.3 on a 1-10 scale, with a "10" signifying "Forget it — you might as well carry it there yourself."

For the truckload carriers, the capacity situation is much tighter, with a score of 7.7. And according to Jerry Moyes, CEO of Swift Transportation, things aren't likely to improve for shippers any time soon, either in a loosening of capacity or a relaxation of rate hikes. Delivering the keynote address at last month's National Industrial Transportation League (NITL) show, Moyes declared matteroffactly, "Our industry is going to have to start getting paid more for the services it provides."

Don't expect to see an influx of capacity coming to the rescue this time. There are too many barriers to entry for any new carriers wanting to enter into the transportation business. Moyes lists four major barriers in the current environment:

  • Banks aren't loaning money to trucking companies.
  • Fuel costs are at record highs this year.
  • Insurance is both difficult to get and costly.
  • Drivers are in short supply.

Moyes also worries about the effect the cleaner diesel engines mandated by the federal government will have on trucking companies. Swift buys more than 4,000 engines per year, and Moyes is concerned that the engines, which will be required starting in 2007, will cost the industry up to an extra 4 cents per mile. Another truckload carrier, Schneider National, has estimated that these new engines could cost between $14,000 and $16,000 per truck.

In other words, it's just getting too expensive for the carriers to invest in more capacity with the same reckless abandon they may have shown in previous eras of unexpectedly robust business.

So what's a shipper to do to ensure they get put at the front of the line for capacity?

"One of the best things shippers can do is use the technology that's available," suggests James Welch, Yellow Transportation. "Shippers need to find better ways to package and label their shipments correctly and accurately," he notes, and adds that it's advantageous to shippers and carriers both that shipments are loaded and unloaded promptly when the truck arrives at the dock.

Beth Enslow, vice president, enterprise research with analyst firm Aberdeen Group Inc., echoes Welch when she advises shippers to "implement self-service, online carrier dock appointments and dwell-time reduction programs." She also recommends shippers adopt internal collaborative shipment schedules, which she suggests could cut 5-10% off transportation costs. Forward-thinking shippers could also look into testing incentivebased freight contracts, Enslow notes. To look at the situation in another light, consider that the ultimate cause for the capacity crunch is a rapidly accelerating economy, and more business than shippers and carriers were prepared for. That's not a bad thing at all, and if you put good supply chain management practices in place, it should be a very happy new year for shippers in 2005.

Dave Blanchard

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