SHIPPERS, CARRIERS, 3PLS AND THE LOOMING TRUCKLOAD CAPACITY STORM White Paper Spring 15 866.672.2862 m33integrated.com 511 Rhett Street, Suite 3 Greenville, South Carolina 29601
Freight is always on the move, but many in the shipping and trucking industry see signs that domestic trucking capacity is constrained from moving quickly enough to keep pace with the rebounding demand for truckloads as the post-recession economy begins to get back up to speed. Commercial truck capacity is essentially an economic equation of supply and demand the ability of private motor carriers to supply truckloads and drivers to efficiently and sufficiently meet shippers demands, delivering freight where and, more importantly, when it is needed. This equation plays out against a backdrop of fluctuating natural, socio-economic, regulatory and marketplace forces. Capacity is impacted by everything from treacherous highways pummeled by harsh winter weather, to a shortage of qualified drivers, contentious government safety regulations, and reluctance among motor carriers to invest in new rolling stock until the economy regains solid footing and momentum. In this uncertain environment where securing adequate truck capacity is becoming more challenging and complex, more shippers are turning to third party logistics (3PLs) providers to co-manage or outsource their shipping and logistics operations outright. 2
TABLE OF CONTENTS Executive Summary 2 The Workhorse of Shipping 4-5 The Conundrum of Capacity 6-7 Regulatory Wrangling 8-9 The Likely Upshot is Upward Rate Pressure Ahead 10-11 Flexible 3PL Partnership Solutions 12-13 3
In this uncertain environment where securing adequate truck capacity is becoming more challenging and complex, more shippers are turning to third party logistics (3PLs) providers to co-manage or outsource their shipping and logistics operations outright. 4
THE WORKHORSE OF SHIPPING Trucks currently move nearly 70 percent of all freight ton-miles, according to the federal Transportation Research Board. Trucking, which is the largest component of the supply chain industry, has operated at 95 to 97 percent capacity for the past three years, according to the Council of Supply Chain Management Professionals (CSCMP). However, as the American Truck Associations bellwether Truck Tonnage Index rose 6.2 percent for all of 2013, but declined to 3.5 percent for all of 2014, a capacity crunch may be accelerating for shippers and carriers in the near future. There is a growing national concern about insufficient truckload capacity moving forward among the nation s shippers, receivers, carriers and industry trade associations due to several market forces. 80 IS DRIVER SHORTAGE AFFECTING CLASS 8 FLEETS? 70 60 Currently affecting fleets Will affect fleets in future Not affecting fleets 50 40 30 20 10 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 12 Q2 12 Q4 12 Q1 14 Q2 14 Source: www.truckinginfo.com Some capacity factors, like the impact of severe snow or flooding, are always in play. Others, like a nagging shortage of drivers and carrier reluctance to add new trucks in less than robust economic periods, have been percolating to varying degrees in the supply chain since the turn of the 21st century. As with many other business segments impacted by the vortex of the Great Recession of 2008 to 2011, a previous need to innovate solutions to industry challenges was rendered irrelevant and masked by the devastating sucking sound of the economic downturn. In trucking, the issue was no longer capacity supply, but shipper demand. Truckloads plummeted by as much as 20%, according to some industry observers. However, with the downturn now in the rear view mirror, that mask is gradually falling away and pre-recession capacity issues are, once again, an emerging and rumbling reality. 5
Nationwide there are about 25,000 unfilled truck driving jobs, according to the ATA. Some industry analysts put that number as high as 100,000 by 2016. 6
THE CONUNDRUM OF CAPACITY Truck drivers, or the lack thereof, have resurfaced as one of the trucking industry s most harrowing capacity constraints. Several factors are at work here. The inability of an individual to qualify for a commercial driving license until age 21 discourages many potential new drivers who then pursue and establish themselves in other occupations after graduating high school. Younger workers also may find truck driving, a job that takes them away from home a week or more at a time for an average annual salary of $38,000, to be less attractive than taking up a trade with more lucrative earnings potential. The shale oil boom in North Dakota and elsewhere is also an alluring siren to drivers seeking opportunities for higher pay. 6% 4% 2% 0% -2% -4% -6% -8% 98 99 00 01 02 03 04 05 A FIVE YEAR GAIN LOST IN THREE 06 07 08 09 10 11 12 13 The number of tractor-trailer drivers increased 11.4 percent from 2002 through 2007 before falling 13.4 percent from 2007 through 2010 returning to levels not seen since the late 1990s. The driver population began increasing again in 2010 and had risen 8.1 percent by 2013. Source: www.joc.com Many existing career drivers are nearing retirement age. The U.S. Bureau of Labor Statistics (BLS) reports that nearly half of drivers are currently 55 or older, while less than 11 percent are 30 or younger. As the baby boomer generation ages out of the work force, there are fewer younger drivers to replace them. From the motor carrier s perspective, recruiting new drivers can be an expensive roll of the dice. The Journal of Commerce recently noted that a trucking company can expect to spend as much as $5,000 qualifying and recruiting a single new driver. Given such an investment, driver retention is a major goal, but turnover at larger carriers is as high as 90% and 75% at smaller fleets, according to the American Trucking Associations (ATA). To avert an impending dearth of drivers as capacity demands steadily build, driver wages have been rising, with some carriers offering signing bonuses or reimbursing commercial driving school tuition. Even so, nationwide there are about 25,000 unfilled truck driving jobs, according to the ATA. Some industry analysts put that number as high as 100,000 by 2016. Contrast those forecasts with the 330,000 new truckers that the BLS projects will be needing by 2020, and even a casual observer can see a coming driver shortage looming on the horizon. 7
Of the 2,300 drivers surveyed, 82.5% indicated that the new HOS rules have had a negative impact on their quality of life and 67% report a decrease in wages earned since the rules took effect. 8
REGULATORY WRANGLING Other truck capacity issues stem from reduced driver productivity caused by the federal Motor Carrier Safety Administration s (MCSA) recent changes to driver hours-of-service (HOS) rules. These revised HOS rules limit the work week for truck drivers to 70 hours, specify work breaks for and require a 32-hour restart period after a driver has driven a certain number of hours. For the carrier, this reduced driver productivity translates to diminished capacity. The new HOS rules also tend to reduce pay for drivers, who are typically paid by the mile, which makes their salary less attractive and forces trucking companies to potentially raise wages to compensate. 1,700,00 WANTED: MORE TRUCK DRIVERS The number of heavy truck or tractor-trailer drivers increased 1.9 percent in 2013, after rising 3.2 percent in 2012 and 2.9 percent in 2011. The number of drivers is still 6.4 percent below its 2007 peak. 1,693,590 1,600,00 1,585,300 1,500,00 1,400,00 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: www.joc.com A study by the American Transportation Research Institute (ATRI) reveals that 80% of surveyed carriers experienced lost productivity (read lost capacity) since the HOS rule changes, with preliminary results suggesting the hit is in the one percent to three percent range a daunting number for an industry with notoriously low margins. Nearly half indicated they now require more drivers to haul the same amount of freight. Of the 2,300 drivers surveyed, 82.5% indicated that the new HOS rules have had a negative impact on their quality of life and 67% report a decrease in wages earned since the rules took effect. 9
3PLs typically realize significant savings for shippers. According to CSCMP s 2014 Third-Party Logistics Study, on average, a company s logistics costs are reduced by 11 percent, inventory costs fall 6 percent and fixed logistics costs by 23 percent. 10
THE LIKELY UPSHOT IS UPWARD RATE PRESSURE AHEAD Further exacerbating the looming capacity storm is the fact that the recent recession left motor carriers feeling like they d been run over by, well, a truck, and it hit the industry unusually hard. As shipper demand fell, thousands of trucking companies went under, removing tens of thousands of trucks and capacity from the supply chain. Those motor carriers who survived the economic downturn did so by reducing their workforces and the size of their fleets. In the wake of the recession, many trucking companies are wary of investing in new rigs and additionally face a lingering credit crunch. According to the ATRI, the number of carriers indicating they intend to add capacity continues to trend down at 27 percent, the lowest ever recorded. VAN LINE HAUL RATES & LOAD-TO-TRUCK RATIOS JUNE 2011-2014 $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 Van LH Rate Van L-T Ratio 6.0 5.0 4.0 3.0 2.0 1.0 The perfect storm: a) HOS changes introduced July 1, 2013, b) winter storms shift freight to the spot market and c) spot market freight and rates remain elevated. Source: DAT Solutions $1.00 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 0.0 Working with a knowledgeable and experienced third party logistics (3PL) partner can provide a comprehensive solution for shippers seeking to avoid increased freight and distribution expenditures in the volatile capacity environment that seems certain to lie ahead. The CSCMP defines 3PL as the outsourcing of all or much of a company s logistics operation to a specialized company. Such outsourcing allows shippers to focus on their core business activities while entrusting transportation, warehousing and other value-added services to 3PL specialists. Use of 3PL providers by large and small businesses has steadily increased in the U.S. over the past two decades, and the 3PL segment is currently growing at a rate double that of the U.S. GDP. 3PLs typically realize significant savings for shippers. According to CSCMP s 2014 Third-Party Logistics Study, on average, a company s logistics costs are reduced by 11 percent, inventory costs fall 6 percent and fixed logistics costs by 23 percent. 11
A company can partner with a 3PL provider on high-value activities that may involve integration with technology, bill payment and auditing, cross docking, reverse logistics and supply chain consulting. 12
FLEXIBLE 3PL PARTNERSHIP SOLUTIONS A company can partner with a 3PL provider on high-value activities that may involve integration with technology, bill payment and auditing, cross docking, reverse logistics and supply chain consulting. A higher level of integration may include customer service, fleet and inventory management, order fulfillment and 4PL. No matter what your 3PL shipping needs, your partner should have the experience, expertise and technical know-how to expedite flexible and highly customized supply chain solutions. 120% 100% 80% 60% 40% 20% LESS-THEN-TRUCKLOAD 1Q 1Q 1Q LARGE TRUCKLOAD SMALL TRUCKLOAD TRUCK DRIVER TURNOVER At large truckload carriers, the annualized driver turnover rate has been above 90 percent for eight straight quarters. That means a carrier with 200 drivers would hire 180 drivers over the course of the year, sometimes filling the same Source: www.joc.com There are several key reasons companies partner with a 3PL. A major theme is the ability to bring significant process improvements and discipline to a complex and ever-changing system. A 3PL provides much needed transportation expertise, the leverage of a larger freight network and the very important component of technology. The significant advancement of 3PL technology applications and solutions allow shippers to avoid major investments, implement and see financial and operational returns faster, while allowing the flexibility to adapt to the rapid changes in logistics technology more quickly and efficiently. Shipping firms turn to 3PLs to introduce new technology and help bridge the gaps in their internal technology platforms. A savvy 3PL will find new and tailored strategic and creative ways to get you the most truckload capacity and driver availability at the best rates. A good 3PL takes the combined transportation footprint of many shippers in order to create an extensive network which becomes attractive to carriers. In doing this, 3PLs can lower shipper rates by increasing the productivity and empty miles of carriers, which a single shipper cannot achieve. They will not only save you money, but also deliver a total savings over the long haul by bringing economies of scale and value to your organization. 13
866.672.2862 m33integrated.com 511 Rhett Street, Suite 3 Greenville, South Carolina 29601 M33 Integrated M33 is among the leading transportation management and third party logistics (3PL) partners to the shipping and truck freight industry. Through our mcap suite of logistics solutions, M33 leverages a nationwide network of carriers and proprietary TMS technology to ensure you have the trucking capacity, driver availability and seasoned supply chain expertise to achieve your shipping and distribution objectives.