How a short-term gain will lead to a long term loss
Growing up I remember learning the concept of sacrificing now for a better future. I learned to feel the pain of exercising now so that I can feel healthy in the future. I practiced holding off purchases of the “I gotta have it now” items so that I can have the cash to pay for the unexpected expenses we all face.
Maybe I’m getting old, but I am seeing the “living for the here and now” becoming more and more prevalent.
When the financial crises hit in 2008, instead of feeling the economic pain of bad choices, learning from it, and being out of it, the Federal Reserve went into an unprecedented money printing and interest rate dropping frenzy. The result has been a lukewarm economy ever since.
Public company after public company made decisions for today’s stock price appreciation instead of long term decisions and investing. Many times this has led to corruption and the falsifying of financials.
I am now seeing this short term thinking in the transportation industry and I believe it is going to hurt many manufacturers and distributors over the next 24 months and beyond.
Every day, executives are making decisions on their transportation spend based on the current market. They are doing this by going to the spot market for every truckload shipment, going onto various websites to get the lowest LTL rate, working with 3PLs that sell only dirt cheap prices based on blanket rates that are subject to change every 72 hours, or bidding their transportation spend every 3 or 6 months.
What will be the long term result of this strategy?
If capacity is low and carriers are doing anything they can to get freight on their trucks, it’ll work.
If capacity is tight and carriers get to choose who they want to work with and the type of freight they want to handle, this strategy is going to backfire in a big way.
Put yourself in the carriers’ shoes. Would you want to work with loyal customers/3PLs who have stayed with you and worked with you during the lean years, or with companies that simply used you when you had the low rate and another carrier when they had the low rate?
As of this writing, capacity has loosened up.
- According to DAT News, spot market capacity is up 32% compared to the same week- 9/13- in 2014.
- Morgan Stanley
- TL Sentiment Survey -9 16 15- “Despite the sequential uptick, the current TL demand, supply, and rate sentiment indices continue to trend near or at the lowest levels we’ve seen since we initiated our survey in 2011, suggesting truckload fundamentals are still relatively soft.”
- TL Freight Index -9 23 15- “Our TLFI is now trending below 2009 levels at this time of year and remains significantly below the historical average trend line.”
- Inventories are high
- Carriers have added capacity through purchased equipment and additional drivers from other industries that have slowed up significantly.
This is the danger zone when executives see quick freight savings now without seeing or thinking about tomorrow.
What will 2016-18 look like? In spite of the slowing economy, capacity is going to be getting tighter in the 3rd and 4th quarter of 2016 and will continue to tighten into 2017-18. See the chart below from FTR.
This is mainly due to “safety” regulations that will hit the transportation industry hard. There are several slated for 2016-17, but the top capacity crunching regulations will be:
- Final ruling on Electronic Logging Devices is expected to be out by October 30th, and in effect by the end of 2016. Experts say the drain on capacity could be anywhere from 2% to 10% over the next two years. Some call it a “game changer”.
- Heavy vehicle speed limiter rule- will increase the need for more drivers and exacerbate the current driver shortage, especially when combined with changes to Hours of Service. This has been delayed for more study with an expected ruling in August 2016.
- Hours of Service study to be completed by the FMCSA with the expectation that the previous changes will be reinstated. The drain on capacity will be 2%-5%. Their final report was due September 30, 2015 but has now been extended to “soon”.
- A few others slated for 2016: Safety Fitness rating process for carriers, adjustment for the CSA scoring system, entry level driver training rules, and drug and alcohol clearing house for commercial drivers.
There are many others too numerous to mention that will hurt the small carriers to the point where they will be unprofitable and go out of business or have to dramatically increase rates.
A recent report said rates could go up as much as 15% to 20%. I believe it could be even higher than that with companies that have no contracts in place and have simply looked for the “cheapest” rate over the years. As an owner of a $250 million LTL carrier told me a while back, “Those companies that have been holding our heads underwater during the slow times will have their heads held underwater with 25% plus increases.”
It is important to note that simply using the same carrier through a 3PL’s blanket rates won’t equate to “customer loyalty” because you have given the appearance of nothing but a rate shopper to the carriers. Blanket rates have a place in the industry for small manufacturers and distributors or to be used temporarily in order to gather data for a RFP, but using a broker’s blanket rates is not a long term solution.
What’s the long term solution?
- Negotiated specific customized contracted rates directly with the carriers or through a logistics provider. Provide accurate and thorough data for the carriers to properly price your program.
- Work with the carriers to help them be profitable with your account- no delayed loading or unloading, excellent packaging to reduce claims, accurate commodity descriptions, completed bill of ladings, and paying on time.
- Work with the carriers when a pattern exists- continually damaged or late shipments. Get to the root cause and work towards a resolution vs. switching carriers each time an issue happens.
- Gain visibility to your supply chain through technology. What good are negotiated rates that you don’t use or unknowingly overpay?
- Are your suppliers providing 100% compliance to the carriers you specified?
- Have you consolidated all potential shipments?
- Are your freight bills truly being audited?
- Are you using the right carrier based on transit time and rates on every lane?
The question every manufacturing and distribution executive must ask themselves is: “Do I want short term gain and long term pain or am I willing to pay a little more than the spot market now for good contracted rates and capacity over the next several years?”
As the ebb and flow of the economy shows potential short term savings compared to your contracted rates, stay loyal because studies have shown you will help your organization succeed in the long run.