The transportation mode LTL, or Less Than Truckload, has grown to become the predominant, preferred means of freight transportation across the US. Additionally, industry experts and third-party logistics shipping providers (3PLs) find themselves in the difficult position of ensuring the flow of merchandise continues as LTL use grows. As a retailer, or as an executive at a multi-location LTL shipping company, you must understand the facts of this change, what’s driving it, and how a 3PL will become increasingly important in the role of monitoring and mitigating volatility in LTL management.
Recently, John Larkin of Stifel’s Transportation & Logistics Equity Research provided an in-depth analysis of the future of the LTL sector to Supply Chain Digest. He expects the LTL sector to decrease somewhat as other modes of transport remain low. However, the overall cost of shipping through LTL modes will increase between three and four percent in the next few years. Afterward, he expects the annual growth to return to the previous 2.5 to three percent. Unfortunately, this produces a distinct challenge for manufacturers and businesses through 2017 and beyond: how will shippers manage to stay afloat with expected increases in the cost of LTL management while pertinent factors continue to drive the growth of LTL? Furthermore, the driver shortage will only exacerbate this problem as fewer drivers equate to fewer overall LTL shipments. Consider the following scenarios of why LTL use will increase and LTL management use will consequently become more important.
Most LTL drivers often operate out of 53-foot trailers, as found within the Cerasis’ Best Practices For Effective Less Than Truckload Shipping White Paper. LTL shipping is designed to enhance delivery of smaller shipments of goods. For example, a business may order a specific number of items, which would be too minute to warrant transport via rail or traditional truckload. As a result, the drivers will make more frequent stops, be charged with monitoring invoices upon loading and unloading, and navigating through city traffic.
Larkin, as featured in Supply Chain News analyzes the market:
First, the LTL sector in the US continues to contract a bit relative to other modes, as truckload, rail and/or intermodal are just more cost effective versus the pick-up and delivery intensive LTL mode. Larkin calculates that LTL revenues are down to just 12% or so of the truckload market, for example.
But, absolute gains in LTL freight volumes have been decent, such that tonnage in 2014 passed the pre-recession highs. Larkin expects tonnage to grown in the 3-4% range over the next couple of years, before falling back to about 2.5- 3% annual growth after that.
In parallel, the LTL sector continues to get more concentrated. The top five carriers by revenue (FedEx Freight, YRC Worldwide, Con-way Freight, UPS Freight and Old Dominion) now control almost 55% of the market, as shown in the graphic below. FedEx Freight is the largest LTL provider, with about a 16% overall share.
The LTL market is more concentrated than the full truckload sector, where Larkin says the largest carrier “has only 2%, and depending on how you count it’s maybe as little as 1%” market share.
Yet, despite being much more fragmented, in general the truckload carriers have been much more profitable than the LTL group (Old Dominion being a notable exception).
Combine that LTL carriers are not as profitable, and there is not as much diversity in the LTL mode of transport (meaning not as many options to choose from), it is clear that combined with lower profitability and the driver shortage, LTL management costs will increase due to GRIs (General Rate Increases) as well as contract rates look to increase.
Now, think about what the driver shortage means. Fewer overall drivers implies that even an increase in the overall LTL capacity through the purchase of new LTL fleets would be incapable of handling the expected demand of LTL shipping without additional drivers. Therefore, the most important aspect of guaranteeing effective LTL shipping rates remains with and lies at the heart of providing plenty of drivers for the additional delivery vans and trailers.
Consumers do not spend countless hours making decisions on how an item arrives. They select a speed of delivery. Businesses are the chief components of driving the LTL shipping industry. However, a business acts as an extension of consumer wants and needs. When a business is incapable of delivering product as planned, the business may lose a customer. Furthermore, the business may incur additional costs due to money-back guarantees, returned orders, and disruptions within consumer satisfaction. Ultimately, consumers order products for home delivery, with the exception of those transferred to USPS, will receive their packages via a LTL means.
Recall the events of last year’s holiday season. According to the National Retail Federation, 85 percent of consumers purchased items online as part of cyber Monday. This amounts of 126 million different purchases within 24 hours. As a result, shipping providers felt the added pressure of needing to successfully navigate millions of individual orders to various locations. It’s impractical to ship such items via truckload, which would require routine, frequent stops in population dense and residential areas.
The predictions for next year are even higher. Furthermore, the NRF’s data does not account for consumers who purchased products in-store and opted for home delivery of such goods. For example, store A ran out of Item B. The store orders Item B from a retail partner and the item is retrieved, loaded, and shipped to the consumer’s home. Ultimately, wether you the shipper are in retail or in the industrial space the chief control over the decision for better LTL management rests on your shoulders. Are you prepared to meet consumer demand, despite all the moving parts of shipping LTL? At the end of the day, consumers have choices, and if product is late, you may not get a second chance.
Since the overall number of LTL capacity on the road is not expected to climb—considering the continuing driver shortage—the only remaining option is to maximize the existing LTL space. Unfortunately, this means longer routes, more stops, and additional management work for the drivers, distribution centers, processing of orders, and tracking of such orders. It falls back to the typical economy law of Supply and Demand. With the increased demand for LTL shipments and a stalemate for the numbers of drivers, the cost of transportation for the mode, LTL, will increase. Around the country, there are literally hundreds, if not thousands, of LTL shipping providers, and no one has the time to check all of these providers for rate comparison purposes. As a result, the use of 3PLs, who can offer both technology, such as a transportation management system, and services for managing LTL shipping related matters such as damage claims and accounting, must increase.
3PLs take on the brunt of work from selecting LTL carriers to negotiating rate agreements with such carriers. Drivers, business owners, and consumers are driving the growth in LTL mode of transport; however, this transportation sector has already reached, or is rapidly approaching, capacity. To keep all parties across the order fulfillment process happy (and to reign in ever increasing costs), more retail, manufacturing, and distribution entities must turn to expert LTL management for shipping.
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