Since the collapse of the housing market and the economy in 2008, the freight transportation industry has managed to claw its way out of a damaging situation and maintain historically low trucking rates. Throughout this time, 3PL transportation management providers have taken advantage of the low-costs of transportation, which further reduced the costs for businesses and manufacturers. However, the industry stands on the verge of a rate-hike cliff. Fortunately, 3PL transportation management providers have some tricks up their sleeves to help alleviate some of the rate increase, but you will still need to be aware why and how this change is coming. Furthermore, you can prepare for the change by understanding what 3PLs can do to help attempt to maintain lower prices of transportation. No one in the transportation industry has the ability to predict the exact behavior of the freight transportation market, but an effective 3PL can make the transition much smoother.
What’s Driving the Trucking Rates Increase?
We have discussed the impact of Reshoring in previous blog posts, and it is also one of the reasons the average rate for freight transportation is going to go up. As more companies begin to move companies back to the US, the influx of manufacturing will require the allocation and transport of raw materials for production to manufacturing centers and more. Unfortunately, this means an already-strained transportation industry will have additional needs.
Throughout the freight transportation industry, the impact of drivers cannot be overstated. According to the Wall Street Journal, truck drivers are quickly aging into retirement, and the costs of hiring novice drivers can be quite extensive. The Bureau of Labor Statistics asserts courses to obtain a Commercial Driver’s License (CDL) last anywhere from three to six months. Unfortunately, this amount of time equates to a higher cost of waiting for more drivers to finish their training, thus driving up trucking rates. Previously, employers were not necessarily under any obligation to provide health insurance to their drivers. However, the Affordable Care Act has made health insurance coverage a necessity for many previously uninsured drivers. As a result, the business expense of obtaining this coverage is requiring a larger investment on the part of the employer. Alternatively, drivers are demanding higher wages to account for this new requirement from employers that do not offer coverage.
Further, as JOC.com wrote in a recent article about the Wall Street Journal analysis:
At the moment, shippers at the NASSTRAC conference said capacity is more balanced than a year ago, in the aftermath of the disruptive polar vortex cycle of winter storms.
“We haven’t had much trouble getting trucks yet,” Candace Holowicki, director of global transportation and logistics for $1.5 billion manufacturer TriMas Corp. told the conference. However, she is cautious rather than “cautiously optimistic.” “What happens when we have another glitch,” she asked, like the polar vortex in 2013-14 or the West Coast port slowdown.
“Supply and demand are so closely matched right now, there’s no room in the industry for one glitch,” she said. “It sends everything into a tailspin. The West Coast ports proved that.”
That 4-6 percent range for truck pricing increases is not the peak of this rate cycle, Albrecht warned. “I think 2016 and 2017 will make 2014 look like child’s play,” Albrecht said. “There’s an incredible storm of regulation coming (in those years) that will make the shipper’s job incredibly challenging.”
Among the regulations he pointed to were an electronic logging mandate expected in 2017, a national driver drug-testing information clearinghouse and hair follicle-based drug tests.
“There’s a belief the (Federal Motor Carrier Safety Administration) eventually is going to make hair-follicle drug testing the standard and do away with urine testing,” Albrecht said. In that case, the number of drivers disqualified by positive drug tests could skyrocket.
Operating at Capacity
Today’s freight transportation industry is operating at maximum capacity. Shipping companies have attempted to reduce the cost through the use of advanced shipping methodologies, condensation of routes, 3PL services, and implementation of a TMS throughout the industry. However, there are simply not enough trucks and space available to ensure the timely delivery of such goods across the country, reports Supply Chain Quarterly.
Predicted Increase in Interest Rates
This summer, the Federal Reserve announced forthcoming interest rate increases, which will be the first interest rate increase in more than six years. This results in more business spending into repayment of debt, which causes less money to be available for paying drivers. Unfortunately, this will only exacerbate the problem of the driver shortage.
Volatility in Crude Oil Prices
The price of crude oil, which is essential in the production of Diesel, can vary greatly from quarter to quarter. Over the past few years, oil booms across America have led to the lowest crude prices in nearly seven years. However, the uncertainty of these oil booms, especially when coupled with weather events, will drive the cost of Diesel up further. As a result trucking rates and conversely the cost of moving product from one location to another grows.
How Will Supply Chain and Logistics Managers Face The Increase in Trucking Rates?
Supply Chain and Logistics Managers (SCLMs) have several options for mitigating the increase in trucking rates and staying competitive. Rather than stating, “keeping the rates low,” business owners must understand that cost increases will come. However, SCLMs are the best chance for keeping the rate hike minimal.
Implementation of Technology-Driven Resources
The use of technology, especially a transportation management system, remains SCLMs’ greatest advantage in controlling the cost of trucking rates. This includes the consolidation of routes into more efficient systems, faster, more accurate tracking of merchandise, and automation in the order fulfillment process. However, Supply Chain processes still have another viable means of keeping prices low.
Some 3PL transportation management providers own their own trucks, fleet, and supply chain processes (known as asset-based 3PLS; BONUS: Asset-Based 3PLs vs. Non-Asset Based 3PLs). However, many 3PL providers also have long-standing agreements with several shipping providers. These partnership agreements exist to help increase the efficiency of all parties in the agreement. For example, Major Shipping Company A may have extra room on Truck 1245 and “sell” this space to the 3PL for a fraction of the typical shipping cost.
3PLs Eat Much of Shipping Costs
In addition to providing technology and in-person resources, a 3PL eliminates the cost of hiring drivers, maintaining a fleet, and implementing policies for individual businesses. As a result, the 3PL provides the resource without worrying about the business spending additional capital on their shipping needs, which is ultimately cheaper for the 3PL than an independent business.
Throughout the freight transportation industry, trucking rates will increase by the end of 2015. Drivers in the coming years will remain hard to come by, but truckload rates could climb as much as 9 % for some carriers in the next 18 or so months, said Donald Broughton, trucking industry economist and managing director of Avondale Partners.
For businesses avoiding 3PL Supply Chain Management, the trucking rates increase will be severe. However, 3PL Supply Chain Management can help mitigate this change by keeping prices minimal. Above all, you, as a business executive, need to understand why this rate increase is happening, especially if you do not have a 3PL transportation management provider.