Last week I was a panelist on a webinar hosted by the Journal of Commerce called Midyear Trucking Report: The New Capacity Reality. The recording of this webcast is available on their website if you go to the “Archived Webcasts” section at the top of the page.
The other panelist was Jason Miller, a professor at Michigan State University and the incoming department chair of their supply chain management program. At the beginning of our time together, he addressed the question: Are we in a freight recession? From the data he’s analyzed, that doesn’t seem to be the case.
According to a “Trucking Ton-Mile Index” they’ve developed, demand remains strong this year. He commented, “Right now demand is a few percent higher than where it was back during that prior peak period in 2018 as well as where we were at this time last year.”
Along with strong demand, he also had a very interesting observation: There is not a shortage of truck drivers! Jason noted that according to the Bureau of Labor Statistics data, there are just over 1.6 million drivers. Candidly, that is not what we are hearing from the CEOs of some very prominent trucking companies, but we will keep our eye on this issue.
The next "hot" topic we discussed was the the issue of freight rates for LTL and truckload moves. As we noted in last week's Two Minute Warning, shippers are wondering why their contracted freight rates aren't dropping as much as they'd like to see.
Bill Cassidy from the Journal of Commerce asked me to address this concern. In response, I noted that we can forget about using the term the "New Normal." Instead, shippers should focus on the "Current Reality." Adding onto this, I addressed the new realities of the marketplace that shippers are facing:
Higher costs for carriers
In serving on the board of a publicly traded truckload carrier, I have a keen interest in looking at data. And one thing the data shows as is that it costs a whole lot more money to operate a truck now than it did twelve to eighteen months ago. Driver wages are up around 25%. The cost of new equipment (trucks, trailers or chassis) are up anywhere from 25% to 50%. Insurance premiums have skyrocketed, and there are other operating costs that are much higher today than before. Add it all up, and the carriers are looking at much higher rates to protect their operating margins and avoid losing money.
Carriers - especially the larger carriers have great data
In today's world, where dimensionalizers and ELDs are common place, the carriers know down to the inch how much space your freight consumes on their trailers. And they know down to the minute how much time it takes to serve your business. If you want to detain their drivers and trailers, expect to pay more. If you want to adopt extended payment terms, expect to pay more. In short, the carriers are seeing if they can do what a lot of their customers are doing: Trying to make a reasonable return on their assets.
New pricing priorities
Given the carriers focus on "margin management" they are, to a certain extent, using a "Cost Plus" pricing model. Instead of being focused on trying to grow market share at any cost, they are using the data to determine who is going to get their assets (a.k.a. capacity) as they stay focused on improving operating ratios. That is why creating an accurate shipper profile is so important.
It is important to highlight the fact that in addressing rate increase requests from your carriers, don't just accept any proposed increase that comes your way. As sourcing and negotiation experts, we strongly recommend that when a carrier proposes a rate increase that seems unreasonable, ask them to share the operating ratio so you can quantify the impact of how your company does business with them.
Shipper of choice
One final note. During the freight crisis of 2021, a whole bunch of shippers once again said they wanted to be a "shipper of choice. " Many shippers found out that this was easier said than done. If you are truly committed to being a "shipper of choice" it’s important to drill into the factors that could hurt of help your relationships with carriers. One way to do this is to use TranzAct's Carrier Yield Test worksheet to drive the conversation. You can also give us a call or send us an email to learn more about how we can help you company to become a "shipper of choice."
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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