Make no mistake about it, Hurricanes Harvey and Irma will touch all of us. Aside from the devastation inflicted on the hundreds of thousands of individuals and families, these hurricanes will also significantly impact corporations throughout North America.
For example, last week the Wall Street Journal highlighted how Hurricane Harvey will impact Newell Rubbermaid’s profitability based on shortages and higher prices in the resin markets. And a friend of mine who is the President of a Chicago-based company sent me information about the significant disruptions in the polypropylene and polyethylene markets resulting from Hurricane Harvey.
Several senior executives have called, and the one question they all ask is: How much will my transportation budget be affected by the hurricanes? We’ve read several articles and talked to industry experts, and the consensus is that freight rates/costs will definitely be up in the fourth quarter of 2017 and in 2018 because of the hurricanes. How much higher is still open for debate, because there are so many variables in play and things are subject to change, but at the recent FTR Conference shippers were warned: “We may be seeing the Perfect Storm!” That said, here are some things we do know:
Diesel fuel has gone up by almost eighteen cents ($.18) in the past two weeks. Depending on your fuel surcharge formulas, this will most likely increase your freight costs by 1.5% to 2.5% as carriers pass along the increased fuel costs. Will the price of diesel come back down? At this point, it is difficult to determine if, or when, this will happen, as the hurricanes took out approximately 16% (or 2.5 million barrels of lost production each day) of the U.S. refining capacity.
For various reasons, expect truckload capacity to be very tight in the fourth quarter of 2017 and on in to 2018. Tighter capacity means higher rates, and we are already seeing a 25% to 30% increase in spot market rates in certain parts of the country. Asset-based carriers are also taking a more aggressive approach in their rate negotiations. For those who are asking: “How this will impact my 2018 budgets?", it really depends on your Truckload Asset-Based:Non Asset-Based Ratio. (e.g. the ratio of truckload moves on your asset-based carriers versus your non asset-based, or freight broker, network). A higher percentage of moves in your non asset-based network will most likely mean higher rates and costs that need to be reflected in your budget estimates. We will pass along relevant information as it becomes available.
Don’t overlook another factor affecting truckload capacity. Hurricane Harvey damaged critically important rail lines. The Union Pacific and BNSF have alerted shippers that it could be months before they have their damaged mainlines in Texas fully operational. This will likely result in some diversion of freight from rail to truck—which will make capacity even tighter. At this juncture, no one knows how Hurricane Irma will affect the CSX or the Norfolk & Southern, but it is important to note that even before Irma, the CSX was having major service issues.
While there will be other consequential fallout from the hurricanes, it is important to understand alternatives that can help mitigate the impact of these events.
First, accept the fact that technology is your friend. In a market where capacity is extremely tight, an effective Transportation Management System (TMS) that automates the bidding/tendering/tracking of can be an essential cost saving tool. For example, when a customer implemented our TMS this year, they were able to reduce their costs in a major traffic lane by over $400,000 by using the automated bidding process within the TMS. Again, that was just one of their many lanes! In a market where capacity is tight, you have two choices: Your people can “dial for diesel” and try to find a truck, or they can use technology to get the job done more quickly and with a better result. A great TMS saves you time and money.
Second, understand that little changes can have a big impact on your ability to get truck at a reasonable price. During the tight truck market in 2013-14, when a major food producer experienced a sudden deterioration in asset-based carriers being able to cover their loads, they were forced into the spot market for more and more of their freight. Net result? A huge increase in their freight costs! So they made some internal process changes and expanded their tendering window from two days to seven days. It wasn’t easy, but they were able to get their asset-based carriers to cover 85% (versus 60%) of their moves and drastically reduce their freight costs. For those skeptics who say “My company could never do that!” we like to (gently) challenge them: “Could never” is really a choice. What that “could never” really means is: “My company is okay with wasting money, so we won’t invest the time and resources to make the necessary changes to save money.”
Third, dust off your Supply Chain Disaster Recovery Plans and utilize scenario planning capabilities that address this critically important question: How will our company respond when natural disasters and other catastrophes impact our ability to source materials or meet our customers’ delivery requirements? We’ve seen far too many disaster recovery plans that are focused on operational and technological considerations, but light on critically important transportation issues.
Finally, don’t be afraid to ask for help. Smart companies realize that even the Lone Ranger had Tonto, because he understood the value of a strong partner. And working with the right partner can help your company see how paying attention to little details can make a big difference and positively impact your bottom line. A partner that can help your company shine the spotlight on the supply chain and transportation areas can drastically improve your capabilities, and can help you regardless as to whether you are in disaster recovery mode or just dealing with the usual fluctuations in the marketplace.