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Keep The Wheels Turning On Your Transportation Program
Companies should budget now for increases for transportation. Not surprisingly, carriers are raising prices to ensure financial stability and preserve financial returns for their investors. However, many logisticians and shippers are forecasting their deliveries will take longer, and many are receiving more late deliveries. Heres an overview of the changes facing carriers and a set of useful ways to deal with them.
By Mark Morrison
Transportation is usually the largest cost in a companys logistics budget. In fact, two-thirds of the logistics budget is typically spent on raw material and finished product movement. Managing these costs have become increasingly strategic and complex because of the recently dormant economy and radical changes within the transportation industry itself.
Regardless of whether an organization purchases transportation services from a third-party or manages them internally, supply chain professionals must anticipate many transportation issues and deal with them proactively. These managers must weigh all the variables in determining which of these services should remain in-house and which should be outsourced to a capable 3PL. In both cases, pressing the issues converging on the industry must be factored into the decision.
Fuel inflation is certainly the most visible cost pressure because it has been tightening for both corporate and consumer worlds. Fuel costs have risen steadily throughout 2004 and are currently at some of their highest levels ever in North America. World uncertainty coupled with a long-term increased demand for fuel seems to threaten to elevate the base price of fuel even higher. Fuel is second only to driver wages in cost impact. Carriers have been hit hard, too, particularly those that are under-capitalized. Weaker carriers have been forced out of business and have taken capacity with them.
More carriers are exiting the market than are entering it. Carrier bankruptcies have been a way of life since the transportation industry was deregulated in the 1980s, but this has accelerated with each economic downturn and increase in key cost factors, such as those pertaining to fuel and insurance. Declining capacity has especially affected rates in the transportation spot market, where rates change daily based on equipment availability.
Both the American Trucking Association and the Canadian Trucking Alliance predict the current driver shortage could last indefinitely. Carriers and transportation managers alike are struggling to hire and retain quality drivers. In an effort to mitigate the shortage, they are spending millions of dollars in recruiting, training and retention processes. The driver shortage is also forcing wage and benefit inflation. As driver wages can average as much as 35 percent or more of total cost, a five percent increase in wages can lead to an overall cost increase of almost two percentage points.
According to the American Trucking Association, rates from carrier general liability insurance have risen at double-digit rates the past several years. The factors behind the premium hikes are many, said Carolyn Gorman, vice president for the Insurance information institute. They include a litigation-happy society, insurers losses in the stock and bonds markets, rising costs of medical treatment for injured parties, rising costs of repairing or replacing trucks and automobiles, and the large losses reinsurance companies which provide insurance to front-line carriers are still feeling since the events of 9/11 almost three years ago.
Carrier premiums are not the only insurance rates impacted. Additional resources are naturally budgeted for standard cost-of-living increases, but the human resources budget must also include additional funds for rising group health insurance rates. While healthcare costs are rising 15 percent on average, estimates call for 50 percent more than that amount in the transportation industry. Companies will pass some of this cost increase to employees, but will also face an increase in out-of-pocket reserves.
Hours of Service
Substantial changes to the Federal Motor Carrier Safety Administrations hours-of-service (HOS) regulations went into effect in 2004 in the United States. The goal of these changes is to improve highway safety and to reduce the number of big-rig related accidents. Driver fatigue has been cited as a major factor in the rising rate of truck-related highway injuries and deaths. The biggest change is in the consecutive hours of on-duty time. The new regulations lowered the total on-time duty from 15 to 14 consecutive hours. While this may not sound like a lot, drivers now have to count the time behind the wheel plus the time it takes waiting while getting loaded/unloaded, fueling their truck, eating, etc. Drivers will spend more time servicing each load they handle now. This will increase the cost of providing transportation services by as much as seven to ten percent according to some industry analysts. And it will strain the industrys already shrinking supply of trucks and drivers.
Unlike other legislation intended to regulate drivers, the FMCSA has put bite into these rules. Drivers or carriers who violate the rules face serious penalties, such as:
The majority of logistics managers surveyed recently by Reed Research Group believe that transportation prices are rising due to the new hour of service regulations. Jim Haughey, director of economics, Reed Research Group, said: Respondents feel prices are increasing by an average of 13.5 percent. Two out of three are feeling the effects through more/higher surcharges. Companies are also feeling the effects of the new hours of service rules with regard to deliveries. More than half have been told by their carriers that deliveries will take longer. Nearly half have been receiving more late deliveries recently.
At a recent gathering of U.S. and Canadian transportation lawyer associations, the Canadian Trucking Alliances chief also stated that the new hours of service regulations are increasing trucking costs, rates and other charges. Changes in the rules governing truck driver hours of service in North America are making driving hours as precious as gold and reduced the tolerance for delays at borders and shipping docks amongst truck drivers to the point where motor carriers resolve to charge customers for delays and ancillary services, said David Bradley, CEO of the CTA.
The reality is that the trucking industry is in the midst of what some have termed, the perfect storm, Bradley added. Operating costs like fuel, insurance, wages and security are all going up. At the same time, there is a capacity crunch in the industry in large part reflecting a driver shortage combined with an upsurge in demand. Overlay that with a five percent productivity hit from the new US hours of service regulations and you have created the perfect conditions for increases in freight rates and accessorial charges.
With all these factors to consider, transportation outsourcing has become an increasingly attractive alternative for many shippers. Whether its replacing or supplementing a private fleet or managing a diverse base of for-hire carriers, outsourcing shifts the headaches of daily operations to providers who specialize in providing these services. It also shifts the burden of finding drivers and trucks, managing higher insurance costs and dealing with complicated regulatory changes that affect the laws of supply and demand. Ultimately, this allows shippers to redirect their time and resources to core areas of their business, such as producing and marketing their products.
Depending on the nature of your transportation operations, youll have potentially two major decisions points to address in the outsourcing process: Shift operation of your private fleet to dedicated contract carriage via a third-party logistics provider (3PL), and/or; Outsource the back office managed transportation function that selects modes, plans routes, hires carriers and provides transport data and metrics for freight that moves via common carrier.
Lets examine the details of each decision point.
Dedicated Contract Carriage
Dedicated contract carriage (DCC) is an alternative method to moving and managing your materials via private fleet. DCC gives you access to quality drivers, equipment and management, just like you have with your own fleet today. But you wont have to deal with any of the day-to-day operating challenges, because the 3PL takes care of the details.
Because the provider performs similar services for other shippers, they may be able to leverage their experience and buying power in your favor. This is especially true in the case of management information systems and software, because of the investment the 3PL has made in sophisticated computer services.
DCC provides a customized transportation program thats geared to meet your companys unique customer requirements, service commitments and overall goals. This will yield a number of tangible benefits, which include: high-level customer service, maximum equipment utilization, minimized empty miles, higher productivity, self-promotion through specially marked vehicles and single-focused management.
The 3PL will create a fleet that on the surface looks like private carriage. But its not. Yet DCC offers all the capabilities youd expect from your own transportation department:
DCC removes the day-to-day burdens from your companys plate by assuming all of the related responsibilities and liabilities, which include staffing and training, drug testing, workers comp, CDLs, payroll and driver logs, accident insurance and cargo coverage indemnification, scheduling and dispatching, record-keeping, and licensing, permitting, taxes and other fees.
In addition, the 3PL will enable you to free up a substantial amount of capital, because they may buy your equipment, help you dispose of it, or assume your leasing commitments as part of their service agreement.
And since your private fleet will be reduced or eliminated, youll have fewer direct costs like insurance and fewer administrative costs like tax reporting, licensing and managing government audits.
Finally, DCC can help you eliminate expensive down time by offering scheduled preventative maintenance and fuel services. The 3PL will take responsibility for many of the taxes that go hand-in-hand with fleet ownership, such as tolls, road and fuel taxes, and third structure assessments.
Management of your common carrier freight should not be viewed as simply a tactical part of your business. A properly managed transportation function can create big cost savings and generate supply chain efficiencies. But realizing those benefits involves selecting a partner who will provide outsourced transportation management services where they can add value to your business by operating a set of basic and enhanced services that are integrated with fundamental changes to the supply chain.
For a shipper to realize maximum value in outsourcing the management of its common carrier network, a well-orchestrated transportation solution should provide benefits in the following areas:
The heart of any well managed transportation solution is baselining historical data and implementing the solution with gain sharing that creates a partnership between the shipper and the 3PL. The better the data, the better the solution. The more skin or investment there is in the game from both sides, the better the solution.
Whether you continue to operate your own trucks or choose to outsource this to capable providers, you cant ignore whats happening in the industry: Spiraling fuel costs; lack of capacity; shortage of truck drivers; more regulation; and higher insurance costs. Are you properly prepared to minimize your costs and maintain service levels when these factors are eating away at your operations every day?
From equipment and personnel to capacity and insurance, its clear that price pressures are attacking companies transportation systems. If transportation services are outsourced, a company should expect its provider to find new efficiencies and directly address the specific problems the organization and industry are facing. Experienced carriers should provide you with customized solutions. Presented in design mode, these solutions should be realistic, viable options that can be implemented immediately and help the organization realize meaningful gains.
A companys transportation needs will ultimately determine whether to outsource. And if the outsourcing decision is made, the company will need to choose to use a dedicated fleet as the right outsourced solution or a managed transportation network.
Companies should also budget now for increases. Carriers must raise prices to ensure financial stability for the long run and preserve financial returns for their investors. Not surprisingly, companies that outsource will find a small price increase in transportation a good investment for committed capacity.
Transportation remains the backbone of the economy and the largest cost in your logistics budget. Managing these costs well will enable you to keep the wheels turning on your transportation program.