For over a year, carriers have warned us of pending capacity issues and increases in rates occurring in 2018. We are a month into the New Year, and early indications are that those predictions are going to be on target, particularly in the LTL sector. If the economy continues to improve as most expect it to, soon we will begin to see capacity shortages and higher rates. Although most shippers have already factored last fall’s general rate increases into this year’s budgets, most industry watchers believe we will see additional increases this year. In a recent Logistics Management article, John Schulz wrote LTL shippers……”should brace for some of the steepest increases in a decade because of rising costs and sharply higher demand.”
As everyone in the industry understands, the primary reason for decreasing capacity is the continuing shortage of drivers. This is not a new problem by any means, but one which has been with us for several decades. It is being exacerbated in the LTL sector however, by the significant increases in on-line ordering and the resulting smaller shipments. We are creating more shipments, but not more drivers. The other reasons for driver shortages are well-known. Factors such as pay, lifestyle, hours of service, and government regulation all contribute to a somewhat negative work environment.
Already, a number of carriers have increased pay, added sign-up bonuses and other incentives to attract and retain drivers. Since the total pool of experienced drivers is limited, we will see more turnover in the industry as drivers move for more lucrative positions. Currently, the turnover rate is in excess of 90%. Private fleets for example, pay as much as 30% more than the for-hire carriers, making them formidable employment competition. The end result of all this is that shippers will pay the cost of keeping drivers in the system and keeping them happy.
Another contributing factor will be increasing carrier equipment costs. The cost of a tractor has more than doubled in the last ten years because of the modifications involved in reducing carbon emissions. Today, the air coming out of the engines is cleaner than the air going in. The most recent major expense hitting the entire industry is the cost of the new electronic logging devices (ELDs) that became mandatory for most interstate carriers on December 18, 2017. Under the new law, most tractors will be required to have the new equipment. Although some of the major carriers installed them several years ago, many, particularly the smaller carriers and owner-operators, did not. Not only will ELDs require additional investment, they are predicted to reduce driver productivity as well. The elimination of paper logs will eliminate the ability to drive an extra hour or so with no consequences. Experts are suggesting this productivity loss may be as much as 4 – 7%, thereby requiring more drivers to move the same amount of freight.
Finally, just as other firms have learned to do, carriers are taking advantage of new technologies – in their case to price more efficiently. One recent example is another result of the electronic commerce trend. FedEx and UPS found themselves handling an increased number of light weight packages that occupied an inordinate amount of space. Last year they began the use of a new “volumetric divisor” which is used to calculate the dimensional (dim) weight of the packages they handle. Charges are based on the actual weight or dimensional weight, whichever is higher. LTL carriers are beginning to adopt similar pricing schemes. This is sure to increase the costs of firms moving this kind of traffic unless they take corrective action.
It will become increasingly important for shippers to search their supply chains for ways to mitigate increased rates. For example, changes in package design could eliminate the need for lightweight packing materials, reducing the size of shipping cartons. The outsourcing of distribution to a logistics service provider with a strong consolidation program can reduce transportation costs. Less tangible, but just as important, try to improve relationships with carriers and drivers. Good relationships can be very important when capacity is tight.
In summary, while it appears that some rate increases are inevitable, taking a hard look at your processes and techniques may yield some surprising positive results.