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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

October 7, 2014



What to Do About the Rise in Costs Because of the Trucker Shortage

With Rising Rates Caused by the Trucker Shortage, the Increase in Total Cost May Not be as Bad as Previously Forecast Due to Adjustments Made by Shippers


Dr. Watson Says:

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...I’m of the opinion that the shortage has already increased costs ...
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This past summer we continued to see a lot of press about the shortage of truck drivers and the impact this could have on the economy.   Dan Gilmore recently quantified this more directly in his First Thoughts column suggesting that trucker wages could rise 34% (and maybe even higher).  He estimated that this would lead to a 14% increase in the cost to operate a truck. 

Gilmore’s opinion may be a little controversial, but I don’t think so.  Basic economics teaches us that when a competitive market (like the trucking market certainly is) faces a shortage, some carriers will start to pay drivers more and shippers, who want to make sure their load arrives, will agree to pay.  And, if even the rates don’t go up, we shouldn’t think that costs aren’t already higher:  given the current shortage, more shippers are already spending more time working with carriers to ensure their loads move.  So, the cost isn’t showing up in the rates directly, but in the shipper’s increased overhead or in the opportunity cost from the fact that more people on the logistics team are working on finding carriers instead of working on other projects.

So, I’m of the opinion that the shortage has already increased costs.  Eventually, the rates will go up and the shipper will not need to spend as much time looking for carriers.

But, I’m also of the opinion that shippers will also be able to take action to make sure that costs do not rise as much as the rates will rise:


Previous Columns by Dr. Watson

Four Supply Chain Lessons from the Amazon book The Everything Store

Supply Chain by Design: What Toyota, Schneider National, PayPal, and Palantir Got Right

Supply Chain by Design: Service Level Measures in the Supply Chain, Part 2

Supply Chain by Design: Service Level Measures in the Supply Chain

Supply Chain by Design: Nike's Phil Knight on the Importance of Supply Chain

More

1.

Shippers can trade-off inventory for transportation costs by replacing weekly LTL shipments with monthly truckload shipments (or weekly truckload for monthly rail shipments).

2.

Shippers will be more careful with transportation planning and look to build fuller trucks and look to shift LTL to multi-stops

 3.

Shippers can redesign their supply chain to account for the higher transportation rates. This will often mean more warehouse closers to the customers. Or, the redesigned supply chain could allow for more truckers to leave the warehouse in the morning and be home the same day—thus attracting truckers willing to trade-off of higher rates for fewer nights away from home. Or, picking warehouse locations with other manufacturers to jointly deliver to retail customers.


Final Thoughts:

The items on the list are similar to my column from last year that argued that the Hours of Service rules may not have as large of an impact as predicted. (How did this prediction turn out? Gilmore's same article on truck wages suggested that rates are rising 2% because of HOS. Have shippers had time to adjust or did this rise get lost in the more important driver shortage?)


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