First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  Feb. 18 , 2011  

Supply Chain News: Transportation Tsunami Coming Again?



Are we headed back to a another crisis in transportation, or more specifically, trucking?

At one level, it is hard to really well recall the trucking tumult we had in the 2005-06 era. Rapidly rising rates, oil prices, driver shortages, congestion, etc. - it was a dominant supply chain theme for almost two years.

So much so that we launched a contest to summarize these woes with an acronym, since so many conference presentations were all starting with a recitation of the same set of transportation woes that everyone already knew were here. My idea was just to remind everyone if we must of all the troubles in a single slide, not 5-7 of them, as was common at the time:

Gilmore Says:

The primary question from that may be what a shipper can do to avoid this tsunami, but at minimum the message is to start preparing your management now for what may be coming - and consider what the steps are that shippers can start taking now.

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I started with this acronym offering: RISCED:

Rates (rising)
Infrastructure (lousy in the U.S.)
Service demands (customers keep raising the requirements)
Capacity (who’s got a truck?)
Energy ( I needed a vowel, and used this instead of fuel)
Driver shortages

We then had an SCDIGEST reader contest to improve on this, which was won by Greg Andrews, then of Adtran, now at Georgia Tech, who submitted CRISES:

Shortage of drivers

Why bring up all this past? Because we seem to be here again, but a bit more stealthily. Many logistics professionals do not yet see it coming.

We all know what is happening to the price of oil and diesel fuel. Oil is now approaching the $100 per barrel oil, not long ago seen as cataclysmic, in a period of lukewarm economies (and hence demand) in most of the developed world. In the run up to the skyrocketing oil costs of 2008, by contrast, the global economy was cooking (if somewhat rotten under the surface).

Now, we are at these oil price levels before a broad based economic recovery, and with turmoil to say the least in the Middle East. This week, famous oil industry analyst Charles T. Maxwell said that oil prices are on a march from today's levels to $300 per barrel by 2020. That's only nine years away, and means we'll be at $200 before too long if he is correct. Wow.

More recently, my new friend Mike Regan of TranzAct Technologies has been telling everyone he can that there is a looming "War on Trucking."

I am not quite sure that is the right way to phrase it, but Regan is on an interesting and consequential track here, and it seems likely that we are going to again see a confluence of factors putting tremendous upward pressure on trucking costs and travails.

I will get to the details of that in a second, but Regan says that "Today we are witnessing early warning signs that may very well result in a "Supply Chain Tsunami." Shippers who ignore these warning signs may see their transportation costs go up by as much as 10% to 20% within two years."

The primary question from that may be what a shipper can do to avoid this tsunami, but at minimum the message is to start preparing your management now for what may be coming - and consider what the steps are that shippers can start taking now.
So, what are the forces that are combining to cause the earthquake that may be result in a trucking tsunami?

Combining our thoughts with some of Regan's, it lines up something like this:

Fuel Costs/Surcharges: Covered above - right now we have highest costs per a barrel of oil ever in a February, and there are many reasons why prices may head further north.

CSA 2010 Rules: The implementation of the Comprehensive Safety Analysis Program in 2011 by the Federal Motor Carrier Safety Administration (FMCSA) is likely to have a significant impact on the size of the truck driver pool (down) and therefore trucking costs.
In short, CSA implements a new series of programs that track and rate the safety record of drivers and carriers in much greater detail than today, and will drive even greater visibility to a driver's safety record before hiring by a carrier.

Whether this is a good thing or not we could debate, but there seems near universal consensus that this is going to have a big impact on the pool of truck drivers that carriers and private fleets will be able to hire, with a consensus that the driver pool will be reduced by about 15%. That inevitably will push wages and rates up.

From another view, at the CSCMP 2010 conference this past October, John Smith, chairman of CRST, said the carrier recently tried to hire 30 new drivers. Out of an applicant pool of 300, only six passed the drug test or otherwise were deemed qualified. Of the 6, only two passed the CSA safety screen.

"You can't find drivers," he said in the midst of 9%+ unemployment, even well before the full CSA 2010 impact is felt.

Smith also said it turned out CRST's independent driver of the year for 2010 would not make it past CSA screens today for some traffic violations in the past.

Hours of Service Changes Again: As many should know, FMCSA is currently proposing new hours of service (HOS) rules, even though there seems to be no compelling public safety benefits from doing so. (See Proposed New Hours of Service Rules a Lump of Coal in Trucking Industry Stocking, ATA Says).

The proposals, now open for comments, could reduce driver availability and therefore carrier capacity by some 12%, substantially impacting the supply-demand balance in truckload carriage. As just one of a growing number of examples, International Paper has lately moved to a dedicated fleet to protect itself against looming capacity shortages it foresees.

Carrier Asset Discipline: For perhaps the first time in history, carriers by and large are showing tremendous discipline in keeping capacity low in the face of a generally improving freight volume environment. Major carriers such as JBHunt and Schneider National are increasingly focused on integrated intermodal service, rather than straight truckload carriage.

In its truckload segment, for example, JB Hunt had a total of 2,588 tractors at the end of 2010 in a period of economic and freight recovery, versus 2,861 at the end of the dismal 2009. Market shares gains are out, margins and returns on assets are in at most carriers.

Infrastructure Spending: There is a level of consensus that the US needs to spend more on its logistics infrastructure, especially roads and bridges.

In the past week, the US Dept. of Transportation proposed a new six year, $556 billion surface transportation bill. There are many questions about whether this makes sense, does it have the right priorities, etc., but one thing is for sure - the money will need to come from some place.

Gasoline and diesel fuel tax increases are a hugely likely target, driving trucking costs up.

I need to wrap it up here, but we can add to the above list:

• Some form of tax on carbon (direct, "cap and trade," or EPA fiat) that will increase transportation costs generally and trucking especially. Legislation in unlikely through 2012, but the EPA is a wild card.

• Federal policies that will in general favor rail transport over trucking

• Something called the Taxpayer Responsibility, Accountability and Consistency Act of 2009, which would make it harder for carriers to treat owner-operators as independent contractors, and thus raise the carriers' cost structures.

Add it all up, and Regan says "If you are a supply chain or logistics executive within your company, what would happen if you presented a budget to your CEO that showed transportation costs had increased by 20% from 2010-12?"
We're out of space, but there are two takeaways:

1. Shippers should become more educated about these changes and trends, and prepare management now for what may be coming soon.

2. If the face of a "tsunami," one should naturally move to a "logistic higher ground" to avoid the flood waters.

What does that last point mean? More on that soon.


Do you agree that there could be a new trucking crisis looming? Or is it overblown? What would you add to our list of issues? Are shippers prepared? Let us know your thoughts at the Feedback button below.

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