First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  Aug. 19, 2011  

Supply Chain News: a 360-Degree View of Transportation


I was the keynote speaker this week at the Oracle Transportation Management Special Interest Group meeting in Philadelphia (thanks largely to Graham Page of Sears), an event that is basically like a user group conference, except that it is run by the users, not Oracle.

None of the presentations in my small stable of "of the shelf" materials seemed quite the right fit for this meeting, so I promised to deliver on a "360-degree View of Transportation." Then as usual I scrambled mightily to create this new presentation on time, finishing up with a good 2-3 hours to spare.


Gilmore Says:

Nearly every trucking company cited driver shortages as an issue in their Q2 conference calls. What will happen as the economy gets humming again? Real problems, that's what.

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It seemed to be well received (I say with an admitted strong bias in favor of my own work) , and I am going to take this opportunity to summarize the key points in the limited space available in this week's column. Here we go, admittedly in mostly a US-centric mode:

The Freight Market Now: Data shows how connected overall freight movement is to industrial production, which collapsed in 2009 and while clawing back, is still not at pre-recession levels. The ATA freight tonnage index is now at 115, meaning total freight being moved on trucks is just 15% above levels seen in the year 2000 (that would make average annual growth of less than 1% per year).

Globalization and the flow of good across the globe is likely to continue to grow sharply over time - the question is, will it be "balanced?" If not, developed economies could embrace policies that try to achieve better balance. Note high flying Brazil just announced a series of measures to encourage domestic manufacturing, rather than China imports.

Truckers are getting smarter. First, they are being remarkably disciplined about adding capacity, perhaps more so than ever before. They are also driving much better utilization of their assets. There is now for the first time in a long time a big gap between the change in total miles driven and asset utilization, with utilization rising much faster. That's related both to the asset discipline and smarter networks and technology.

That said, trucking is a lousy business right now. Return on capital for the whole industry has averaged 3.9% over the last 10 years - well below what is needed to run a business. Truckload is challenged enough, but LTL is a basket case, with most carriers (Old Dominion the notable exception) running operating ratios (op expense/revenues) in the high 90% range and at times worse. Something has to give. LTL carriers were successful is raising prices lately, and are pushing for more, but you may soon see coalitions to guide industry pricing, and one current such effort, though small in scale, was actually given the OK by the Justice Dept. a couple of years ago.
Rail is a different story, where pricing power and profits are strong. Revenues are up much more than volumes. That situation, however, is causing regulatory backlash, and we are likely to see some action there relative to "captive shippers" and bottleneck pricing before the end of the year.

On the truckload side, rates are clearly up of late with rolling pockets of capacity concerns. That said, there is strong growth in intermodal, a move that could continue if carriers can get drayage costs down. Could lead to growth in intermodal in the roughly 500-1000-mile mid-length haul area, especially making intermodal competitive in 500-700 mile hauls.

Oil Prices Heading Higher: Despite the frequent ups and downs, I believe the long-term trend will definitely be up. The data supports the "Peak Oil" concept that says we are finding less and less reserves, and that production in existing wells is tapping out. The "production to reserves" ratio is falling rapidly in the Middle East. Combine that with rapid growth in oil consumption in Asia and likely other emerging markets soon, and it is clear the trend line amidst the ups and downs in the daily price is heading up - well over $100 if/when the economy recovers, I believe.

It is also worth noting how the US dollar-denominated price of oil is closely tied to the value of the dollar - almost in lock step. Dollar falls, the price of oil rises - oil sellers want more dollars for a barrel if the value of those dollars decreases. Saving the value of the dollar for now despite the printing presses running full time is the Euro debt crisis. If that gets solved (a big maybe), the dollar could take a big hit and oil prices zoom up.

MIT's Dr. David Simchi-Levi showed in 2008 on SCDigest how rising oil prices can have a big impact on optimal supply chain network design, especially as prices start to get over $100 barrel. Companies need to follow the lead of P&G and other leaders in running scenarios at many different levels of oil to be prepared and not totally re-active as prices rise, or to adopt strategies that give the best risk-adjusted result across many price levels.

Data from Wolfe Trahan also shows the clear correlation between the change in the price of oil and diversion from truck to rail and vice-versa - a very close relationship.

Cap and Trade Potential: It's dead in the US through 2012, but don't think a cap and trade or carbon tax program as a reaction to the potential threat of carbon emissions is totally gone. The EPA, for example, is making its own moves without legislation. There is a Cap and Trade program coming next year in California. Australia just announced a carbon tax program starting in 2012.

This is a huge binary fork in the road. Without Cap and Trade or a carbon tax (the much better/simpler approach if you are going to do something), CO2 emissions reduction programs are simply a matter of company decisions on whether the initiative will save money or have important PR benefits. With one of these regulations, there will be a new cost/tax placed on our supply chains that will also be very complicated.\
This will drive the cost of oil/energy higher, in ways we cannot predict now. It may also lead to calls for a "carbon tariff" to protect the domestic market from imports that are now even lower cost relatively if they are not subject to a carbon tax. But how such a tariff would be implemented is unclear.

Bottom line: educate yourself on what cap and trade and carbon taxes really mean (we have explained it here before) - you will surely impress your colleagues and company execs at some point.

Government Intersection with Logistics has Never Been Greater:
While the transportation sector has always been highly intertwined with laws and regulation, it is more impacted right now than any time I can remember: the highway bill, infrastructure bank, hours of service, CSA 2010, electronic on-board recorders, expansion of FMCSA powers, railroad pricing, the battle over heavier trucks, and many more issues are now on the docket.

Two are especially worth noting, because they receive less media coverage: One is the potential for higher, maybe much higher, diesel taxes to pay for more infrastructure spending. That was part of the previous developing highway bill that was axed after the 2010 elections. The question is: at what point will the benefits of improved roads and bridges start to be no longer worth the cost? More ominous, there was a GAO report this year that said truckers and shippers were hugely under paying the full cost of truck transport. Those unpaid costs were largely around "social costs" relative to congestion, emissions, and accidents. The implicit recommendation: taxes/fees on trucks need to rise substantially to make them pay the full societal costs.

The second is the on-going battle between the Port of LA and the ATA over a move to regulate transportation locally in the name of the environment, rather than nationally as is the case now to avoid a patchwork of local regulations. This is a hugely important issue, now again in a federal court after the ATA lost the last round in a strange decision.

This Time, the Driver Shortage is Real: Previous predictions for a driver shortage crisis proved a little overblown, but it is coming now. For really the first time, in a soft economy and lousy construction environment, workers are not moving back into trucking where jobs are available. Truckers as a whole age seeing an aging profile, and younger workers just aren't interested.

Nearly every trucking company cited driver shortages as an issue in their Q2 conference calls. What will happen as the economy gets humming again? Real problems, that's what. For every 6% increase in trucker wages, operating costs rise 2%. So if it takes 12%, that's a 4% rise in costs that will be passed on.

Transportation Talent: In this complex supply chain world, more than good "execution" and analytic skills are needed for success. Increasingly, transportation managers need softer skills (communication, collaboration) and to be able to speak the language of business effectively. Also requires new knowledge areas, like understanding supply chain finance.
Leading companies get this, and are continuously recruiting this kind of talent and developing those skill sets. There is both a company and personal dimension to this.

"Perfect Logistics": We are rapidly getting to a point where near perfect logistics will be commonplace and expected, and the real question will be how much it costs different companies to achieve it.

There is more, but alas on that tease I am out of space - the last point is something we will get back to very soon on these page.

What is your reaction to Gilmore's 360-degree view of current transportation issues? What would you add? Let us know your thoughts at the Feedback button below.

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