This Week in SCDigest

The savvy "buy side" analysts reward the company that spins out more cash per dollar of sales, even if that advantage doesn't show up directly in earnings per share that the "sell-side" analysts focus on.

So I think that is where I will end it up this week. It also occurs to me this is all is just as relevant for supply chain managers too, not just accountants.

Finally, my good friend Gene Tyndall wrote an article a few years back on supply chain for some accounting journal that was very good and also relevant here. I will chase it down by next week.

Week after that, actually - no main newsletter next week due to Thanksgiving, but there will be an OnTarget on Tuesday. Would love your thoughts on all this.

What would you tell accountants about supply chain? Any reaction to what Gilmore has said thus far? Let us know your thoughts at the Feedback button (email) or section (web form) below.

While I have no doubt logistics costs are going up, a 22 percent increase is doubtful. Any significant price increase will force shippers to change practices to help carrier mitigate cost increases. Also, if rates go up substantially, expect more capacity to enter the market to bring supply and demand in line. However, it takes 1-2 years for additional capacity to come into the market, so there could be some eye-popping rate increases in the short term, which will recede over time.

The article did raise some interesting points worth commenting on, and I will end with my own prediction of cost increases.

$70,000 pay for drivers is not needed to solve the truckload carrier driver shortage. This is the level of pay needed to attract the quality of driver carriers' wish they had. Moaning about how driver use to be is a staple of conversation in the trucking industry. If an average wage of $46,000 attracts enough drivers to result in at most a 5% shortage of drivers, than a 20% increase to $55,200 would surely produce enough additional drivers to fill all the trucks. We are probably looking at a 10-20% increase once demand heats up.

So far as I know, private fleets and local trucking operations don't have as much of a problem attracting drivers as truckload carriers. Still, if truckload wages go up, the increase will ripple into non-truckload carriers. So no fleet is immune.

Werner raising wages 14% means little as they have always lagged the industry in pay rates. A long time ago they adopted a high driver turnover model of training students and then paying them a low wage rate for the first few years. Most fleets used to require 3 years of over the road experience, so the students were somewhat stuck. Now carriers are only requiring six months experience, so I suspect that Werner was having trouble-keeping students long enough to make the cost of training worthwhile and is now seeking experienced driver hires.

The Teamsters are not going to organize any mega fleets in our lifetime with the exception of FedEx. After bankrupting almost all for-hire union carriers, the teamsters have never organized anyone of significance. Trucking companies who employ owner operators such as Swift, lease those drivers in states with the most favorable laws to minimize the risk of contractors ever being deemed employees. Long Beach is an exception to that rule, but drayage costs are a very small component of overall logistics costs.

The only healthy mega carrier where Teamster labor is the dominant force is UPS. So the Teamster dream of getting the other half of the small package duopoly organized. However, there have always been thousands of employees drivers at FedEx the Teamsters could have organized a long time ago, so I doubt their ability to do so now. Even if it occurred, UPS and FedEx are already jacking up rates as fast as the market will bear. So it is hard to make a case that rates will go up any faster if they both operate under the same labor contracts.

A carbon tax has no chance of passing congress. While Obama has pushed the limits of what a president can do through executive orders, he still cannot order new taxes. On the flip side, a president who promotes domestic oil production could dramatically bring down fuel costs. As most rates are still tied to a fuel surcharge, lower fuel costs will automatically result in logistics costs going down. This is one of the mitigating factors I mentioned, as a 22 percent increase in logistics costs would have shippers screaming to congress for relief, and fuel costs are the obvious place to start.

Electronic logging will have a much bigger impact that 2%. (I really don't know how any trucking company could detect a 2% change in productivity due to single factor.) Paper logging has always been the fudge factor that mitigates the loss in productivity of new regulations.

Example, if a driver sleeps overnight in a customer yard, an electronic logger starts the 11 hours driving cycle when he moves the truck to the dock. With a paper log, he probably wouldn't log driving until he leaves the shipper gate, a lost of at least a 1/2 hour of driving time. Fueling, a 20-minute activity is now counted against the 11 hours of driving time. If the driver is on an overnight run, he is going to want to bed down at least a 1/2 hour before the 11 hours are up as there is no wiggle room for error with an electronic logger. No matter how efficient shippers and carrier become, it is hard to mitigate productivity losses like these.

My guess is a 10% loss of for-hire capacity not currently electronically logging and not receiving a local terminal exception. If 1/2 of for-hire trucking capacity falls into this definition, than I expect a 5% capacity loss, which will lead to a short term spike in truckload rates. If you think I am overstating the case, you haven't been around enough over the road drivers.

As truckload drivers are paid per mile, lost miles due to the decrease in driving hours will force a 10% wage increase just to maintain a $46,000 average driver wage. Factor in another 10-20% to fill all trucks we are looking at wage increase of 20-30%. If driver labor represents 41% of logistics cost, we are looking at a 8-12% increase. That is probably the worse case, and only for heavy truckload shippers.

Even at the lowest level, I would not want to be one trying to justify an 8% increase to a CFO. When fuel drives logistics cost up, it is fairly easy to explain why to anyone who recently filled a car's tank. You cannot quickly explain to anyone why going to paperless logs has increase costs, not lower them.

David Goodson