Perfect Storm for a Transportation Capacity Pinch

09/21/2017

Increasing demand and decreasing supply is creating a pinch in the transportation supply chain that goes beyond what we have seen in quite some time.

The results, increased costs and, for some areas such as Florida, unprecedented delays. We are seeing delays and anticipate worsening conditions. Fairrington continues to be committed to service and we know it is important for clients to understand the landscape and future projections so they can plan their future initiatives.

Why the capacity pinch? On the increased demand side, it is a good news and bad news situation. A strong economy coupled with major storm events have increased demand. On the supply and cost side, driver shortages and regulations reduce capacity.

Increased Demand

Economic growth during 2017 has been a key factor in the increasing demand.

  • Economic activity in the manufacturing sector expanded in July, and the overall economy grew for the 98th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. – Institute for Supply Management, August 1, 2017
  • US-manufactured goods exports have improved in 2017 “For manufacturers, exports have trended in the right direction in the early months of this year—a welcome development after weaker data in each of the past two years. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $353.09 billion year to date in April, up 3.44 percent from $341.33 billion one year ago.” – National Association of Manufacturers, June 2017.

Looking at shipments since 2013, this year has been second-best to 2014, when shipments boomed from a strong manufacturing economy.”      Transport Topics

Two major storm events and perhaps more looming.

  • Harvey drove disruptions well beyond the impacted areas of Texas and Louisiana and while it may not be front page news, recovery efforts continue to pinch an already stressed network. J.B. Hunt, one of the largest transportation logistics companies in North America made the following statement, “Although Houston and the surrounding parts are the most immediate area impacted, and the capacity disruption stretches nationwide.”
  • The timing of Irma on the heels of Harvey provided additional pressure. It has been reported that FEMA is paying $6,000 per load for relief efforts.

The chart below demonstrates the imbalance of 5 loads for every truck.

Decreased Supply

  • Driver shortages are increasing as the workforce continues to age. The time away from home and other factors can paint it as an unattractive career choice when given alternatives such as construction work. Commercial Carrier Journal reported that driver turnover is at 90% as drivers move to new opportunities or move from carrier to carrier. Even the move from carrier to carrier results in increased uncertainty and unplanned disruptions.

Driver turnover jumped to 90%     “Indicators: Driver turnover rate swelled in second quarter”, Commercial Carrier Journal, 9/18/2017

  • Regulations have increased. The Electronic Logging Device (ELD) mandate became effective December 2017. Safety is vital, but there is a cost to comply and it is nontrivial. Anecdotal reports are that 40-80% of tractors are compliant. Compliance means drivers to strictly observe hours of service regulations, decreasing the hours per driver that were available in the past. The annual DOT Road Check Event validates our estimate of a minimum of 2% to 3% truck capacity coming out of the market when full enforcement of the yielding mandate becomes reality.

Additional Cost Factors

  • To counter driver shortages, carrier have implemented pay Increases. CRST Expedited, part of CRST International (No. 13 on the CCJ Top 250), announced it is boosting pay for new contract student drivers by 15 percent.

“Two Major Fleets Boost Driver Pay” Commercial Carrier Journal 9/1/2017

  • Rail options have often been seen as a cost effective option, but they are also facing challenges. The CSX Transportation service issues have led to major trade groups to call for government investigation into rail disruptions.

Projections

Rate increases are expected across all modes of transportation. Here are some rough projections based on recent announcements.

  • Truckload 4-10+%
  • LTL 5-6%
  • Intermodal 3-5%
    • Small parcel 4-6% solutions
    • Revised DIM thresholds
    • Peak season surcharges
    • Increased minimum charge floors
    • More frequent fuel surcharge calculations

Fairrington is committed to service and our transportation operations department is working diligently to mitigate the impact to as few destinations as possible. As always, we reach out to clients that are directly impacted. If have questions, contact your Client Services Representative at 630.783.9200.