Coming to Grips with the Shortage of Trucking Capacity

Stephen DeAngelis

February 29, 2012

Yesterday’s post entitled Trucker Shortage Continues to Garner Headlines, focused on what most analysts consider an acute problem — a growing shortage of truck drivers. But the driver shortage is only half of what is causing the capacity crunch. There is also a shortage of equipment (i.e., tractors and trailers). This shortage must also be addressed. To address the driver shortage, trucking company executives believe that driver pay must be increased some 30 percent in order to attract new drivers into the sector. Such an increase would likely mean an 11 percent increase in freight rates. To address the capacity shortage, companies need to buy more trucks. But it doesn’t make sense to buy trucks if there are no drivers for them. Nevertheless, let’s look at the capacity challenges.

An article in American Shipper notes, “Almost all new truck purchases are to swap out old equipment, according to trucking executives. A recent survey of 125 motor carrier officers conducted by Transport Capital Partners, a strategic advisory firm specializing in trucking, found that 73 percent expected to add between zero and less than 5 percent capacity in the next 12 months, compared to only 60 percent who responded that way in May. And there was a 90 percent drop since May, from roughly 28 percent to 3 percent, in the number of companies that planned to augment their fleets by 16 percent or more.” [“Where did all the trucks go?, 24 October 2011] Obviously, capacity can’t grow if the only equipment being bought is to replace older equipment.

The current economic situation is probably the main reason that trucking firms are hesitating to buy new equipment. The article reports, “Modern Class 8 tractors are 30 percent more expensive than ones being replaced ($125,000 compared to $85,000 10 years ago).” As a result, “Investment in new vehicles remains difficult for many companies because of the high initial cost for trucks that carry clean emissions technology, higher maintenance costs and tight credit from banks.” The challenges don’t stop there. Even if companies were ready to buy new vehicles to expand their fleets, the vehicles really aren’t available. The article reports:

“About 12,000 trucks need to be produced each month just to maintain the industry’s fleet at its current size and there [were] only … four months [in 2011], as of August, in which truck production … exceeded that level. ‘And the reality of it is that it’s not a shortage that you can get over tomorrow. The equipment manufacturers are running flat out just to do replacements but they’re really reluctant to open any new facilities because of the cyclical nature of the industry,’ [Lana Batts, President of Transport Capital Partners], said. ‘So it’s going to take a long time to work our way through five years of not producing 12,000 trucks a month,’ which means rates, accessorial charges and driver wages will go up in the near future, she added.”

One indication that capacity is unlikely to improve over the short-term is the report that “Sweden-based global truck and bus maker Scania is cutting its production rates back a further 15% and plans to lay off some 1,000 workers as it said demand for heavy vehicles continues to decline in Europe, Latin America, and elsewhere.” [“Scania to cut truck production levels,” by Sean Kilcarr, Fleet Owner, 21 December 2011] The importance of having new equipment should not be underestimated. The article notes, “Having a modern fleet helps with recruiting because drivers don’t want trucks that break down and prevent them from hitting the mileage targets upon which their pay is based, he said.” The article goes on to note that shippers are starting take notice and action. It reports:

“Astute shippers have been strengthening their relationships with core carriers the past couple of years in anticipation of capacity problems. The idea is to give consistent business to certain carriers, accept fair rates and reduce dock-wait times so that a shipper is rewarded when decisions have to be made about which customer to serve first during busy times. Creating more regular routes reduces ambiguity for carriers and lets them plan how to use their assets more effectively.”

Lora Cecere also believes that something has to give and she believes companies should ask, “So what do I do about it?” Doing something now is important because she believes that “power in the supply chain is shifting to the logistics providers.” [“Keep on Truckin?” Supply Chain Shaman, 28 April 2011] She recommends that companies pursue five tactics that are in line with those recommended above by America Shipper. The first tactic involves being a company with which providers find it easy to do business. She writes:

#1. It is going to get worse not better. Act now. Be easy to do business with. The old saying, ‘when the going gets tough, the tough get going’, has never been truer. Companies that understand the true nature of the transportation issues are investing in building long-term relationships with carriers. This includes the use of transportation planning systems to speed tendering, building continuous loops and managing empty miles, driving improvements in supply chain execution at the dock, in drop yards and in continuous shipping operations. They are making it easier for the carriers to get the loads, move trucks more easily in and out of the warehouse facilities and making their operations easier to do business with. Seven-day shipping operations are becoming the norm.

Being easy to do business with doesn’t happen with the wave of wand, it takes planning and effort. Improving planning is the second tactic recommended by Cecere. She writes:

#2. Improve planning. The early bird gets the worm. Companies are speeding time to tender by 30% through the use of advanced planning tools and business-to-business connectivity. This includes the use of transportation forecasting applications, direct integration of transportation planning systems to inbound and outbound manufacturing planning systems, and quicker processing of orders. In January 2011, the Supply Chain Leaders Association polled 45 supply chain leaders, 46% responded that improving supply chain optimization was the most important factor to improve to drive growth. … The use of transportation forecasting improves carrier visibility of an order by a day. The need to forecast transportation is obvious.

The three things that all companies need to concentrate on are processes, technology, and people. Cecere has already addressed the first two. She turns next to people.

#3. Educate, forecast and build a guiding coalition. Educate your management team quickly on the new reality because the paradigm has changed. To do this, look outside in. I recommend the use outside benchmarking to help your team quickly see that freight costs, availability, and increasing variability are the new reality.

The next tactic recommended by Cecere addresses the speed at which things happen in today’s business environment.

#4. Improve decision velocity. Freight is no longer the tail that wags the dog. Times are tough for the carriers. Remove the barriers. Improve time to decision for freight payments, fuel charge adjustments, and accessorial charge. Invest in analytics to get at the data in Enterprise Resource Planning and Supply Chain Planning Systems that is largely untapped. Make decisions quicker. Make decisions better. Improve the working capital in the transportation supply chain.

Cecere’s final recommended tactic involves taking a broader, holistic view of supply chain networks and taking responsibility for it.

#5. Take responsibility for your ENTIRE network. Today, 33% of companies have central teams that plan and execute freight contracts. This consolidation of freight requirements enables a company to take control of THEIR entire network and gain economies of scale. Even though you have outsourced manufacturing, leaders still take responsibility for their network and the movement of the freight.

American Shipper indicates that some shippers are turning to private fleets and dedicated contract carriage to ensure that disruptions don’t occur. It reports:

“Retailers and manufacturers, in an effort to create more transportation stability, are also expanding their use of private fleets and dedicated contract carriage in which a carrier sets aside a certain number of vehicles and drivers to transport cargo for a customer on a regular route. Most dedicated contracts have surge protection for the shipper to accommodate spikes in volume, Larry Menaker, who heads his own eponymous consulting firm, said. … Some private fleets have created extra capacity in recent years by selling empty space in their trailers on return trips to others needing transportation to the same general destination. … Shippers can further redesign their supply chains to reduce their transportation costs and attract carriers by adjusting production schedules to produce loads when motor carriers have room and shipping in off-peak months when trucks are more plentiful, [freight industry economist Noël Perry] said. There is about a 15 percent swing in available capacity between the highest and lowest volume months of the year, he noted.”

Clearly, there are no silver bullet solutions to the looming trucking capacity shortfall. The solution, however, appears to begin with attracting more drivers into the business. Inevitably, that means that shipping rates must rise (even if diesel prices stabilize or alternative fuels finally come into vogue). Shipping companies are pushing for permission to carry heavier loads as one way of increasing capacity, but that effort is facing some opposition. For on that topic, read the Trucking Sector portion of my post entitled The Supersized Supply Chain. Shippers need to begin to take actions now to avoid potentially devastating consequences of not being able to ship goods in a timely and affordable way.