Fluctuating capacity and freight rates have created a challenging transportation landscape for shippers in recent years. But, as 2020 approaches, there remains some uncertainty on what shipping costs will look like over the next year, and how companies can best position themselves to keep pace with the ever-changing environment.
There are several key market indicators to follow and analyze in anticipation of a tightening market.
Spot load-to-truck ratios. When looking at the number of loads available per truck in the spot market, there are significantly different trends for the availability of refrigerated and frozen capacity over the past three years, according to research presented by DAT Solutions, LLC, Philadelphia. For example, during the peak of produce season, there were roughly five available loads per truck in the spot market in June, while that number was near 12 in 2018 and seven in 2017.
Class 8 truck orders. Trucking companies tend to buy trucks at the top of the cycle when profit is good, when there is an abundance of loads to be hauled and when there’s the possibility of adding even more profit through more trucks on the road. This inevitably leads to an over-capacity situation and a slowdown in orders, which will bottom out with an under-capacity situation. Barring a large boost in the economy, the industry can expect to see capacity in the industry fall over the next 6-12 months until it reaches equilibrium or an under-capacity market, as outlined in an article by ZeroHedge.com.
An increase in diesel prices. In previous cycles, the diesel market increase created a large number of trucking companies to fail due to the inability of fleets to accurately and timely recoup fuel costs from brokers or shippers, according to DAT Solutions. There is currently no major impact based on fuel prices, however, given that a large part of the market trades at all-in rates vs. an itemized fuel surcharge, any large or sudden increase in fuel costs will have a whiplash effect on trucking capacity.
Freight volumes. There has been a steady increase in freight volumes since 2015, and an abundance of capacity relative to past markets, as presented in research by the American Trucking Association, Arlington, Va. Simply put, a lot of freight moving does not necessarily equal constrained capacity. Previous deflationary markets have started with a decline in volumes, followed by closures or bankruptcies because of lack of volume, ultimately leading to a balanced market and eventually to a capacity deficit.
The next cycle will come from a combination of the factors listed above. A sudden movement in demand (up or down) such as a capacity decrease in the face of lower volumes or flat in the face of increasing volumes, or an increase in fuel costs will drive equilibrium and eventually result in a more capacity-constrained market. There are other environmental and regulatory factors at play, but none seem capable of moving the needle greatly from where the industry is today.
How should shippers prepare for 2020?
To prepare for the potential market changes in the next year, shippers must take proactive steps to get their supply chains ready. Budgeting for 2020 should include careful consideration of a supply chain’s partnerships, technology platform and overall tolerance for risk. The spot market will not be “shipper-friendly” for the full duration of 2020, so hedging positions with more assets is likely a safe bet.
Shippers should find ways to utilize latent capacity within their network or within their transportation manager’s network. In today’s environment, this is a more effective tool than rate negotiations. By reducing deadhead and dwell time, businesses can reduce rates as well as better position themselves to a more secure capacity, especially when capacity is tight.
Leveraging advanced logistics technology can also help shippers optimize capacity by consolidating loads or taking advantage of continuous move opportunities.
It is also incumbent upon shippers and their third-party logistics providers to treat carriers with respect and employ “carrier-friendly” practices. Implementing both driver-friendly practices and assisting carriers in making the best and most efficient use for their trucks helps shippers become a “shipper of choice” with their carrier partners.
The transportation industry is evolving. Data, technology and collaboration are available to help companies move forward in building more efficient transportation networks. It is important for shippers to not only look at the trends and predict the market and its impact, but to also begin investment and analysis of tools that can ultimately help in all markets.