‹ back to June 2010 issueToo Much to Handle - Freight Outlook

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By Larry S. Field 

Today’s freight capacity is tightening both domestically and internationally. As a result, transportation costs are rising. Over the last couple of years, companies that move freight by truck, rail, air or steamship have reduced their fleets in response to the widespread, decreased demand for goods brought on by the economic downturn. Since a high in 2006, freight capacity has decreased by 14%, according to Transport Topics.

However, as the economy begins to improve, there will be more demand for goods, which in turn increases the demand for freight capacity. These factors are triggering a surge in transportation costs and a reduction of available equipment and space in trucks, steamships and rail cars, which are needed to move goods. Companies that rely on freight, particularly manufacturers and retailers, must have a strategy in place to combat rising costs and maintain their ability to deliver goods.

Industry snapshot

Freight carriers posted profits for the first quarter of 2010, the first time since the end of 2008. Additionally, the American Trucking Association reported that truckload shipments have risen 12% over the last seven months and load postings – the listings of available freight posted at truck stops – increased 299% in March 2010 over the same period in 2009.

This is good news for the freight industry and for our economy, but without sufficient fleet capacity and available drivers, products that flow from Point A to Point B will be delayed waiting for an available ship, truck or train. Today, for example, there is a backlog of steamship containers waiting for available space on ships from the Pacific Rim to the U.S. Due to this fact, manufacturers may not meet their production schedules and retailers may not have seasonal product to sell at the right time. These factors could contribute to a stifled economic recovery; one that is trying to grow but is being constrained by the limits of freight capacity (See June 2009 article "Economic recovery may hinge on freight capacity").

After surviving one of the most severe industry downturns on record, it is understandable that freight carriers are being cautious about reinvesting in their fleets.

Additionally, once they order new trucks, the manufacturing lead-time is such that, the new trucks will not be ready to move anything soon. These factors are already beginning to contribute to freight price increases, such as the recent rise in domestic truck and rail rates or the general rate increase (GRI) by international steamships. This trend will continue as the economy improves and demand grows. A good example of this can be found in the busy freight market at the Port of Los Angeles, where it is noticeably harder to find an available truck. Here, there is more freight than capacity, and like the backlog of containers in the Pacific Rim, shipments can be seen on the docks waiting for an available truck.

Current strategies

From our experience working with unique and diverse companies, we are often in a position to present our clients with freight savings opportunities, which can yield cash fast. A successful redesigned transportation program will improve EBITDA within 60 days.

Companies that rely on freight should consider a strategy of locking-in pricing agreements now, which secures reasonable and competitive pricing for the future and helps maintain profit levels regardless of economic ups and downs.

Another strategy to keep in mind is that the “best way” to move freight may not be the fastest way. A freight program can be designed strategically to optimize and balance the mode of transport, timing of ownership and warehouse storage - producing a result that meets the unique needs of the company. For instance, to increase working capital, the timing of ownership, often related to “freight terms” and “service time to deliver,” can stretch a company’s cash position and enable restructuring alternatives that would not have been available otherwise.

Conclusion

After years of cutting prices and fighting for every shred of business, freight carriers are beginning to reclaim a better negotiating position, enabling them to raise prices. The days of “not enough freight to fill the available trucks” are over. Now it’s “not enough trucks to move the available freight.” As the economy improves and demand grows, companies must be creative in formulating freight strategies. The right strategy can help reduce a company’s costs and preserve its ability to deliver goods.