Putting a cap on capacity

Last winter’s harsh weather complicated transportation conditions nationwide, resulting in delays and shortages in everything from food to fuel. These supply chain disruptions were simply glimpses into what could become the new normal. There are structural changes in domestic shipping’s operating environment that likely will result in decreased capacity over the long term.

Distressed infrastructure, increasingly long and variable shipping and transit times, as well as growing inventories resulting from transportation uncertainty, are putting significant strain on individual manufacturers. Meanwhile, economic and regulatory factors will all but eliminate any excess capacity in the system. This is all in an environment in which the number of truck drivers has decreased.

Midsize businesses are being put in an increasingly precarious position. Going forward, shippers will have less control of their costs and will need to make additional accommodations to maintain confidence that capacity will be available when they need it. Meanwhile, key cornerstones of transportation capacity, such as trucking and rail, are poorly positioned to meet growth in demand as the economy picks up.

What does this mean for shippers? First, it means demand and competition for transportation assets is increasingly heated, putting transportation service providers in the driver’s seat in terms of setting price and availability. Capacity is becoming a bottom-line business concern that can’t be ignored, especially among companies without the buying power of the largest shippers.

Second, it means businesses relying on freight transportation are finding that shipping costs are becoming an increasingly unpredictable line item. For now, most businesses have transportation contracts in place, but even those that do are seeing a 3 to 5 percent increase in the cost of those contracts.

So how can a company that’s not among the nation’s top-tier shippers guarantee ongoing access to shipping while keeping costs at reasonable levels?

There are several approaches to this problem, but the bottom line is that CEOs need to have a plan in place today for what lies ahead, a plan that takes into account the pros and cons of time and costs involved in a particular course of action. Shippers might consider several options.

The first option is to do nothing. You can sit tight, especially if you have flexibility in shipping times
or are prepared to take what the market gives you when or if you require a more demanding shipping deadline. This can save short-term costs, but it also requires assuming the risk of changes in the capacity cycle that could put you in the position of paying more for less in the future.

The second option involves restructuring or rethinking internal logistics strategies. Boosting resources and responsibility of internal logistics operations can establish a sustainable and predictable platform, not just for current capacity challenges but for those that lie ahead as well.

Steps you could take include expanding your logistics team or investing in advanced supply chain software options. You might make strategic real estate investments that place your goods closer to their destinations or explore different modes of transportation, such as intermodal. These decisions could require investments in time, talent and capital, but also could position you well for future tightening in capacity and a rise in transportation costs.

The third option is to form strategic partnerships, which can give companies access to more and bigger capacity resources — pooling demand to create economies of scale and accessibility and reduce risk. This approach could increase rates per shipment, but also could result in long-term money savings in efficiency, reliable transportation access and productivity.

Finally, the fourth option would be outsourcing to a third-party logistics company. Such service providers can help shippers increase their buying power by combining their needs with those of other organizations. Because of the increased volume, logistics companies can command more capacity and better pricing. This comes at a cost, however. An assessment should be conducted to determine if such costs would be offset by the reduced price of each individual shipment.

All this being said, we must be keenly aware that there are no one-size-fits-all answers. But there is no doubt about one thing: For the foreseeable future, all shippers will need to start considering transportation capacity as a factor in their business planning and strategy.  

Ken Kramer is senior vice president of the Mid-Corporate Transportation Group at BMO Harris Bank in Chicago. Contact him at ken.kramer@bmo.com.

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