“Share and share alike” is a maxim shippers find hard to follow, especially if it means sharing zealously guarded supply chain resources. Few corporate secrets are as sacred as those involving the cost of bringing goods to market. There, the argument goes, lies critical competitive advantage.
That attitude is beginning to change. Tight truckload capacity on U.S. highways and the prospect of a capacity crunch in 2012 are starting to turn shippers into secret sharers. They’re not just swapping ideas; they’re sharing trailers, warehouses and entire distribution networks to contain rising costs and unlock hidden capacity.
In one really sweet supply chain deal, two of the world’s largest confectioners agreed to share distribution and transportation assets in North America. A major flooring products manufacturer is co-loading trailers, intermodal containers and rail boxcars with other shippers to fill more space, lower costs and secure capacity. And third-party logistics providers are matching potential shipper partners.
“Collaborative supply chain operations are a growing trend across industries as companies seek to fully leverage their logistics infrastructure,” John P. Bilbrey, president and CEO of Hershey, said this month when the $6 billion U.S. chocolate giant launched a joint transportation initiative with competitor Ferrero, the almost $9 billion manufacturer of Nutella and Ferrero Rocher chocolates.
Sidebar: Matching Shippers, Mixing Modes.
Whether it’s called collaborative distribution, shared dedicated carriage or an integrated delivery service, cooperative shipping is gaining a foothold in a trucking market hollowed out by the recession and where economic roadblocks make rapid expansion of capacity unlikely even in a more robust recovery.
The effort is a response to a capacity picture that has undergone significant changes across supply chains since the 2008-09 global economic downturn, as shippers have scaled down inventories and carriers have tried to adjust capacity to a smaller market that has put a premium on flexibility. The capacity questions have run on two tracks, however, as international ocean and air operators, with their expensive assets needing revenue to meet capital costs, have struggled with overcapacity.
Domestic operators in the U.S., however, are matching capacity more closely to demand, putting greater pressure on logistics managers to find the right capacity in the right place at the right time.
The economic downturn for trucking that began in 2006 and slid into the 2008-09 recession burst what shippers now know was a capacity bubble, eliminating 15 to 20 percent of the U.S. tractor-trailer fleet. Those trucks were sold, scrapped or otherwise put out of service, and a new generation of trucks that would have replaced older models simply wasn’t built in 2008 and 2009.
That left carriers with a rapidly aging, costly-to-maintain pool of Class 8 tractors that now must be replaced with much more expensive new trucks — the price of a Class 8 tractor has grown nearly $40,000 over the 10 years to as much as $120,000.
The recession also pushed more than 330,000 tractor-trailer drivers off trucking payrolls from 2008 through 2010, an 18.4 percent reduction in the heavy truck driver work force. Carriers are having a hard time getting those drivers back.
Sidebar: Big Ships, Bigger Decisions.
Tight truckload capacity is driving up domestic transportation costs, reaching across sectors and modal lines to affect less-than-truckload and intermodal pricing. Truckload line-haul per-mile rates were up 11.7 percent year-over-year in September, according to a report by Cass Information Systems and Avondale Partners, released Oct 17.
That increase exceeds even the 10 percent year-over-year increase in truckload rates TransCore Freight Solutions pinpointed in its 2011 Carrier Benchmark Survey. Carrier revenue jumped an average 18 cents per mile to $2.03 per mile, or $17,808 per truck per month, the load board operator said.
Trucking costs could go much higher, with rates rising as much as 15 to 20 percent over the next couple of years, said Mike Regan, president of transportation management and freight payment specialist TranzAct Technologies. “I don’t think shippers have even begun to see the worst of it,” he said. “I am convinced that the only thing constraining rates right now is the condition of the economy.”
Shippers will be forced to consider collaborative shipping and other ideas that once wouldn’t have made it past the loading dock to try to restrain rising freight costs. “We’re in an environment now where the assumptions about linear rate increases our supply chains are modeled on are no longer relevant,” Regan said.
“Companies can only accept these rate increases for so long before the CEO, president and CFO are going to start asking, ‘What is our response to manage this?’ ”
When it comes to actual carrier capacity, “I don’t know that there’s much shippers can do; it’s a fixed variable,” he said. “What they can do is look for opportunities where there is empty or partially utilized capacity already in the market.”
That’s part of what Hershey and Ferrero are doing. Their distribution alliance may be one of the most significant joint endeavors in the candy world since H.B. Reese mixed peanut butter and chocolate. Confectionary companies have a history of collaborative transportation in markets such as Chicago, where candy makers on Cicero Avenue were aggregating shipments at least as recently as the 1970s, Regan said. The Hershey-Ferrero deal heralds a higher level of cooperation.
The companies will share warehousing and distribution assets in North America to reduce truck miles, carbon dioxide output and energy use. They’re expected to share trucks as well, while keeping manufacturing and marketing strictly separate.
Hershey and Ferrero won’t just reduce greenhouse gas emissions by filling trailers together; they’ll also be able to ship products using fewer trucks and at a lower cost.
Allying with a competitor will actually enhance Hershey’s competitiveness, the company said in a statement. Although the candy maker declined to comment for this article, it’s clear more efficient use of existing truck and warehouse capacity will cut Hershey’s distribution costs — or at least help counter price increases.
Sonney Jones of Dal-Tile had a similar goal when he began looking for shippers to share trailers headed from Mexico to the United States. By finding “compatible freight” to load atop his heavy floor tiles, the division director of transportation could better utilize the full cubic space of a trailer, cutting transportation costs for both Dal-Tile and its partner shipper while raising the carrier’s revenue and profitability per truck.
“It’s basically a marriage of freight types, and, really, opposites attract,” Jones said. Dal-Tile ships 75- to 90-pound-per-cubic-foot tile from Monterrey, Mexico, to distribution centers in the U.S., freight that would “weigh out” a trailer long before it “cubed out.” By removing some tiles per shipment and sharing the trailer loading lighter freight, both shippers can cut their costs up to 15 percent.
But the partnership isn’t just about cost. “It’s about capacity sharing as much as finances,” Jones said. “It eliminates some of the problems with capacity.”
Jones hasn’t had a hard time finding trucks, but he believes cost constraints on carriers and the impact of regulatory changes and more stringent enforcement on drivers could have an effect on the availability of trucks in 2012 and beyond.
Dal-Tile is working with other shippers — the companies have nondisclosure agreements and cannot be named — and logistics provider Transplace to truck freight from Monterrey to the U.S. through Brownsville, Texas, and last week began shipping test loads with another partner in El Paso, Texas. “It looks very promising at this point. The ability to share capacity is all about how well your partner fits your needs and how well you fit your partner’s needs. It’s a marriage of freight types, service expectations and lanes.”
Dal-Tile already has extended its cooperative model beyond trucking to intermodal and boxcar rail, Jones said. “We’re trying to move as much as we can by intermodal,” he said. “It’s getting more and more difficult. The rates have gone up in many lanes to the point where there’s little difference between intermodal and truckload service. That’s part of the tightening of capacity all around, and that’s why we’re trying to solve the capacity riddle by co-loading freight and mode shifting.”
Finding the right partner is not easy: There’s no speed-dating service for shippers.
“It probably took us a year to understand how to qualify somebody, but we’ve made some progress identifying what seems to work,” Jones said. First, “you’ve got to be in similar lanes and have similar service requirements.” The value of the freight plays a role as well. “If you have a low-value product, and your partner has a high-value product, you may not look at the benefits of the program equally. Your transportation costs as a percentage of sales will be very different.”
Money is the root of most disagreements, and Jones acknowledges sharing information on costs can make shippers uncomfortable. “As we go along, we’ve gotten much more ‘open book’ with our partners,” he said. “There’s an honest concern about sharing costs, and you’ve got to be sure you get your share of the benefits and understand them as well as your partners do.”