The economy is anemic, freight demand is slight, cargo space plentiful and rate increases minimal. Obviously, it’s time to plan for growth.
Shippers, carriers and third-party logistics providers need to strengthen multimodal transportation networks before the economy really heats up, or face a long-predicted capacity crunch. The cost of complacency will be higher than many will be able to pay, speakers warned at the JOC Inland Distribution Conference.
“If we return to normal growth in the short term, it will make 2003 and 2004, when we had the tightest capacity we ever saw, look like a walk in the park,” said Christopher B. Lofgren, president and CEO of Schneider National, Green Bay, Wis.
“I think we saw a sea change (in transportation) from 2005 to 2009, and (over-)capacity drove that,” said Jack Holmes, president of UPS Freight, Richmond, Va. “I think we’re going to see another sea change, and lack of capacity will drive it.”
Lofgren and Holmes, both keynote speakers at the JOC event, were among 12 company presidents and 58 speakers at the two-day logistics conference, which examined the forces driving change in North American supply chains, making them more dynamic, more complex and more multimodal. Approximately 350 supply chain professionals attended this month’s conference in Kansas City, including shippers, carrier executives, logistics operators, port managers and real estate developers.
Many of those attendees were looking for ways to minimize supply chain risk by exploring intermodal or multimodal transportation options. In effect, they’re interested in hedging against any potential tightening of truck capacity.
“We're not adding productivity, we're not adding capacity, and at some point in time this is going to create some issues,” Lofgren said. Trucking companies that "never really recovered" from the 2007-2009 recession are not reinvesting in their businesses at a rate that will compensate for increased demand, Lofgren said. "The margins in this business still aren't where they were in 2004 through 2006," he said. "If you don't generate the return, you may not reinvest at the same level you used to, and you certainly won't invest in growth."
In the second quarter, the JOC Truckload Capacity Index rose to 81.3 from its historic low of 79.7. That indicates the actual tractor count at a $10 billion group of truckload carriers tracked by The Journal of Commerce is nearly 20 percent below its fourth quarter 2006 level. The index hasn’t been above 90 since 2008.
“We’re in a world full of uncertainty and risk mitigation,” said Jon DeCesare, president of World Class Logistics Consulting.
“Five years ago, (risk mitigation) was not high on the priority list,” Richard H. Thompson, a managing director at Jones Lang LaSalle, said during a panel discussion of industrial real estate trends. “It is now, and I think that’s been driven by several highly visible natural disasters.”
Rising freight costs and tightening capacity present risks, too, and shippers need to manage them. “As freight costs go up, what do you do about it? What if you can’t get a truck?” Thompson asked. “I was that guy, and it’s not fun being that guy when you can’t get a truck. The only viable alternative I know is rail and intermodal.”
Intermodal traffic in 2013 will expand 3.9 percent year-over-year, as domestic volume jumps 6.4 percent and international traffic inches up 1.5 percent, said Larry Gross, a senior consultant for FTR Associates. He expects total intermodal traffic next year to grow by 3.5 percent, with domestic volume gains decelerating to a 4.8 percent year-over-year growth rate, but international traffic inching up to a 2.1 percent rate from 2013.
Truckers aren’t fighting intermodal growth, they’re fueling it, Lofgren said.
“Back in 1980, no one thought trucking companies and railroads would be close strategic partners, but today we are,” said Lofgren, whose $3.5 billion company has trucking, logistics and intermodal arms. “We have to continue to find ways to make freight move in a productive manner,” regardless of the nature of the container.
Schneider National, founded in 1935, is the second-largest truckload carrier in the U.S. and the largest privately owned one. Over the past decade, as distribution demands changed, Schneider expanded its use of intermodal rail and put more of its trucks into shorter haul, and typically more profitable, regional service.
“We used to be a long-haul, one-way, over-the-road trucking company,” Lofgren said. “We believe (intermodal) is the right way for that freight to run. The railroads are making investments to improve service and capacity, and it’s the best way to move long-haul heavy freight.” Domestic intermodal volume will grow twice as fast as over-the-road volume in coming years. “The scarcity of truck drivers will help (intermodal) grow faster, and fuel costs will clearly pay a role,” he said.
Third-party logistics providers increasingly play a prominent role in intermodal and multimodal transportation, and asset-owning carriers need better strategies for dealing with non-asset players, Holmes said. “In 2008, many carriers went purely tactical, dropping long-term strategies,” he said. “LTL companies made it very easy for 3PLs to move into the traffic management space.” Among carriers, “there isn’t really a strategy in place to deal with non-asset companies; it’s purely tactical. One thing you'll see going forward is that that relationship is going to change.”
UPS Freight, he said, is looking for “preferred” partners that bring added value to the shipper. “The music is about to start, and it’s time everybody gets dance partners,” Holmes said. Pure rate resellers may be left standing alone on the market’s floor. “We’ve been firing some of the people we’ve worked with, because they’re using us to market their products but the freight is not ending up in our vehicles.”