Rate and supply issues could impact carriers during the final half of 2017. The warning comes from the Shippers Conditions Index (SCI), a monthly report compiled by FTR, a transportation forecasting firm. Early this year, the SCI’s positive score of 1.9 indicated mildly favorable conditions for shippers. April’s score, released in June, was -3.9. This most recent score falls into a “soft negative range” according to FTR.
FTR’s current forecast indicates a continued downward trend for the rest of the year. However, the firm does not expect the SCI score to dip into negative double digits. Scores below -10 indicate an increasingly critical situation for the transportation industry.
Factors That Influence Shipping Problems
Several factors influence the economic health of the transportation industry. These include regulatory compliance with the Electronic Logging Device (ELD) mandate and Hours of Service (HOS), driver shortages, shipping trends, and rate negotiations. Any one of these issues can affect shipping to an extent, but their combined impact is responsible for the tighter transportation conditions.
ELD Compliance and HOS
The American Transportation Research Institute (ARTI) compiles an annual list of the top 10 critical issues the trucking industry faces. Heading up the list are ELD and HOS compliance. Both regulations have significant economic impact on trucking firms and owner-operators.
With the December 18, 2017 compliance deadline rapidly approaching, many carriers are uncertain about the benefits the ELD mandate offers. Initial installation costs are between $200 to $1,500 per vehicle. The Federal Motor Carrier Safety Administration claims the devices will prevent almost 1,900 crashes annually and lower paperwork costs across the industry by $2.4 billion each year. However, the savings may not be evident immediately, especially for small or mid-sized fleets and owner-operators.
Although the 34-hour restart provision for HOS was suspended in 2014, the regulation could be reinstated without a permanent solution. Combined with a shortage of safe parking solutions and the precision of ELDs, drivers could face the difficult choices. For example, they may face consequences for violating HOS rules to find suitable parking or acquire fines and tickets for parking on off-ramps to rest.
Retailers are responding to an instant gratification culture by stocking larger inventories, anticipating customer needs months ahead of current demand. Some companies even offer same-hour fulfillment of goods. The cost of carrying forward-positioned inventory affects more than retailers; with stock on hand, frequent transportation deliveries become unnecessary. A few retailers are also creating in-house delivery fleets to reduce transportation costs. These trends reduce the availability of shipping contracts for fleets and independent truckers.
The cost of inventory management has some shippers looking for 90-day or even 120-day terms. The extended wait for payment may convince marginal carriers to prioritize load capacity over long-term profitability. However, exchanging lower rates for faster pay may not be sustainable long-term. If rates continue dropping, layoffs and other budget cuts can become unavoidable. Combined with rising costs to comply with transportation regulations from over a dozen federal agencies, it is possible for smaller fleets to undercut themselves in the interests of maintaining cash flow.
Good News on the Horizon
Fortunately, not all the data points to negative scenarios. There are indications that the US economy is on the rise, including a surge in products made in the USA. In January, the Cass Freight Index increased 3.2 percent compared to the previous year. This could indicate that the freight recession that began in March 2015 could be coming to an end. Another promising sign is that many retailers and manufacturers are embracing a “just-in-time” inventory model that reduces inventory management and overhead costs. These retailers require quick, efficient delivery to meet customer demand, producing a steady stream of work for reliable drivers.
Another positive is that bureaucratic deregulation was a major plank in the Trump administration’s campaign platform. Many within the transportation industry are hopeful that some of the red tape surrounding trucking regulations will disappear. For instance, alteration of the ELD mandate to make it friendlier to trucking companies would significantly reduce the regulation’s potential pitfalls.
However, Michael Lotito, an executive with labor and employment law firm Littler Mendelson P.C., warns that a decrease in federal regulations may not be completely beneficial. He suggests that states and municipalities may choose to fill perceived voids in federal regulation with their own rules.
The extent of any deregulation is still undefined. The Trump administration is still in its infancy. While the White House is interested in simplifying bureaucracy, the administration also makes it clear that sacrificing public safety is not an option. That line has yet to be drawn, and only time will tell where it will fall.
Handling Shipping Industry Challenges
Although the end of the transportation recession may be in sight, weathering current challenges is necessary to keep carriers afloat in a sea of change. Fortunately, there are several things companies can do to stay ahead of the game.
Jonathan Starks, chief operating officer of FTR, offers a couple of suggestions. First, he recommends proceeding as though the ELD mandate will take effect in its present form. “Without a clear answer from an administration that is still in its infancy, shippers are wise to prepare for a full implementation.”
Being aware of the timetable and actual costs for device installation is part of that preparation. Employers should also update handbooks and company policies to reflect device use and compliance. Reviewing how the 34-hour rule would interact with ELD compliance is also a good idea.
Negotiating New Contracts
Secondly, Starks recommends balancing capacity with rate-based negotiation. He notes that although freight markets were at an optimal level early in the year, approaching transitions in the shipping environment create the “potential for significant capacity shortages by the end of the year.”
Negotiating contract rates with an eye toward both workload and price can help keep cash flow going and promote long-term sustainability. It is also wise to set aside a portion of profits to supplement lean seasons.
Managing Capacity Shortages
Having a competitive edge is necessary when competing for loads. Although price factors into the final decision, quality is a significant component as well. Cultivating a company culture of excellence, integrity, and respect can provide an advantage over competitors with mediocre service.
Keeping an eye on e-commerce trends is also helpful. More consumers are shopping Cyber Monday and Black Friday from the convenience of their homes instead of making purchases in person. The fourth-quarter uptick in holiday sales will likely produce more work as well.
Trends ebb and flow in any business, including the trucking industry. Knowing what to watch out for and how to weather tight conditions can help you stay ahead of the game.