Answer the Question...
One of my weekly habits is to go into linkedIn.com and look at the questions posted in the Supply Chain Management area. (If you don’t know what LinkedIn.com is, go there at www.linkedIn.com.) There was a question from the sales manager of a little 3pl about the death of carriers due to high fuel prices and if the “community” knew of any shippers that were looking for capacity.
No one really answered his question, mostly there was ranting about how if the carriers were going out of business it was because they were bad managers, or how it is a play to get higher rates, or random single point issues about how the truckers are hurting. What struck me was how ill informed and somewhat ignorant some of the posted answers really were. Don’t get me wrong, there were “glimmers” of some knowledge, and there were some very good spot on answers for one of the factors affecting the truckload market, but nobody painted the whole picture.
I found myself thinking about the innovative shippers and what they are doing to be ready for the problems to come. The really good ones are “changing” they way they went to market in the past. I think that these changes are good.
There are several things that shippers are doing to not only deal with the problem now, but in preparation for the tightening of capacity in the 3rd and 4th quarters that is going to happen. Many shippers are watching the smaller carriers close down with concern. In the 1st quarter over 900 carriers closed their businesses. The very sharp rise in diesel prices put many small carriers into a cash flow squeeze that they could not survive.
The really smart and innovative shippers are using a combination of tools. They are “paying forward” to some strategic asset based carriers to assure that those carriers are there to cover the critical lanes when the demand for truck capacity returns. They are paying a “little bit more” than market now to those carriers and having the conversation with the carrier that the shipper is working as a partner, and the carrier needs to make sure that the capacity is there. These same shippers are also partnering with 3PL’s, either brokers or transportation management companies, for the coverage on the smaller, less regular lanes. Again, there is conversation about the shipper’s strategy.
Then there are short sighted shippers that see this as an opportunity to drive their rates down. Those shippers are going to be searching for capacity as the economy rebounds. And they will have a hard time finding it. Why? Because major carriers are shrinking capacity, and the “buffer” of the smaller carriers is going away.
But there are still some “thorny issues” that our old practices do not address. I am not the only person thinking about this; my conversations with the innovative shippers that I know illustrate that “gears are turning” on the following issues.
Fuel Surcharge Lag:
In March diesel climbed over 45%, and continued to move higher in April. But in March the weekly cost rises were in the 20 to 30 cent per gallon ranges. Even if a carrier collects a fuel surcharge (not always a sure bet if working with a broker or a “bad” shipper) the surcharge programs never accounted for these kinds of sharp rises in a single week. The surcharges are based on a survey of 350 truck stops and fuel depots conducted by telephone on Monday and posted at 5PM on Mondays by the DOE. That average cost is used to determine the contractual surcharge applied for the current week.
In a rising market that DOE average is stale in one or two days. When the cost climbs over 30 cents in one week a driver filling on Friday could be losing as much as $60 for just that tank. In a week of sharply rising costs like what happened in March and in May, that single truck could see a loss to market of over $200.
Should there be an “Average” between the weeks, something that would “smooth out” the rises, (and the occasional falls”? One idea that I heard was just use the surcharge for this week for the loads that moved last week and not worry that the carrier is “getting more”. Not sure how many like this idea?
Empty Miles:
The truckers get to charge for fuel for the actual mileage between origin and destination. But the truck had to deadhead to the origin point. With the market decline of available freight, trucks are deadheading greater distances to pick up loads. A reported average from a few weeks ago for one carrier was average “empty miles per load” to be about 47 miles. Figure that the trucks get 6 MPG and that company burned 8 gallons of diesel to position for every load, about $38 for every load.
One shipper told me that it looked like carriers were starting to really account for deadhead into the rates. The carriers always accounted for some deadhead, but this shipper said that he is feeling it. Another decided to help a carrier find a customer for an inbound carrier, not to lower the rate, but to keep the rate steady and assure capacity.
Mileage calculation:
“Practical Miles” is what the carriers would like to charge, which assumes that the truck is moving over major and interstate for most of the trip, using secondary roads for the least amount. “Shortest Distance” will use any truck certified road to calculate the distance. There can be a big difference between “Practical” and “Shortest” distance, for some lanes as much as 10%, but in most cases about 3% – 4%. Progressive shippers that look at transportation as a strategic relationship will use “Practical Miles” in the billing. Other shippers that look at transportation as a commodity will use “Shortest Distance”.
Payment Terms:
The freight moves today but it takes more than 30 days – maybe 45 days before the bill gets paid. The carrier paid for the fuel today, the driver payroll and expenses this week and the truck this month. If a carrier is not getting paid until a month from now, or worse, 45 days out, who’s freight are the carriers going to move when the capacity tightens?
How are you innovating with your carriers?
In the mix commented:
ex trucker commented:
