Want Lower Transportation Costs? The place to look is not in the Transportation Department
By Lee Clair, Managing Partner, Transportation and Logistics Advisors, LLC
It’s common knowledge that freight transportation has gotten more expensive over the last 15 months. After several years of relatively stable rates, increased demand from stronger economic growth, combined with a capacity shortage have made it difficult for shippers to make their budgets. The ongoing driver shortage, resulting in increasing driver pay, has been exacerbated by the phasing in of the electronic logging device (ELD) mandate late in 2017 and in the first half of 2018. While the capacity shock from ELDs has now settled, we expect that capacity will remain tight unless there is a recession. While shippers may not see the same level of rate increases in 2019 as in 2018, the rates are not likely to be “rolling back” either. The structural changes for now are here to stay.
There are however, changes that shippers can implement to moderate the impact of rate increases or potentially even lower their freight transportation rates. However, they are likely to require more change and be more complex than options of the past.
Many shippers have begun making the changes needed to become a “preferred” customer. These include paying the carriers quickly, turning trucks faster, and putting in driver-friendly facilities and amenities. Other simple solutions, however, are considerably further off. Driverless trucks aren’t likely to be a short-run solution to the driver cost issue. While rail intermodal continues to grow, it is too small to make a meaningful impact to the overall cost and capacity issue.
Going forward, lowering trucking costs will require dramatically more complex changes. Moreover, almost all of these changes are outside of the control of the Transportation Department. These changes need to occur well before the load is given to Transportation to be moved.
One way of lowering costs is to help a carrier get better utilization of their trucks and drivers – two of a carrier’s largest costs. Expanding shipping and receiving operations to seven days would result in drivers not sitting idle over weekends waiting to make a delivery or to pick up a load. Similarly, extending the pickup and delivery time windows during the day could also dramatically increase productivity. This could also include late-night shipping and receiving or 24 hour operations, with the added benefit of helping the drivers avoid the congested rush hour windows associated with late afternoon shipping. But, these are operational changes beyond the transportation department, and that will require increasing the budgets for whoever is responsible for staffing the gate or docks.
Another option for a shipper to lower shipping cost is to change the shipment size. Here again there are several options. Redesigning packaging to better fit the product (and remove “air”) can make it easier to fit more freight in a truck. Improved product packaging could also help make pallets stackable without damaging the freight – gaining significant trailer capacity for products that do not weigh-out. For shipment quantities under a full truckload, changing the order frequency and order quantity can have a big impact. Shifting from parcel to LTL, increasing the size of an LTL shipment, or shifting from LTL to truckload multi-stop can lower the cost/item significantly. But once again these are not changes most Transportation Departments can make. These changes will need to be made with significant input from Marketing and Sales and Operations – and then executed by Transportation.
Customers who believe that rail carload cannot play a role or play a bigger role need to think more expansively if they want make a step-function decrease in their transport spend. Complex solutions involving using large blocks of cars and multi-modal delivery could result in significantly higher asset velocity and lower rail costs. Or operational changes where the finished product is shipped in bulk in covered hoppers or tank cars and packaged in market is also an option. However, almost all/all options of this type will require capital, operational changes and customer commitment changes – all of which are outside of Transportations control.
The conundrum is that because these opportunities are in the control of Marketing and Sales, Finance, and Operations, and not Transportation, we have yet to see a company where these other departments had any idea what the options are and what can be done. The solution is that Transportation needs to be at the Strategy Table helping facilitate an understanding of what the options could be, and providing input to the decision process, not trying to move what they are given at the lowest cost after the strategic decisions are made.