Freight costs are currently on the rise, leading to decreased earnings and halted growth. This historic raising of rates is primarily due to a lack of space and transportation facilities. Companies like Dean Foods Co. are not able to move their goods, causing them to alter their annual earnings projections.
According to Ralph Scozzafava, Chief Executive of Dean Foods Co., “Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus [the] prior year.” These rising prices are changing the way the shipping and supply industries operate.
Reconfiguration of Supply Chains
As distribution channels struggle to keep up with the ever-growing U.S. economy, companies are beginning to see a halt in growth. This has led many companies to reevaluate how they operate their supply chains. Their goal: to compensate for the increased costs of shipping by freight. Some companies, like Kraft Heinz Co. and Coca-Cola Co., are simply raising their prices.
What worries these businesses the most is that these changes are not what most experts would describe as cyclical. According to Lee Clair, a managing partner at Transportation and Logistics Advisors LLC, “this is structural.” That means that rising prices are causing changes at even the most basic levels of supply chain operations and every entity involved in the process is going to have to adapt to these changes.
Specific Case of the Food Industry
One of the industries hit the hardest by this reconfiguration is the food industry. The increased complications that come with the need for refrigerated trucks are beginning to cripple some companies.
In addition, the constant activity that comes with the food industry means that there is no let-up when it comes to demand for a product.
Even more so, these demands are constantly changing in nature, adding another complication. All of this could lead to an increase in the cost of food since companies like Tyson Foods Inc. are seeing such drastic increases in freight costs (around $270 million for Tyson alone).
Some businesses are able to utilize internal resources to combat these issues. For example, Dean Foods already operates a sizable fleet of their own and they plan on utilizing this fleet to the fullest extent. However, internal fleets do not seem to be enough. Striking deals with trucking companies for lower rates and maximizing shipping operations seem to be the only options that those in the food industry have.
Truck Capacity and Long-Haul Drivers
What makes this lack of truck availability even more shocking is the fact that trucks have actually been plentiful in recent years. Perhaps some of the reactions to this past boost in the market have led to the issues the industry is facing today.
For example, many companies reduced their fleets because they simply did not need as many trucks. When demand began to increase toward the latter half of 2017, none of these companies were prepared. There was no contingency plan in place for a sudden boost in the market.
Now, the trucking industry is not only facing a lack of trucks, but there is also a shortage of drivers due to a new federal rule that requires truckers to keep track of their hours by using an electronic tracking system. The new emphasis on time tracking has also extended the time it takes to complete a route by almost 100%. Obviously, this has only increased the cost of having items moved by freight. Most shippers are compensating for these losses by increasing contract rates by an average of 10%. Some shippers, like Covenant Transportation Group Inc., are having to raise their rates even more, as much as 14%.
Role of e-Commerce
The fast-growing world of e-commerce is a factor to consider in all of this, as well. Cashing in at $1.3 trillion in sales per year, this industry has perhaps had the most impact on the rise of shipping demands. Customers want their products more diverse and shipped to their home or closest store faster than ever before.
Therefore, shippers and retailers alike are having to adjust to a new set of systems and processes. Although we are seeing a rapid decrease in return shipping, the number of items that are being shipped out greatly overcomes this difference.
To combat this, retailers are working to improve inventory management. In addition, clear communication and effective coordination with shippers is becoming even more important.
Unfortunately, these positive changes take time. Having multiple problems to face, shippers will need more time to adapt than normal. Eventually, things should level out.
Changing the Supply Chain
As this new era of expensive freight transport dawns on the shipping and retail industries, strengthened and renewed partnerships will be essential for those who wish to survive. Retailers need to seek out shippers that are willing to offer lower rates in exchange for long-term contracts or other incentives.
Currently, shippers have a little more negotiating power, but some give and take will go a long way in securing a future in this ever-changing industry.
One of the major factors that will lead to the successful balance of the shipping industry going forward is a sense of shared responsibility and collaboration. As we have seen in recent years, supply and demand are constantly shifting the balance of power and do so with little warning. If shippers and retailers can work well together and compromise, no matter who is coming out on top at the time, then perhaps future shifts of power will not cause as many issues.
Along with these changes to the shipping and supply industries comes a new competitive advantage. Space is becoming the most sought-after commodity, whether it is warehouse space or the number of trucks and drivers you have available. Open availability will keep your business flowing.
Finding a particular niche and excelling at it will also earn you the business that your company desires. For example, a shipping company that can offer a consistently available fleet of refrigerated trucks to companies that ship perishable goods will find itself with a lot of business in this current market.
On the other hand, a fleet that can handle anything at any time could also be an advantage. It is all about finding what your company can do for others and doing it well, earning you a reputation that garners fresh and repeat business.