Firms See Capacity Curbed By Rising Costs, Regulation

PHILADELPHIA — The combination of rising truck equipment costs, the driver shortage and increased government regulation is forcing shippers to confront a new reality: Capacity is no longer “infinite,” and new ways to improve efficiency must be found, several industry experts said last week at the Council of Supply Chain Management Professionals annual conference.

“I don’t believe that historic levels of service are possible or sustainable,” said Don Osterberg, senior vice president of safety and security for Schneider National Inc., Green Bay, Wis.

Although signs of a capacity shortage are not evident yet, Osterberg and other industry experts said shippers and logistics service providers must rethink long-held beliefs about how much inventory is needed and where they source products.

CSCMP represents about 9,000 educators, industry researchers and supply-chain practitioners. A major focus of its annual conference this year was the “impending capacity crisis.” The meeting also featured sessions on talent development, technological and organizational innovations and academic research.

Osterberg said he is “fairly certain” the Federal Motor Carrier Safety Administration will reduce trucking’s productivity through its new hours-of-service rule, expected to be issued late this month. He said the expected changes likely would mean that drivers are unable to travel as far or make as many stops, effectively raising the cost of transportation.

“Commercial drivers were the elastic link in the supply chain,” Osterberg said. “That is becoming increasing inelastic.”

Drivers no longer are willing to “push the envelope” on HOS because of repercussions if they score poorly on roadside safety inspections under FMCSA’s Compliance, Safety, Accountability program, he said.

“There is a real tug of war going on between carriers and shipper expectations, said Thom Albrecht, managing director at BB&T Capital Markets in Richmond, Va.

Albrecht said the cost of heavy-duty Class 8 tractors has more than doubled in the past 20 years, while the average number of miles driven per tractor has fallen. In addition, the residual value of used tractors has not increased, resulting in a higher cost of ownership for truck operators.

In a recent survey, 40% of shippers said freight rates were up more than 5%, compared with 35% of shippers who reported that rates decreased in 2009.

“We’ve flip-flopped,” Albrecht said.

Whereas two-thirds of shippers said price was the most important consideration in 2009, only 5% now cite price as the most important factor.

Albrecht said driver turnover rates among truckload carriers are increasing at a rapid rate, even though housing and construction activity remains weak, which suggests that more drivers may be leaving the industry.

“Something different is happening,” he said.

Tom Carpenter, director of logistics in North America for International Paper, Memphis, Tenn., said tight capacity in the next two or three years will make it more difficult for his company to reduce transportation costs.

“We will need to find other ways,” he said. “Our mandate [to lower transportation costs] hasn’t changed.”

Carpenter said his company is taking a closer look at inventory levels.

“During the economic downturn, inventory was evil. We wrung it out as quickly as we could because transportation capacity was plentiful. Now, we can’t manage our business as if transportation capacity is infinite,” he said.

To help carriers provide needed capacity, Carpenter said, his company is sharing more information about shipments in advance. He also is seeing more use of “scorecards” by carriers to rate shippers.

“In a constrained environment, this is a natural thing to happen,” Carpenter said, “and it should be a healthy process. If you view it as adversarial, it will not work out. We want to be the best possible shipper. We may disagree about metrics, but we welcome open dialogue.”

Michael Heckart, manager of North American logistics for Deere & Co., Moline, Ill., said heavy specialized equipment is “really tight” in terms of capacity, and the company is looking at the need to use 2,000 more trucks to carry the company’s 2012 model combines because the current 80,000-pound federal gross vehicle weight limit means that a second trailer will be required to carry tires and other parts.

A proposal to increase the maximum weight of tractor-trailers to 97,000 pounds with an extra axle on the trailer to carry the added weight has been introduced in Congress.

“If we had 97,000 pounds, we could do it all on one truck,” Heckart said.

Deere’s program, Achieving Excellence, rates the performance of its suppliers, he said. In 2012, the company will pilot test a “reverse AE” program, in which suppliers evaluate Deere.

Michael Cole, senior director of transportation for Kraft Foods, Northbrook, Ill., said his firm has taken a number of steps to boost capacity, including increasing the use of freight brokers, expanding its dedicated fleet to 400 power units from 220 and adding more than 100 trucks to its private fleet.