Logistics Crisis Looming
By George Anderson
According to Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, 10,000 truck companies fold every time the cost of diesel fuel increases by a dime.
With the cost of diesel fuel up more than 40 cents in the past year and further increases expected there is clearly cause for concern, writes Robert Malone in an opinion piece on Forbes.com.
In fact, there is sufficient evidence, according to the author to suggest, “The danger of a widespread U.S. logistics breakdown is here and staring us in the face.”
Mr. Malone contends current capacity for truck to haul goods is already stretched. The fuel used by trucks now accounts for 21 percent of the nation’s total fuel consumption and the demand continues to increase as congestion on roads and other factors reduce the mileage traveled on each gallon.
Rails offer a partial solution to the fuel usage element but, according to Mr. Malone, “the U.S. corridors and hubs are in need of major overhauls and higher technology extension at a price that reaches into the hundreds of billions of dollars.”
Something clearly needs to be done but what?
Mr. Malone offers a number of recommendations for what is and is not needed.
What isn’t needed, writes the author, is another “presidential commission.”
As to what can be done, he suggests work begin immediately on short-term projects improving roads, rails and ports financed by existing government funds or emergency funds if current budgets do not cover the cost of financing necessary projects.
Longer-term solutions include a greater government commitment to aiding intermodal transportation where a combination of shipping methods are used to move products from their point of entry into the supply chain to their final destination at retail.
He also suggests greater investment in pursuing alternative vehicles and fuels. Hybrids and hydrogen as a fuel are seen as plausible options.
Moderator’s Comment: Is “the danger of a widespread U.S. logistics breakdown is here and staring us in the face” as suggested in the Forbes.com article?
What points raised in the article do you believe are most important to address? –
George Anderson – Moderator
There is a huge risk of a slow meltdown; however, the very nature of independent trucking is also it’s salvation.
The only reason that independents close shop when fuel prices go up is because they can’t pass those costs on to their customers. However, when enough independents close up that goods can no longer be delivered on a timely basis, then their customers will have no choice but to raise what they’re willing to pay to cover the increased cost of fuel.
This will be particularly true for goods with limited shelf life. As trucking companies go out of business, companies will have to pay a premium to move to the top of the line, otherwise their goods will go bad before they ever reach the stores.
The increased pay will then reverse the trend and lure people back into the trucking business.
In other words, the law of supply and demand works. And it works best in areas like independent trucking where you have lots of individuals making independent decisions, as opposed to only a few people making decisions for massive parts of the infrastructure (e.g. rail).
Of course, there will be an increased cost to the consumer, which will reduce demand. Thus there will be some shrinkage in the need for trucking companies (and a lot of people will lose their jobs); however, over all, the law of supply and demand works well when it’s given a free hand.
The best thing that the government could do is (a) provide education and retraining for people who do lose their jobs, (b) encourage alternative energy systems (especially for trucks), (c) avoid things like price freezes and subsidies that limit free market activity.
Intuitively I would have to agree with the Forbes’s article in its assessment of the infrastructure. I don’t have enough personal knowledge to dispute it. I also agree that something has to be done to lesson transportation costs. I think the first step is to make better use of what we have as we also make bigger changes for the future.
More efficient use of our current infrastructure can be accomplished several ways. The simplest is to begin running our retail businesses off of “inventory and forecasts” rather than “orders and shipments.” By using forecasts to plan capacity and then executing to the capacity, retailers can make much better use of their transportation dollars. This means the number of DC deliveries (capacity) will be based on forecasted need, most effectively by category and based on weight and cube of the of the average container in each category. When the actual inventory numbers are factored into order generation, the planned capacity will be used to allocate the space to the items most needed. Extra items can be added to fill partial trucks and less urgent items can be dropped to squeeze an order into the planned capacity if necessary. Add to this the use of “drop and hook” deliveries that allow the trailer to be delivered overnight when there is less traffic and you have an opportunity to take advantage of less crowded streets. Finally, the consideration of mixed loads that can carry products at multiple temperatures can reduce the number of trucks. Looking at DSD, it might be time for the retailer to give more shelf allocation to these items or reduce the assortment so that fewer deliveries are required. Vendors should use the presentation stock allowed as a factor in their pricing.
There is one additional change that would help all of us (passenger cars and delivery trucks). In addition to “Turn on Red” intersections, we should have “Stop and Go” intersections. Basically these are intersections with unobstructed views that would work like stop signs during the late night hours. The driver would be required to come to a full stop, but instead of waiting for the light to change would be allowed to continue if there was no traffic. I hate waiting at a stop light at midnight when I know there isn’t anyone coming. This would save us all some gas.
Longer range I believe some serious investment in Transporter technology, allowing the transfer of products over the phone lines or even wirelessly is warranted.
Ever since motor freight pricing was deregulated, the industry’s profit margins have been challenged. It’s hard to compete in a commodity service industry. When costs rise, the marginally profitable players have little pricing power and they go under. The remaining players will have greater pricing power when the marginal players go under. The nation would benefit from appropriate infrastructure improvements to its roads and rail lines, but it’s clear that there will be no push in this area from the government. If the auto industry is a guide, alternative fuels for trucks will be Japanese innovations.
No doubt a presidential commission will happen anyway.
I think that the idea of immediately improving heavy, and more importantly, light rail with funds that are currently supporting roads should be the first move. This could mean that private railroad “right-of-ways” become government owned and supported with tax dollars. Or perhaps, Interstate 70 and/or 80 should have a heavy rail line running down the median.
The better solution is to have an energy policy that rewards investment in alternative vehicles and fuels. Hybrids and hydrogen as a fuel are seen as plausible options.
While I agree that transportation is a potential problem, I have problems with the supporting statistics (lies, damn lies and statistics). 10,000 trucking companies go out of business every time the cost goes up 10 cents. How big are these trucking companies? Are we talking about 10,000 “one truck corporations” that were operating on a shoe string and over financed to begin with? If 10,000 trucking companies have gone out of business then how is anything getting delivered anywhere now. If the 10,000 companies accounted for any real portion of the US trucking industry then freight prices would be going through the roof. Why don’t we compare these “statistics” with the number of first year business failures (which tend to be measured by non renewal of business licenses)? My experience is that many many small businesses change their name (contractors, roofers, painters) every year to avoid legal obligations due to shoddy work. I am not saying this happens everywhere and I am not saying it should be applied to independent truckers. I am only saying that if you have a bad experience with “Phil’s Transport” you won’t call back. But you might dial “Phillip’s Cargo.” Check the phone numbers. Names change but numbers tend to stay the same. The statisticians and bureaucrats and reporters are too lazy to actually do this or too “book smart” to know how the world actually works.
Without trying to solve one of the many societal imponderables (like how to run an effective public school system, or provide for affordable health care) represented by the nation’s logistics infrastructure…let’s question some things.
Economically, if costs rise, the provider attempts to pass them along to the purchaser, and so on down the value chain. If an alternative option exists at a lower cost with equivalent performance, the purchaser will choose that option.
Did I miss something somewhere? Some breakthrough in transportation technology? Is there some way of moving stuff from “here” to “there” that doesn’t require petrochemicals?
I have clients, small ones, who ship via independent truckers. The rates for shipping are rising with diesel prices. Maybe not in direct proportion. If these 10,000 companies fail with each dime, who is picking up the freight they hauled? Why can those providers compete but the 10,000 not?
Absolutely we need, as a nation, to invest in logistics infrastructure. Good luck selling that in any national election involving taxes. I agree with the sentiment, just not the practicality.
I think this is a case of the sky is falling. Or the truck is crashing. When it isn’t.