This is the fourth part of our supply chain blog series, in which we explore the biggest roadblocks and changes executives are facing in today’s dynamic supply chain. This part covers key domestic freight issues and how companies can position themselves to mitigate the impact of these changes.
Increasing Headwinds: Rising Costs Plus Fewer and Drivers and More Scrutiny
As the U.S. economy has expanded in recent years, demand for domestic freight in the U.S. has experienced a similar boom, with demand growing at an estimated 7% year over year. During this period, freight costs also rose considerably, leaving domestic freight companies struggling to keep pace. Driver shortages are currently estimated to exceed 50,000 drivers nationally, and the gap is expected to swell to 175,000 drivers by 2026. Further magnifying this issue, carriers are experiencing additional Hours of Service (HOS) scrutiny related to the recently enacted Electronic Logging Device (ELD) mandate. Drivers are strictly monitored to ensure a maximum of 11 hours of daily drive time, restricting schedule flexibility and limiting wages. The full effects of reduced driving time on the overall driver pool are yet to be seen, as some drivers face wage reductions of greater than $10,000 annually as a result.
Impact to Carriers
In a recent American Transportation Research Institute (ATRI) survey, carriers ranked the driver shortage as the number one issue in the industry today. Competition to recruit drivers has resulted in wage increases of 10-12% in the past year, and the abundance of competing job opportunities has pushed driver turnover at large truckload carriers up 20% year over year to 94% annually. When combined with recent fuel volatility of 41% during 2018, carriers have experienced a 30% year over year cost increase to $2.32 per mile. Despite attempts to widen the candidate pool by lowering the interstate commercial truck driving age to 18 nationally, cost inflation in the domestic freight industry continues to outpace increases in demand.
Positioning for the Future
With freight demand expected to increase beyond 2023, carriers will feel pressure to pass along cost increases to their customers, compelling companies to make tough decisions regarding the future of their distribution networks. Despite this uncertainty, there are a number of approaches which we believe can mitigate cost exposure and position companies to be more adaptable in the future.
- Load and Route Optimization – New data-driven approaches to routing can reduce mileage between stops, deadhead mileage, and idle time per route, mitigating current headwinds and maximizing value-added delivery time. Coupled with thorough reviews of current equipment, businesses can better align capacity goals with the optimal fuel and driver needs. Companies can also take a smarter approach to their current loading processes, implementing new packaging designs and pallet configurations to maximize capacity per truck. Working with customers to adopt more aggressive order minimums and rounding can also increase the rate of more fully weighted or cubed-out trailers, reducing the cost per unit for both the customer and supplier.
- New Partners – Order frequency and volume are not always consistent across an organization’s distribution network. To service these changing customer needs, providers such as Uber Freight and Convoy provide companies more flexibility in short-term scalability than traditional freight providers, offering the ability to pay by the route for additional delivery needs and reducing the reliance on traditional third-party logistics providers. While Freight as a Service (FaaS) is not immune to the driver shortage, the additional flexibility allows companies to overcome extraordinary capacity restraints in the short-term without sacrificing service to high-volume, high-frequency customers.
- Network Strategy – As transportation expense becomes a larger line-item, supply chain leaders will be challenged to balance tradeoffs between transportation and labor uncertainties. It is imperative that companies closely examine their distribution strategy, weighting tradeoffs between labor, overhead and transportation costs, as well as inventory. As cost pressures continue, a well-tuned network strategy will ultimately allow carriers to best mitigate the impact of these changes.
As the domestic freight industry continues to experience cost inflation into the foreseeable future, companies will be forced to look for new ways of working. Taking a proactive, multifaceted approach positions companies to be more flexible and enables them to best meet their business needs in the face of uncertainty.
This blog was co-authored by
Patrick Stone is a senior consultant in North Highland’s Process and BA capability. He has more than 7 years of experience in process design and operational improvement, working across the retail and financial services industries.