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DG&A's Transportation Consulting Blog

 

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On October 11, my company co-hosted the 2017 Surface Transportation Summit with my partners at Newcom Business Media. I am very pleased to report that we had another packed house for what has become the premier educational and networking event in Freight Transportation in Canada.

The day was again kicked off by one of Canada’s leading economists, Carlos Gomes of Scotiabank and by two investment analysts, Walter Spracklin, CFA, Equity Research Analyst - Transportation Sector, RBC Capital Markets and John Larkin, CFA, Managing Director and Head, Transportation Capital Markets Research, Stifel Financial Corp., who provided an American perspective. These gentlemen highlighted that 2018 will be a year of economic growth. This economic growth, coupled with the ELD mandate and the limited supply of quality drivers in the United States, will translate into tight capacity and higher freight rates.

One of the slides that caught my eye was the one inserted above from the John Larkin presentation. John’s views are consistent with what one of the largest US trucking operators, J.B. Hunt Transport Services, is telling its shipper customers. They are advising them to budget for transportation cost increases as high as “10 percent or more” as the peak fall distribution season and electronic logging mandate intensify a driver shortage. “This is one of the highest periods of turbulence and volatility in supply we have ever experienced, and we don’t think it will abate any time soon,” John Roberts, president and CEO, and Shelley Simpson, chief commercial officer, said in a letter to J.B. Hunt customers.

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As the long, slow recovery from the Great Recession continues, shippers and carriers have become used to modest economic growth. Demand for freight services has been steady but not robust. The muted demand for freight services has not put undo pressure on truck capacity; rate increases have been limited in recent years. This may be about to change.

Regulations have placed constraints on the management of trucking companies, particularly full load carriers. The Hours of Service regulations coupled with the ELD (electronic logging device) mandate are placing limits on the number of hours that a driver can legally operate a truck. These directives limit truck capacity. The difficulties in finding quality drivers and the high turnover ratio among current drivers provides additional challenges for many truck fleets. To address the potential erosion in capacity, truckers are applying a variety of technologies.

Good quality transportation management systems are allowing truckers to better manage their routes and balance their lanes. Dimensional scanners are helping LTL carriers manage the space available on their trailers by matching freight rates to cube utilization. ELD technology provides carriers with information on how long their drivers and equipment are held up at customers’ facilities. The net result of all this is that small parcel, LTL and truckload carriers can be much more accurate in tailoring their freight rates to the “carrier friendliness” of their clients.

How can shippers become more "carrier friendly”?  Here are a few items to consider.

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The essence of successful freight rate negotiations is an honest exchange of information. Carriers count on shippers to supply them with complete and accurate information on shipment weights, dimensions, volumes by lane, seasonal spikes and any special service (i.e. job site deliveries, weekend pickups etc.) requirements. Shippers expect carriers to be able to supply them with the correct types of equipment to pick up their freight at the designated time, to provide adequate amounts of equipment at the right time to move their loads, to meet their designated transit times over 95% of the time and to provide good customer service and quality information as they outlined in their submission and interview.

While this all seems so straight-forward and reasonable, there are a host of challenges that get in the way of committed shipper-carrier relationships. Here are a few to consider.

Changes in Shipment Volumes

Business conditions are constantly changing. There are ebbs and flows in the general economy that can impact on many industries, including both shippers and carriers. There is ongoing competition in the market where shippers win or lose customers every day. Then there are mergers and acquisitions and new product launches (or old product cancellations) that can lead to rationalization of locations for factories or distribution facilities. The net impact of these changes is that the shipment volumes discussed in an RFP may not come to pass or the actual volumes by lane may vary over time.

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The first part of this blog focused on the operational, service and equipment issues that constitute a strong shipper-carrier freight agreement. This blog will address the financial and business issues that need to carefully captured in detail.

6. Rates and Service Charges

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Motor carrier agreements or contracts are documents signed between shippers and carriers that set out the parameters and processes under which two or more companies work together to provide freight transportation services. These documents, often prepared by lawyers (with input from freight management professionals), set out a range of service expectations and freight rates that define the relationship between the parties. While freight agreements have come into widespread use, the question is if and when these documents are necessary?

One could argue that if two or more parties are operating in good faith, do they need a legal document to circumscribe the nature of their relationship? If shippers and carriers are supposed to work together as partners in an open and trusting manner, does a formal, written agreement get in the way of a business partnership arrangement? Does it inhibit open and honest communication?

Do motor carrier agreements create a rigid framework that reduces flexibility? Are they detrimental to the sometime unpredictable and fluid nature of freight transportation? Does a formal agreement make it more difficult for a shipper to obtain additional equipment or after hour’s service? Do they place carriers with a limited set of equipment into a straight-jacket? Does the fear of punishment or service failure force a carrier to provide equipment and service to one client (that has a contract) at the expense of another client (that doesn’t have one)?

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