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Some Major Trends Shaping the North American Freight Transportation Industry in 2015

This past year was a tumultuous and transformative year in Freight Transportation. What is in store for us in 2015? Here are some trends to watch.

1. Dimensional LTL Pricing

The National Motor Freight Classification (NMFC) system, developed during the Great Depression by the National Motor Freight Traffic Association, classifies goods based on four elements—density, stowability, handling, and liability—that reflect a shipment's "transportability." However, the ratings from the system are not derived from the dimensions of the actual shipment but from average shipment characteristics. The classification methodology was not designed to accommodate the changes in modern-day production methods, where goods tend to be lighter and generally cube out in a trailer before they weigh out. For nearly eight decades, less-than-truckload (LTL) carriers have been using this system to allocate their trailer space.

Change will come to the LTL freight industry in 2015, driven by so-called dimensionializing, or dimensioning, machines that precisely calculate the amount of space a shipment will occupy in a trailer. The machines measure a shipment's dimensions—arrived at by multiplying length, width, and height—and provide proof of their calculations. A high-end "static" machine designed to measure stationary objects sells in the low to mid-$80,000s. The payoff can be rapid—30 to 60 days, depending on how a carrier uses the machine and how it calculates return on investment (ROI). Carriers like UPS Freight and FedEx Freight, LTL units of highly visible companies that have used dimensioners in their parcel operations for decades, are going that way. Old Dominion Freight Line Inc., that has used dimensioning equipment since 2009, YRC Worldwide Inc., and many of the other leading players in the LTL sector will likely follow the leaders.

2. Low Energy Prices will continue for much of 2015

As 2014 comes to an end, crude oil prices have dropped by fifty percent to the md $50 range per barrel. The recent downturn is being driven by the determination of the Saudis, the largest and low cost producer of crude oil to take market share from the “frackers” and “oil sands producers” whose costs are much higher. By maintaining production levels, their intent is to keep prices low for a long enough period of time to curtail the development of new projects that would increase supply. For this strategy to work, crude oil prices will have to remain at these levels or even lower levels for an extended period, at least for much or all of 2015. This will clearly have a significant effect on carrier fuel costs, on shipper fuel surcharge costs and on the economy as a whole.

3. Canadian Exports to the US will increase in 2015

Low energy prices will have a profound effect on the Canadian economy in 2015. With the energy industry such a large part of the Canadian economy, it is likely that low energy prices will have some major negative and positive impacts. There are several reports that the oil sands industry is cutting back on new projects and reducing staff. The Canadian dollar has sunk to about $0.86 against the US dollar and may sink further to the low 80s. With lower manufacturing costs than the United States and the low cost of diesel fuel, this will make Canadian manufactured goods more attractive to their closest and largest trading partner, the US. On the flip side, American goods will become much costlier to buy for Canadian firms. Watch for the north – south balance of freight to continue to evolve and for the Canadian manufacturing industry that is largely based in Ontario and Quebec, to have a banner year.

4. More Mergers and Acquisitions will Drive E-Commerce Growth

The year is ending with two blockbuster deals that were designed to enhance the e commerce capabilities of two the industry giants, FedEx and CH Robinson. C.H. Robinson acquired Freightquote.com, Inc., a privately-held freight broker providing services throughout North America. (http://scdelivery1/en/us/About-Us/Newsroom/Press-Releases/2014/CH-Robinson-to-Acquire-Freightquote/#ixzz3MAppQXkD). Freightquote is one of the largest internet-based freight brokers in the United States. The company provides truckload, less than truckload and intermodal services to approximately 80,000 customers. Its proprietary e-commerce technology allows shippers to easily access competitive rates and automated load acceptance and payment functionality. E-commerce is going to be a bigger part of future supply chain services.

FedEx Corp. agreed to buy logistics firm GENCO, a specialist in handling product returns, as e-commerce operations expand at the operator of the world’s largest cargo airline. GENCO had annual sales of $1.6 billion and more than 11,000 employees. GENCO, an acknowledged leader in reverse logistics, handles more than 600 million returned items a year. With the growth of e-commerce there are likely to be more returns. Retail e-commerce is overtaking the traditional business-to-business deliveries that once drove sales at shipping companies such as FedEx and United Parcel Service Inc. UPS, the world’s largest mover of packages, has predicted that e-commerce shipments will expand four times faster than the U.S. economy. Watch for more companies to follow the lead of these industry giants and acquire companies that can bolster their e commerce platforms.

5. Shipper-Carrier Collaboration will continue to evolve

In 2014, we witnessed the impact of tight driver and equipment capacity. These constraints pushed freight rates upward. While these forces were in play, customers were demanding a higher level of service reliability. This caused shippers to place a greater importance on carriers with high transit time consistency, higher equipment availability, more flexibility and multi-modal capabilities. These requirements will only increase in 2015.

Watch for shippers to seek out carriers that excel, on these attributes, in their respective sectors. Winning carriers and shippers will align their processes and people in more strategic ways to reduce costs and increase service efficiencies. Watch for shippers to continue to increase their businesses with logistics service providers. Finally, to ensure even higher levels of service, watch for more shippers to make use of dedicated transportation services. On the carrier side, watch for more companies to participate in “gain sharing” and “open book” policies with metrics and financial targets that benefit both parties.

6. Rails will continue to Capture Truck Traffic

Plenty of runway exists over the coming 5-10 years for intermodal to continue capturing truck traffic, often with the blessing of the truckload carrier, that is now viewed as a customer rather than a competitor of a railroad. Shippers are increasingly looking for carriers and logistics service providers that offer multi-modal capabilities. Driver shortages make intermodal service particularly attractive on long haul freight movements.

7. The Location of Manufacturing and Packaging Sites will Change

A set of forces is changing the location of where goods are manufactured and packaged and from where they are delivered. Capacity shortages and customer service demands will force shippers to re-evaluate inventory levels and the number and location of their manufacturing facilities and distribution centers. The location of intermodal facilities will become increasingly important. 3D printing/additive manufacturing could become the ideal technology to facilitate the further shortening of supply chains. Labour costs could become a smaller part of the equation. Tailored manufacturing capabilities can be located close to burgeoning markets and inventories can be minimized.

8. The Rise of Value-Added Niche Freight Brokers and 3PLs

The freight industry has changed significantly from the days of small parcel, LTL and truckload freight. As new business sectors emerge and technology changes, specialized hybrid freight transportation companies are emerging to meet these needs. Watch for an increasing number of companies to establish themselves in the retail distribution/e commerce/last mile delivery space. Look out for companies that specialize in energy transportation. The near shoring movement will give rise to a set of companies that can best bring these goods to market. The “Asset Light” segment of the freight industry will continue to grow.

9. Truckers will continue to expand their Logistics Service Capabilities

Logistics service providers now control twenty-five percent of the LTL freight industry. Shippers are increasingly looking for companies that are “solution providers” rather than pure transportation suppliers. Watch for more carriers to build their 3PL platforms from both a service and technology perspective.

10. Big Data to Drive Predictive Analysis and Profitability Improvements

Truckload carriers will continue to make use of smart pricing and costing models that can aid in making smarter management decisions on how and where to position assets. We can also expect to see more smartphone-enabled technology to provide for dynamic, real-time load information sharing. The carriers that don’t invest in these technologies will pick up the “bad freight” that they aren’t able to properly price and service effectively in their networks.

11. New Companies with Fresh Approaches will continue entering the Freight Industry

Outsiders are being enticed by the unique and big problems that are pervasive across the freight industry. Successful entrants partner with people that have been in the industry for a long time and that prefer to focus on technology solutions that bridge the asset-based world with the digital world versus playing the traditional trucker/freight broker role. When they do go into brokerage, they are providing innovative leading-edge services rather than provide point A to point B transportation services.

12. The Americans are coming to Canada

Canada has a market the size of California, or about one tenth the size of the US market. American trucking companies have discovered Canada. Just as many major American retailers (e.g. Target, Nordstrom, Victoria’s Secret) have established operations in Canada, so too have American trucking companies. While some American trucking companies (e.g. Celadon) have been actively acquiring Canadian carriers, watch for more American companies to look for ways to gain market share in Canada.

13. E Commerce Growth will spur an Expansion of the Last Mile Sector of the Freight Industry

Compared to FedEx and UPS, last mile companies represent a small percentage of the freight industry. Watch for that to change. A recent study identified that most companies in this sector have less than 250 trucks and fifty percent operate in 3 states or less. But some large players are taking notice. For example, TransForce has acquired Dynamex and Velocity Express. XPO has made 3 acquisitions in this space. Companies that have scale, low cost structures and good technology will gain in this growing sector.

14. De-Globalization is Shifting More Manufacturing Back to the United States

In an MIT survey, 34% of respondents stated that they are "considering" bringing manufacturing back to the U.S., while 15% of U.S. companies responded that they are "definitively" planning to re-shore. The major reasons given, in this order, were time to market (74%), cost reductions (64%), product quality (62%), more control (57%), hidden supply chain management costs (51%) and protect IP (49%). Cheaper energy costs and rapidly rising labour costs in China are also helping shift the pendulum. The authors stated that ‘We are in the middle of a transformation from a global manufacturing strategy, where the focus is on low cost countries, to [one] where China is for China, U.S. (or Mexico and Latin America) is for the Americas and Eastern Europe is for European markets.’

15. North American Economies will have a Good Year

While there is some anxiety on the stock market as we end 2014 and much concern in the boardrooms of energy producers in North America, consumers are enjoying and will continue to enjoy the benefits of low energy costs. This additional discretionary money will likely be put to use in buying other goods and services. Recent US economic data paints a picture of an economy in strong recovery mode. Consumer spending that typically represents two-thirds of GDP, is likely to receive a positive bounce from low energy prices. The New Year could be a good one for shippers and transportation companies.

Happy New Year to the readers of this blog. Your comments and critiques are always welcome. To stay up to date on the freight industry, please feel free to subscribe (at no charge) to my daily digital newspaper (http://paper.li/DanGoodwill/1342211466 ) and for information on Best Practices in Freight Management, join our group on LinkedIn (https://www.linkedin.com/groups?gid=4357309).

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