Ocean Transportation Woes Ripple Freight Supply Chains

Ocean Transportation is Affecting Your Freight Movements

Global supply chain challenges we still face in the wake of pandemic will only become worse as the latest global incident ripples across international and domestic transportation networks for months to come.

Before the Suez spectacle unfolded across the world’s media in March, the international freight-shipping environment faced a capacity crunch, high rates and slowdowns on the West Coast ports. Many companies have already been considering strategic changes to their supply chains, including their inventory management philosophy.

Now that traffic is moving again through the shortest route between Europe and Asia, let’s examine how this ocean transportation disruption unwinds for North American shippers moving freight in the months ahead.

Ocean Transportation Rates, Capacity in Q2

Rates have not contracted at all through the first of the year. Ocean shipping saw 12 consecutive general rate increases starting in June and ending in October. Rates have remained high ever since – even through the traditional drop in demand between the end of peak season and the Chinese New Year.

Much of this is due to an ongoing capacity crunch. The logistics funnel is feeling the impact of domestic challenges for rail and extremely high demand on drayage, especially for the West Coast ports. Conditions there improved slightly, but just as we saw light at the end of the tunnel with 18-20 vessels in line to unload container shipping halted in the Middle East.

Now the port problems extend to the East Coast. Shippers will struggle to find bookings for April and May arrivals, especially as retail based BCOs (beneficial cargo owners) are claiming significant capacity through the canal into Houston.

In the immediate term, we could see upward pressure on ocean rates. Some have already reached “fall-out-of-the-chair” levels. Plus, with less available capacity on the ocean side, there is a big demand on air freight for shippers and importers that cannot wait on a delay. That will drive a spike in air freight rates in the near term, illustrated by an uptick of $3 per kilo over the past few weeks.

Capacity Challenges Beyond Shipping Containers

Not all of the capacity problems are about containers shipping on the water.

It will take weeks if not months for ships slowed in the Suez to arrive at destination. The larger problem: all those vessels are already booked into peak season. If one vessel is caught up in the Suez or the West Coast situations, and they are put three weeks behind, that trickles down into the rest of the sailings.

To be clear, I am still bullish on the ocean transportation market. Ocean carriers are making record returns on high rates. But we should all know, vessel operators do not like the operational challenges any more than the BCOs. The next 10 weeks are critical in bringing the industry in order prior to peak ocean shipping season in 2021.

Some predict there is a two-month window where the industry can catch up with itself. That prediction assumes nothing else happens before late summer. As we have learned in the past 18 months, there are few assurances as far as once-in-a-career calamities are concerned.

International Trade Compliance is Still on the Radar

U.S. Customs and Border Protection (CBP) is very active right now and operating in a revenue-generating mindset. Trade enforcement officers are proactively examining the ACE Portal. They are trying to find situations where a shipper is manipulating the Harmonized Tariff System to limit the impact of tariffs and duties.

Meanwhile, there does not appear to be any immediate movement on trade relations with China, or with China 301. Your compliance protocols require the ongoing scrutiny applied during the previous federal administration.

With the extraordinary amount of activity coming through the ports, CBP faces similar capacity challenges to BCOs, vessel operators and port operators. The difference: trade enforcement officers have technology to help which is always powerful.

Adapting to Disruption in Ocean Transportation

Problems in the Suez Canal add another big supply chain disruption on top of the COVID-19 whiplash, which is still causing massive challenges. Of course, supply chain disruptions come in different categories. COVID was a one-time event. In some ways, the Suez was, too.

When multiple “one-time events” come in quick succession, however, many companies begin thinking about their broader supply chain strategy. One glaring learning from the pandemic: an over-dependence on the import supply chain, particularly with China, have become unbearably problematic.

Import volatility has pulled inventory management into the spotlight. International just-in-time planning for inbound materials became part of a very leaned-out supply chain for many companies. Some of those organizations are reassessing their inventory approach, realizing you cannot sell it if you do not have it.

Erring on the side of caution, moving an organization from just-in-time inventory to a just-in-case buffer inventory brings its own challenges. Our warehousing partners are not only at capacity but also reluctant to acquire more space. They fear the next disruption around the corner – or the ever-growing area that is e-commerce.

We are still feeling that bubble. COVID caused us all to start shopping online. Now that health risks are receding, convenience and consumer habits will only build the e-commerce retail channel that grew 32.4 percent last year compared to 2019.

That presents a puzzle of balancing inventory build to limit cost and operational needs against the prospects of e-commerce growth and developing the volume of inventory required to service digital sales needs. The last thing you want is a customer visiting your site only to find you are out of stock. Two clicks to your competitor is simply too close for comfort.

Mitigate the Risk of Ocean Transportation

In the long-term, costs rule most transportation planning strategies. The past 18 months have taught us that other factors need to be in focus as well. That is why Transportation Insight initiates broader supply chain conversations with our customers. Controlling cost while effectively managing the movement of your freight across your end-to-end supply chain relies on numerous factors.

We take the larger picture into consideration. We help shippers evaluate the transportation environment and determine the right go-forward strategy that controls cost and protects service. That may mean analyzing options for re-shoring or near-shoring. It may also mean leveraging deep data analysis to help you identify the inventories of materials or finished goods that are most critical to the success and growth of your organization.

And with the uncertainty of e-commerce, we focus on providing hybrid-digital solutions that evolve alongside your business to meet your needs as they change.

For a deeper dive into transportation management for the months ahead, register for our Q2 Transportation Trends webinar. It features forecasts and analysis from our multi-modal experts in truckload, less-than-load, small parcel and international ocean transportation.

Freight Capacity Shortages and Service Challenges Persist

Freight Capacity Shortages and Service Challenges Persist

The Logistics Manager’s Index (LMI) showed a December 2020 logistics growth rate of 66.7, or about 12.7 points ahead of the 2019 rate. While a small drop from November’s 70.8, this may be more of a breather than a shift. The decline in growth rates are reflected in slight declines across all of the metrics of the LMI (except for the two freight capacity metrics which have increased).

Consumers show no signs of halting online shopping activity. In addition, the ramp-up of vaccine distribution, while it will hasten a return to some sort of normalcy, it will consume freight capacity. The upshot? Service challenges likely will remain at some level.

LTL Capacity Bears Weight of Freight Volume Growth

LTL carriers struggle to keep pace with demands for freight capacity on docks and trucks.

Nearly all – 87.9 percent – survey respondents to a JOC survey in September and October 2020 indicated that longer transit times were a challenge. In addition, 47.2 percent experienced increased shipment loss or damages, and two-thirds had labor shortages.

The sustained growth in shipments across the logistics industry during 2020 contributed to these numbers. Tonnage in the LTL sector in November 2020 showed a 6 percent year-over-year increase in growth, according to the Cass Freight Index.

A few regions were especially hard hit. The Port of Los Angeles processed 889,748 twenty-foot equivalent units (TEUs) in November 2020, up 22 percent from a year earlier. During the same time, at least one carrier suspended financial guarantees for time-critical services in California and Portland, Oregon due to spiking COVID-19 cases among its drivers.

The increases in shipment volume also meant many distribution centers were taking longer to accept shipments. That led to backups with carriers. Detention and storage charges, formerly unheard of in the LTL market, have become more common.

Consolidation in the market continues among both larger and regional companies. Among these moves, Cross Country Freight Solutions announced in January the acquisition of Midwestern LTL carriers, Price Truck Lines and Mergenthaler Transportation. In September 2020, Forward Air Corporation, an asset-light freight and logistics company, announced its acquisition of the assets of CLW Delivery, Inc., a privately-held, final-mile provider with annual revenues of about $20 million.

Because capacity constraints show little sign of easing, service challenges likely will continue into early 2021. Expect corresponding impacts on rates in 2021

LTL Solidifies Residential Deliveries, Moves Toward Digitization

Many LTL carriers focused on effectively handling residential deliveries are exploring new methods, such as purchasing smaller trucks that can maneuver in neighborhoods and urban areas.

The LTL sector is steadily digitizing, with the formation in November 2020 of the Digital LTL Council, comprised of 20-plus transportation companies. Its goal is to establish a set of uniform standards that support the scalable automation and digitalization of LTL shipments.

Over the past year, some council members experimented with standards for electronic bill of lading (eBOL) solutions. Carriers that digitize could save up to 1.3 percent of costs. Digitization should also cut errors and allow all parties to quickly locate freight in transit.

Given ongoing tightness in the LTL market, carriers likely will be selective about the shippers with whom they partner. Shippers can make it easier for carriers by improving facilities where needed and facilitating efficient drop-offs and pickups.

Truckload Freight: Volume Up, Service Down

Truckload shippers face cost and service challenges as high volumes exceed capacity already limited by the number of trucks on the road.

As in the LTL market, the truckload (TL) market is experiencing both sustained growth and service challenges. The American Trucking Association’s For-Hire Truck Tonnage Index rose by 3.7 percent in November, driven in part by robust e-commerce orders and strong single-family housing starts. At the same time, languishing restaurant, manufacturing and energy sectors remained a drag, the ATA noted.

Data from DAT Freight & Analytics shows another bifurcation in the truckload market. Dry van contract volumes were down 10 percent year-over-year, while spot market volumes were up 107 percent. Similarly, refrigerated contract volumes were down 21 percent, while spot market volumes had spiked 116 percent.

About 41 percent of carriers responding to the 22nd COVID-19 survey by Morgan Stanley, published in December 2020, indicated COVID-19 has hampered their ability to operate smoothly. The driver shortage was the most commonly cited reason, with varying emergency restrictions coming in second.

Freight Capacity Constraints Drive Up Truckload Rates

Given ongoing capacity constraints, the truckload market likely will see rates continue to increase for at least the first half of 2021. Transportation Insight expects contract rates to increase 3-5 percent, and spot rates to rise by about 5-7 percent.

However, some good news appears further out on the horizon. A smaller percentage of carriers responding to the Morgan Stanley COVID-19 survey – 36 percent versus the previous 39 percent – indicated the impact of COVID-19 would remain negative a year out.

In addition, truck sales are up nearly 197 percent year-over-year. As these come online, they will boost capacity, helping moderate the upward pressure on rates.

Several unknowns could affect the truckload market. They include the potential for another wave of shutdowns. Transportation has been considered an essential business, which should mitigate any impact.

Potential changes from the new presidential administration, as well as from newly elected state and local officials, are additional unknowns. However, as of early January, no proposed regulations that would significantly impact the truckload market appeared on the horizon.

Challenges to Truckload Digitization

Many shippers in the truckload space are interested in digitization, including electronic bills of lading, which would cut the time required to load trucks and reduce exposure to illness. However, given the thousands of carriers across the country, ranging from national enterprises to operations with a handful of trucks, this shift likely would occur incrementally.

Even as the volatility of 2020 abates, most carriers will continue to focus on contractual rather than spot pricing as a way of gaining further stability.

Shippers of Choice

In both the truckload and LTL markets, capacity constraints appear likely to continue.

Shippers who continually switch carriers to improve service may find their efforts fruitless.

Instead, by taking steps internally to remain shippers of choice and working with logistics providers like Transportation Insight to address challenges, you can mitigate rate increases and strengthen the service your receive and your access to capacity.

Download our First Quarter ChainLink 2021 for more forecasts and cost impact analysis from our freight capacity experts. Read this quarterly industry forecast for a multi-modal look at the trends that will affect your business in the months ahead.

Strategic Supply Chain Planning 2021 | Beyond COVID

Companies are looking at diversifying their supply sources. Whether this means on-shoring, near-shoring or simply adding alternative regions to the existing base. This is not a quick proposition. Suppliers have to be located, certified and tested. Order patterns have to be established and inventory policies implemented. All of this takes data, analysts and time. Perhaps the most difficult part, managing change in your supply chain planning.

Whether you are a manufacturer, distributor or retailer you have to be able to support more direct consumer channels than you may have traditionally. This will involve better collaboration, inventory management and alternative fulfillment and transportation options. Again, this requires data, analysts and change management.

The companies that will lead the pack are the ones that recognize the permanency of the COVID changes on the horizon and establish long-term supply chain strategies to mitigate risk and guarantee products and service to the end customer.

Planning for Supply Chain Flex is Paramount

An exponential boom in e-commerce sales rapidly created significant congestion for last mile deliveries. The effect spilled across the entire supply chain. At distribution and fulfillment centers some shippers saw their small packages go unshipped due to volume caps implemented by parcel carriers. Elsewhere, LTL carriers facing heightened shipment volumes at their terminals delivered fluctuating service levels.

As a result, many companies examined how they complete final deliveries to their clients, a process that retail giants like Amazon have nearly mastered. More and more companies are shifting toward expedited service from either existing brick-and-mortar facilities or an adjusted network of distribution centers. Smaller, urban fulfillment centers added in certain areas can help skirt site-specific volume limits. More options make you less susceptible to geography-based capacity constraints.

But you must understand how those changes in network design affect cost and service performance. 

Through its ability to evolve a massive local network, Amazon proved to be among the most reliable carriers during the disruptions of 2020. Not everyone has the deep pockets to establish an Amazon-like network with large distribution centers and cross-dock strategies. 

However, you can determine where you can compete with that sprawling service network – and where you cannot. SKU rationalization, margin analysis of different channels and overall network design analysis can help businesses of any size understand where growth is occurring and where it is not. From there you can align your supply chain planning based on the demand patterns your business is experiencing.

Look Upstream to Determine Opportunity

With everything happening in the supply chain environment, it is important to get outside of your business and examine your network upstream to your suppliers. This provides insight in several important areas. 

Over the past 20 years companies have worked to reduce and remove inventory where possible, achieving the absolute least cost in the process. Today, you must balance inventory, determine which inventory is right, and even decide the right customers to serve. Understanding your processes, as well as those of your partners is integral to transportation cost management.

When your retail partner asks you to drop ship product to their customers, can you segment your inventory into the different physical channels to both serve those individual orders and continue filling regular store-level inventory needs?

How should your inventory model change as you move toward insourcing or reshoring? With longer lead times and growing landed costs emerging from foreign vendors, local suppliers allow you to manage a smaller inventory or direct ship to customers and, ultimately lower overall cost. Do you have the contingencies in place across your network of vendor partners to deploy local or regional sourcing in the event of ongoing disruption in Asia?

By stepping outside your own walls and understanding processes upstream and downstream – as well as their alternatives – you become a stronger partner, especially if you can offer your suppliers visibility into your own demand. Ultimately, that level of collaboration helps your partners plan better, improving efficiency and service to you in the process.

By helping customers understand their total value stream and deploying a lean-minded supply chain strategy consultation, we help them visualize how changes to their network can improve cost and service across their transportation environment.

Capacity for Change can Limit Improvement

Achieving flexibility in your supply chain requires both an ability to recognize when processes are not performing and a willingness to apply change. If you don’t change, nothing changes, and it became especially clear in 2020 that a lot of companies don’t know how to implement that change. 

Leadership has to want to change and improve, and it is important to understand that if you are not constantly problem-solving then you are going backwards. Smaller companies understand this especially well, but larger companies are often separated into silos and metrics conflict with day-to-day activity.

Are you willing to let your partners save you from yourself? If leadership is not willing to accept analysis and insight that supports change, then activity rarely changes until crisis occurs. And when that crisis occurs, without analysis to support process improvement, you may not be able to determine the right practices to change.

Performing that analysis is no easy task. A lot of smaller companies don’t have the skillsets or capacity to complete that data-driven look. Likewise, medium and large companies may dedicate people to monitor performance in different supply chain areas. They may not have the groups of people capable of not only understanding how to complete the analysis, but also problem solve. 

That is where Transportation Insight helps. We not only have the capacity to complete analysis of SKU-level performance, network design and alternative, contingency supply chain strategies. Importantly, we also teach your teams how problem solve, a skill that you can then pass along to others in the organization.   

Once we deploy a problem-solving mindset alongside analysis of your supply chain data, we can create a map of the transportation activities across your network and determine options for alleviating problem points that drive up your cost. By pairing those continuous improvement efforts with renewed network flexibility that eliminates the risk of disruption, Transportation Insight positions you for improved cost control and enhanced opportunities for growth. 

For more insight that will help support your supply chain strategy in 2021, download our latest industry forecast. Read the First Quarter ChainLink 2021 for a multi-modal look at the transportation trends that will affect your business in the year ahead.

International Shipping Rates Challenge: New Year, Same Capacity Challenges

In the international shipping marketplace, that translates to equipment availability issues, ongoing capacity pressure and motivation for the major shipping alliances to maintain record-high rates.

Although the Chinese New Year February 11-26 offers promise of a breather for vessel, port and intermodal operations, events of 2020 created enough congestion and imbalance that volatility will continue to affect supply chains reliant on international transportation.

Let’s explore factors that will affect price, capacity and service in the first half of 2021 and continue to contribute to international shipping rates challenges.

No International Shipping Relief in Sight

Signs of a unique year are already emerging. Freight capacity demands are at levels unlike we’ve ever experienced for this season. Bookings are at capacity through January and into February.

As a result, international shipping rates are not going down any time soon. Since the 3 major shipping alliances control about 85 percent of international shipping capacity, operators leverage their power more than in the past. A General Rate Increase has not been announced since September, but we are not seeing the typical drop in costs that normally accompanies a loosening of capacity that follows peak season. That will keep rates elevated.

Additional loaders are being deployed to keep up with demand. Some of those come online to send empty containers back to Asia. There, ports wait for a hundreds of thousands of containers to move slowly back into the flow from the congested U.S. West Coast.

Optimism is high that the Chinese New Year will afford two weeks of breathing room for the international shipping industry to catch up. Unfortunately, 16 days will not likely be enough time to alleviate several months’ worth of challenges that continue to affect services and cost across your end-to-end network.

Ripples Across Transportation Spend Clogs International and Domestic Supply Chain

The ripple of demand, capacity and equipment availability is felt across all transportation modes. Congestion on the rail stalls movement of freight. Full inbound containers detained by the rail are being stored off-site, requiring additional moves. When there is disruption to intermodal, expect it to occur across truckload and LTL and pressure cost management and service times as a result.

In this environment, global distribution of COVID-19 vaccine creates additional demand spikes, especially for the Air Freight mode that will fill a key role in the transportation of temperature sensitive materials. Likewise, expect to see impact across other domestic modes as medical supplies are prioritized, and, in the process, pushing transportation pricing up and capacity down.

On the trade compliance front, a new administration in Washington, D.C., has promised to bring regulation changes that will likely develop more slowly. Efforts to rollback tariffs, like China 301, get a lot of attention, and while the policy changes of a new president may not move quickly, expect some ripple in the complex rules for importing and exporting goods into the United States.

Consumer Behaviors Drive “Forever Peak” with Overseas Shipping

Problems challenging the international supply chain emanate from ongoing shifts in consumer behavior. E-commerce continues to fill buying voids left open by vacations and visits to the mall. Disposable income drives the online purchase of goods and the volume of consumable goods moving through transportation networks is creating an extended peak season across all modes.

Buyers are quickly becoming accustomed to the immediate purchase satisfaction that comes from an online order, and that is not ever going to revert. Raw material, component and finished good sourcing strategies as well as inventory management practices become increasingly complicated when buyers know they can take their cart elsewhere if you do not have the desired quantity available to fill their online order.

To make sure you protect that experience and secure every sale, it is critical to understand how every piece of the end-to-end supply chain puzzle – from foreign production site and overseas shipping, to trade compliance, domestic transportation and last mile delivery – fits together into a total landed cost of goods.

An expert partner can help you assemble the big picture perspective so you can control your international and domestic spend and turn your focus toward achieving strategic goals for your business.

For more insight on multi-modal transportation trends that will affect your cost and service in 2021, download our Q1 Industry Forecast. It features a look at things to come for shippers relying on Truckload, LTL and Parcel transportation, as well as our international transportation forecasts.

Holiday Shipping: Will Your Parcels be Picked Up and Delivered on Time?

Days after “Black Friday” UPS put holiday shipping restrictions on Nike and Gap and directed drivers to stop Cyber Monday pick-ups at other large retailers that are already exceeding parcel volume forecasts through booming online sales.  

In a year marked by a pandemic-driven shift in consumer buying habits that has driven consecutive quarters of record e-commerce growth, parcel networks have been at or near capacity for months. An unprecedented holiday peak has been on the radar, but as expected, early promotions and efforts to bring parcel volume forward could never be enough.

And in the midst of a monumental peak period, the parcel carriers continue to adjust their strategy to not only drive revenue growth in high demand e-commerce service areas, but also protect volume and achieve competitive advantage as Amazon’s delivery networks continue to evolve. 

Let’s look at some of the latest developments in the parcel shipping environment. They may affect your ability to delight customers this holiday season.

E-Commerce Bloats Holiday Shipping Volume Beyond Capacity

Demand for the 2020 holiday peak shipping season is forecast to exceed 86 million packages a day – about 7 million packages outside current parcel network capacity. These estimates are validated by the National Retail Federation’s estimate that online shopping increased 44 percent during a five-day stretch that included Black Friday and Cyber Monday. 

Both UPS and FedEx prepared retail shippers for tight holiday shipping capacity, issuing advice for holiday shippers and encouraging clients to “shop earlier than ever with special offers or other incentives.” Yet, before December even dawned, both carriers were enforcing volume agreements and applying peak season charges and accessorial fees that create additional order fulfillment cost for shippers. 

In this environment it is critical that you have real-time understanding of your parcel shipping activity. While volume outside agreed-upon levels or historical averages may result in added cost during other parts of the year (as it did with COVID peak surcharges), packages exceeding a shipper’s determined space simply will not be served – at least until additional capacity becomes available.

Shipping Delays: Expect, Forewarn and Facilitate

Based on the recent trends observed, the average package delay rate during the 2020 holiday season may range between 14 percent and 18 percent. Consumers in densely populated cities can expect delays as high as 25 percent to 30 percent. 

Unless you create an expectation of delayed delivery, this can be a real problem for customer experience. Proactive communication with your customers about anticipated delays is one of the most important steps in preserving holiday shipping experience.  Use your website and email communications to help set expectations. 

That said, as consumers’ expectations on speed evolve, we are seeing an increased willingness to wait for a delivery, especially if it means free shipping. According to BoxPoll, more than half of consumers opting for free shipping (57 percent) considered five-day delivery to be “fast” – that’s up 8 percentage points compared to last year. One-third of respondents in the weekly survey said that seven-day delivery is “acceptable” at minimum.

Retailers are positioned to capitalize when they maintain awareness of shipping characteristics, alternative service models and, of course, their customers’ expectations. A “no-rush” option is a familiar part of the Amazon order process, and now other brands are following suit, even offering incentives for delayed or “slow service.” If a consumer considers five-day service “fast,” are you driving up cost by offering more service then they need?

FedEx Counters Amazon’s E-Commerce and Logistics Buildout

The FedEx acquisition of ShopRunner complements the actions that we have seen FedEx taking to remain relevant in e-commerce as Amazon continues to strengthen its logistics and fulfillment capabilities.  

The move reinforces the FedEx position as the anti-Amazon solution for companies seeking an Amazon alternative. Some of the carrier’s other recent activity following the same strategy includes:

  • Acquisition of GENCO to form the basis of Fulfillment by FedEx
  • Moving to a seven-day-a-week delivery schedule
  • Severing ties with Amazon for delivery to focus on other e-commerce volume
  • Pulling SmartPost deliveries into the Home Delivery network to bolster density and profitability.

With the global parcel market positioned to more than double by 2026, fueled by e-commerce growth and further accelerated by COVID-19, both FedEx and UPS will need to continue adding value to retailers’ unichannel solutions to keep volume when Amazon opens their delivery network to third party shipments. Amazon suspended its delivery service earlier this year due to the pandemic, but it is expected to reopen in the near future.

Of course, the parcel carriers are among an ever-growing contingent of organizations devising new strategies to compete with Amazon. Just in time for the holidays, WalMart is dropping the $35 minimum on free shipping for e-commerce purchases of electronics, toys and clothing made for participants in its WalMart+ membership program. The move – and the program – are both designed to compete with Amazon Prime.

Are You Positioned to Compete?

Make sure your holiday shipping success is not eclipsed by transportation costs.

Can you quickly determine how your parcel shipping volume falls within your capacity agreement with your carriers? Do you know how quickly your customers are getting their orders – and whether you are meeting your delivery commitments? Can you determine which SKUs are making money – and which are not?

Ongoing awareness of evolving trends in the parcel environment – from service disruptions to capacity shortages – is integral to your ability to pivot your small package shipping strategy. 

Understanding how those trends affect your transportation cost and service to end customers requires expert analysis and actionable intelligence. The latest enhancements to our technology platform puts the power of that information at your fingertips with best-in-class visualization of data gathered across your entire supply chain.

Schedule a demonstration today to see how our clients are able to identify business trends, understand the impact of cost and service on working capital, and recognize ongoing performance improvement opportunities.

Transportation Costs in 2021: Less-Than-Truckload

Transportation costs are volatile for less-than-truckload shipments as capacity constraints persist.

Carriers are reacting to market changes in other ways beyond transportation costs, as well. One example: early in 2020, one national carrier indicated it would match any volume LTL quote from another carrier. Six weeks later, that carrier wasn’t accepting any volume shipments due to the dramatic shift in the market.

Carriers also have grown more comfortable implementing LTL surcharges that further drive up transportation costs. Some are turning away freight that is more difficult to handle.

The LTL transactional market is seeing tight capacity and generally widespread delays, including with premium carriers. Driving this is a 10-12 percent growth in demand, several times the typical range. 

Capacity constraints in the LTL markets may seem out of step with some of the economic news, which continues to reflect the pandemic toll on many businesses. The September 2020 unemployment rate (7.9 percent) was more than double the rate a year earlier. And while the gross domestic product jumped by $1.64 trillion in the third quarter of 2020, that followed a drop of $2.04 trillion in the second quarter.

One reason for the disconnect is the drop in the consumption of services, which dwarfs the drop in the consumption of goods. Between the first and second quarters, consumption of services dropped 13.3 percent, according to the American Trucking Association. The consumption of goods dropped by a more modest 2.8 percent, also according to the ATA. 

Looking at LTL Transportation in 2021

Even as the economy slowly recovers, demand for goods likely will outpace demand for services, the ATA predicts. Until a vaccine has been broadly distributed and COVID cases drop drastically, consumers appear comfortable continuing to spend more time at home. As they do, newly formed online shopping habits probably will continue. Online purchases of furniture and appliances, apparel, and groceries, among other items, are likely to remain at least 10 percent higher post-pandemic, consulting firm McKinsey found. 

This shift is contributing to expected ongoing capacity tightness. In turn, that likely will contribute to a favorable carrier’s market next year. The rate increases some carriers are imposing in high-capacity lanes likely will continue into 2021, until capacity corrects itself.

The level of those rate increase can vary. LTL carriers develop market-specific rate bases so the impact of increases passed along in 2021 can be influenced by carriers’ operating needs and your shipping characteristics. 

Carrier mergers also appear poised to continue. Most take one of several approaches. Some companies join forces to pool resources and become more efficient. Others bring together companies in different sectors, allowing all to expand their range of services.

Shippers of bulky, low-density, non-dock-to-dock freight, along with shippers of over-dimensional freight that parcel carriers are trying to price out of the parcel network, may face additional obstacles. Some LTL carriers are trying to push these freight types to the truckload market and are raising rates accordingly. 

Surcharges appear likely to remain and even increase. If some states, as predicted, add taxes, other LTL surcharges may appear. 

Prior to the pandemic, some LTL carriers began investing in box trucks so they could more easily handle residential e-commerce deliveries. These efforts have slowed during the pandemic and capacity crunch. However, once demand and capacity rebalance, expect to see LTL carriers make another move into this market. 

Managing Transportation Costs Through Capacity Constraints

While shifting from one carrier to another might seem like a way to improve service and transportation cost, jumping may not help. In fact, it’s possible service will further decline. 

Several other steps tend to be more effective. One is to take a longer-term perspective, work with a carrier, and establish a partnership that benefits all involved. Another is to build lead time into processes and set realistic expectations with end customers. 

For more insight on the motor freight environment we expect to emerge in 2021, watch our webinar focused on Brokerage and Capacity Planning 2021. We take a deeper dive into the outlook for LTL, Truckload and International transportation in our Freight Rate Outlook 2021. Read it today for multi-modal rate forecasts and analysis from our Supply Chain Masters.

Freight Rates: 2021 Truckload Outlook

Even within the past six months, many freight rates have spiked. For instance, in May, national dry van rates averaged $1.60. By October, they had shot up to $2.42 – a jump of more than 50 percent in five months. Similarly, flatbed rates rose from an average of $1.90 in May to $2.46 by October. So, while many rates appear to be holding steady, they’re doing so at high levels. 

In addition, aside from a potential increase in demand for vans leading into the holidays, the typical seasonality in demand and rates appears to have taken a hiatus. Instead, pockets of higher demand are driving rates even higher in some areas, such as the Pacific Northwest and southern California. 

Demand for flatbed trucks remains strong across the country. Demand for refrigerated truckloads is loosening but remains high in the Pacific Northwest and the Midwest. 

Driving the Freight Rates Market

One reason for the rate increases is a drop in capacity. While overall shipping tonnage is down, the number of available drivers is as well. Many smaller trucking shops may have left the market, driven out by a challenging mix of COVID-19 and rising insurance premiums, some resulting from high jury verdicts awarded in the aftermath of accidents. And mid-sized carriers have been reluctant to add equipment and drivers in this turbulent time.

In some cases, drivers face prohibitions stemming from violations logged in the Federal Motor Carrier Safety Administration’s (FMCSA) Drug and Alcohol Clearinghouse. While the shipping and carrier community support safety in trucking, this does represent a significant decrease in available drivers. According to the American Trucking Associations (ATA) as of Oct. 1, As of Oct. 1, more than 34,000 drivers were prohibited from getting back on the road because they had registered a violation. Of those, close to 27,000 had not started the process required before returning to their jobs. 

In total, about 74,000 transportation industry jobs have been lost or furloughed, or about 5 percent of the base, between late 2019 and late 2020.

Moving Into 2021

It might appear that the rise in Class 8 truck sales would offset the drop in drivers. According to J.D. Power’s October 2020 Commercial Truck Guidelines Industry Review, sales of the three most common sleeper tractors – those three to seven years old – has been generally rising throughout 2020, and then spiked in July. However, new truck sales equipment may not be available until mid- to late-2021. Moreover, many of these sales are for replacement equipment, rather than expansion. As a result, they are unlikely to add significantly to capacity. 

The conclusion of the presidential and other elections, assuming they occur in a relatively straightforward manner, may spark consumer confidence. In turn, that might drive shipping volumes – a generally positive outcome, but one that may further constrain capacity.

The disruption in the small package market may mean some of those shipments move to the LTL market, and a percentage of those then head to the truckload market. Similarly, ongoing challenges and chaos in the international and intermodal market may lead to more shipments moving to truckload. All of these will, of course, further constrain capacity.

In light of the factors affecting the truckload market, Transportation Insight (TI) forecasts freight rates increase of 3-5 percent for our clients that contract with carriers. Rate increases in the spot market likely will be 5-7 percent. 

In working on behalf of our clients to negotiate rates, we take a lane-by-lane and market-by-market approach. This targets those carriers whose rates appear out of alignment with the market, focused on our goal of leveraging relationships to help bring them into alignment. Shippers gain some protection from the overall increases that might not be available without those relationships.

More Truckload Change Coming

A couple of changes in the truckload sector may have a positive impact on shipments. One is the shift from some national carriers growing their regional presence to rejuvenating their long-haul network. Regional focus is an attempt to entice drivers with more time at home, but with specific market disruptions caused by COVID-19, some carriers are looking to diversify their lane mix. The flipside: this could pull additional congestion off the rail to feed these long haul fleets and add pressure to over-the-road capacity.

Another shift is the increasing use of data, such as score-carding and monitoring, by both carriers and shippers. Early in this shift to monitoring and managing, some carriers worried that data would replace the relationships they cultivated with their customers. 

The opposite appears to be occurring. The data tends to allow for more dialogue and planning, helping to strengthen relationships. In addition, it allows quality carriers to quantitatively demonstrate they can provide the reliability and service shippers require. 

Navigating a Changed Market

In the current truckload market, shippers that have taken steps to become shippers of choice tend to benefit with greater commitment by the carriers with whom they partner. This can mean, for instance, shippers provide longer lead-times and some flexibility on pickup times. Both enable carriers to schedule their routes more efficiently.

It also helps to keep in mind that the rate increases happening now will not last forever. The truckload market tends to self-correct; as freight rates increase, more drivers enter the field and supply and demand start to balance out. In the meantime, however, it helps to expect some volatility to continue. 

To help you navigate that volatility across all transportation modes in your supply chain, we created the Rate Outlook 2021. It provides a forecast for transportation rates in Parcel, LTL and International, as well as truckload. Read it today for information that will help you mitigate risk and control cost across your network. Watch the webinar with our freight rate experts for more guidance on brokerage and carrier capacity planning in 2021.

How will NMFC Classification Changes Affect Your Cost?

The National Motor Freight Traffic Association considers quarterly updates to NMFC Classification.

The NMFC classification, according to the National Motor Freight Traffic Association, is a way of grouping different commodities that move in interstate, intrastate, and foreign commerce. The commodities are grouped into one of 18 classes, ranging from class 50 to class 500, based on four characteristics that determine how easily different commodities can be transported, or their “transportability.” Generally, products with a lower the class are denser and easier to ship. That translates to a lower freight rate. 

Each quarter, the National Motor Freight Transportation Association, which is made up of motor carriers, considers updates to the NMFC. The proposed changes then are voted on by the members of the Commodity Classification Standards Boards. The CCSB is made up of employees of the National Motor Freight Traffic Association. 

It is important to understand how the latest round of changes affect your freight. Doing so allows you to make adjustments and leverage these changes to your benefit to improve your transportation cost control.

NMFC Classifications

NMFC classifies commodities for transportation based on four characteristics: stowability, liability, handling and density.

Stowability: This considers how easily items will fit and/or can be transported with other items on a truck. For instance, hazardous materials generally cannot be transported with non-hazardous materials, making them less “stowable.” The same tends to hold true for items of unusual or oversized shapes. The lower the stowability of an item, generally, the higher its class and cost to ship.

Liability: This covers the likelihood a product may be stolen or damaged, or damage the freight around it while in transit. It also takes into account whether a product is perishable. The more a product faces these risks, generally, the greater the liability to the carrier, and the higher its class and cost.

Ease of HandlingThis covers multiple characteristics that affect how easily products can be loaded or unloaded, including their size, weight and fragility.

Density: As you might guess, this is calculated by measuring an item’s weight and dimensions. The higher the density, the lower the NMFC class and thus, the cost. While this may initially seem counter-intuitive, the calculation recognizes that denser items take up less room than less-dense items, when compared to their weight. That leaves more room on the truck for other shipments.

Updates to the NMFC Classification

In general, the changes this quarter take the density of shipments into account to a greater degree than they previously did. For instance, gloves and mittens, along with sealing and masking tape, are shifting from a single class to a density-based classification. This is similar to other NMFC classification changes that have occurred recently. 

This quarter, the changes cover about 20 NMFC Groups:  

  • Automobile parts
  • Building materials, miscellaneous
  • Building metalworks
  • Building woodwork
  • Chemicals
  • Clothing
  • Drawing instruments, optical goods, or scientific instruments
  • Electrical equipment
  • Furniture
  • Games or toys
  • Hardware
  • Iron or Steel
  • Machinery
  • Paper articles
  • Plastic or rubber articles, other than expanded
  • Tools or parts named
  • Bases, flagpole or sign, concrete, with or without metal attachments
  • Compounds, industrial process water treating, o/t toxic or corrosive materials
  • Forms, concrete retaining, sign or lamp post base, taper-sided, sheet steel 

In addition to these changes, a rule change under Item 110 clarifies that “coin- or currency-operated” refers to items that accept debit or credit cards, or other forms of payment, as well as cash payments. 

Working with Transportation Insight to Stay Abreast of Changes 

When your product ships, you will want to make sure the correct NMFC code is visible on the bill of lading, so the carrier knows to use it. It also helps to describe the product being shipped to the extent possible. 

Every year hundreds of shippers master their supply chain leveraging Transportation Insight’s ability to monitor the industry trends that affect transportation costs. To ensure our clients are using updated codes, Transportation Insight proactively checks all products against the NMFC database to help you manage the changes and control your spend. Our freight bill audit and payment solution provides an additional layer of support that ensures alignment between your billing and invoiced classification.

Do you have questions about how the fourth quarter NMFC classification changes affect your products? Contact a member of our team for a consultation.

For more analysis on freight capacity planning strategy, watch our Capacity Masters Roundtable. It offers guidance from our truckload, LTL and brokerage experts that will help you understand – and control! – cost drivers in the year ahead. 

2021 Parcel Rates: 3 Areas for Attention

The average rate increase for primary services provided by UPS and FedEx mirrors that same familiar 4.9 percent increase that we have seen for many years. 

And just as we have seen for many years, the 2021 parcel rates increase announcements are just a visible layer in the carriers’ rate and service pricing structures. With multiple layers, the complex pricing and surcharge practices of UPS and FedEx can make it difficult to determine the true cost for your small package shipments. 

Beyond the average increase on standard services, it is also important to recognize that surcharges, accessorials, new fees and tweaks to the carriers’ terms and conditions could require you to budget a 2021 cost increase closer to 8.5 percent. Capacity pressures created by exponential e-commerce growth during the pandemic and uncertainty about mid-year or peak surcharges for 2021 creates an environment of unknowns.

You need to understand how your shipment characteristics align with carrier networks. If you are a large shipper with a great contract, be prepared to defend that as tight capacity drives renegotiation motives for UPS and FedEx. Your parcel partner can be a real asset during this time if they have the ability to analyze your historic performance and determine areas for future cost savings that do not jeopardize performance. 

Let’s explore three aspects of this year’s parcel rate increase that could drive new costs in your transportation budget. 

  • Expanded ZIP Codes for Delivery Area Surcharge 

More ZIP codes than ever before will be eligible for Delivery Area Surcharges (DAS) for both UPS and FedEx. Both carriers adjust the applicable ZIP codes every year, but the past two years have reflected significant changes. In 2021, these charges will apply to almost 38 percent of the United States.

The increase for UPS DAS areas will apply to almost 12.3 million people, while the FedEx changes will affect about 11 million people. Ultimately, that means you are facing an additional surcharge for more of your customers. 

This is a difficult adjustment to calculate on your own, but when that much of your customer-base is affected by new costs, deep analysis is required to determine how these changes will impact your budget in 2021.

We talked more about the changes around DAS during our recent parcel rates webinar. Watch the replay for more insight on the how and the why behind this move by the carriers. 

  • Additional Handling Charges for Large Parcels and More to Come

    If your packages measure over 105 inches in length and girth combined, you will be charged an Additional Handling Fee of $16. This dimension change on the fee targets packages that barely miss the Oversize criteria of 130 inches (L and W combined). It applies to packages that take up a lot of space on conveyor belts, but do not get charged high dimensional weight.  

    Parcel carriers are becoming increasingly selective about the packages that move through their automated networks. Large packages, in certain instances, can cause significant problems in an automated facility. Moving them often requires more work from human resources, a costly and time-consuming element. 

    Beyond this $16 charge, UPS is also implementing a new structure for additional handling and large package rates that will differ by zone. Those rates will be announced at a later date, April 11, 2021 for non-hundred-weight packages and July 11, 2021 for hundredweight packages. 

    For heavy retail customers that are not clothing-oriented, this change could create a significant impact. We work with clients to identify specific impacts and solutions to mitigate the added cost.
  • Lightweight 2021 Parcel Rates Face Steepest Increases

    It is important to understand that when the carriers have a rate increase, it is not a universal rate increase across all weights and zones. The average rate increase is 4.9 percent. The level of rate increase for your volume depends on your shipping characteristics. For many shippers a larger percentage of their packages qualify for minimum charges, especially larger shippers with more aggressive pricing. 

    This year, parcel shippers charged at the zone 2, 1-pound minimum will face a steeper increase – about 6.4 percent – than their counterparts in other weight and zone combinations. Likewise, UPS and FedEx rates match between 1 and 15 pounds, and for these lightweight shipments the increases are generally higher than those for heavier packages. 

This strategy of larger increases on lightweight packages is an abrupt change for UPS and FedEx. Two factors likely affect the decision:

  • Competition from Priority Mail: Last year (before COVID-19), FedEx and UPS were both concerned with competition from Priority Mail. Lightweight Priority Mail rates are significantly lower than UPS and FedEx Ground rates, especially to residential addresses. Heading into 2021 with the parcel industry at capacity, there is less concern on competitiveness and more emphasis on profitability.’
  • Profitability: Lightweight packages are typically less profitable for small package carriers than heavier weight packages. Carriers are likely to continue to increase lightweight packages at higher levels as long as there are capacity constraints. Regional carriers can offer an efficient alternative in some of your lightweight shipping scenarios. In light of capacity challenges and other disruptions during 2020, many of these operations have filled a niche and grown. These carriers can sometimes be easier to implement, and they don’t often bring the surcharges the national carriers apply.

    During our Parcel Rates Roundtable we share tips for leveraging regional carriers as part of your parcel program. Watch the webinar to make sure that type of move does not drive up cost with your national carrier due to your tier commitments.

Parcel Bills: Do Not Pay Late

Another area for attention: when its GRI takes effect Jan. 4, 2021, FedEx will begin applying a 6 percent late payment fee. UPS implemented this fee in 2004, and this gives FedEx customers cause to pay close attention to the payment terms in their contracts. 

Not paying your bills on time now becomes a more financially impactful decision, and these fees can add because they apply at the invoice level.

Master Your Parcel Plan, Minimize Rate Impact. 

Do you have your finger on the pulse of your parcel program so you can understand the true cost impact of the 2021 annual General Rate Increase across your end-to-end supply chain?

Questions to consider:

  • How do your contract terms and conditions address volume caps?
  • How will volume caps affect your actual rate increase, surcharges and other fees?
  • How does your customer base change now that more than 11 million people have been added to the DAS delivery charge?
  • How do you budget for these changes?

Open our Parcel Rate Outlook 2021 for our expert support in preparing a plan that carefully considers these questions – and all changes across the parcel environment. Leveraging deep parcel expertise, tools and technology, we’re able to provide rate impact analysis specific to your personal needs and design a business solution that controls cost and protects experience.

Get our Parcel Rate Outlook 2021 today and make sure your 2021 transportation budget considers the nuances lurking in the layers below the 4.9 percent average rate increase.

The Bullwhip Effect: Managing Swings in Demand

To define the “Bullwhip Effect” in supply chain management, it is a term describing a phenomenon that quickly turns otherwise accurate forecasts into outdated information, amplifying misinformation along the supply chain. The dust was brushed off this broad concept, and it returned to the shelves not long after COVID-19 began disrupting global supply chains.

“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

That’s exactly what happened when an abrupt change in customer demand plus factory shutdowns put companies in the tight spot of having to forecast demand in the middle of an unprecedented, worldwide pandemic.

With demand for certain items amplified, the tiniest crack of the bullwhip’s handle caused an uncontrolled, snapping motion at the tip of that whip.

Balancing Demand Effects and Inventory Management

“When major swings in inventory occur from panic buying and hoarding, the impact of this sudden demand is magnified as it moves upstream in the supply chain (similar to the way a bullwhip’s thong amplifies in a wave as it moves away from the handle),” Jenny Reese explains in “Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” The customer feels the anxiety of empty aisles, the retailer loses sales, and customer service suffers. “Distributors are left scrambling to determine who should get how much of a given product in a shortage,” Reese continues, “and manufacturers are overwhelmed with sudden, unanticipated spikes in demand.”

With little or no visibility into demand patterns to lean on, many companies wind up flying blind and hoping for the best.

How Does the Bullwhip Effect Work?

Without accurate, accessible, and strong communication across the various partners in the supply chain, the bullwhip effect in supply chains can disrupt any business environment. In a supply chain made up of a factory, a distributor/wholesaler, retailer, and end customer, for example, the retailer and customer tend to be closely aligned. For instance, a customer places an order and a retailer reacts accordingly.

Continue further up that supply chain, however, and that alignment begins to diminish.

Manufacturers don’t always align their forecasts with retailers’ own projections and distributors are, frequently, caught in the middle of two entities that have zero communication with one another.

These gaps widen during events like COVID-19, with even a small variance creating a Bullwhip Effect. In fact, Jay Forrester, who first conceptualized the Bullwhip Effect in these terms, says that even a 10 percent change at either end of the supply chain can result in a 40 percent fluctuation in the middle. That’s when the wheels fall off the cart; all players in the supply chain make quick adjustments to compensate for the problem.

Why Should You Care?

Virtually every organization must address or, at least be aware of, the Bullwhip Effect. Without up-to-date and wide supply chain communication, companies risk having it adversely impact their operations and their customers. Since no organization is an island, even the most vertically-integrated companies should know the signs of the Bullwhip Effect and how to deal with it effectively.

It’s easy to recognize the Bullwhip Effect in retrospect, as customers are cancelling or returning orders that they were clamoring to buy because they bought too much, overestimating their need. In order to meet perceived demands, erratic production, excessive inventory and depletion of resources highlight this effect. During COVID 19, suppliers most at-risk from the Bullwhip Effect included makers and distributors of PPE, hand sanitizer, toilet paper, and other hard-to-find items.

As a Supply chain professional you’ve been exposed to the Bullwhip Effect. The costly consequences materialize quickly and immediately erode your profitability.

Are you able to make informed decisions based on real time data?

Transportation Insight allows your business to make evidence-based decisions. We amass data about your supply chain to give you a comprehensive understanding of your logistics network. Our expertise and tools enable contingency planning through “what if scenarios” that address the Bullwhip Effect before it impacts your bottom line. Transportation Insight monitors multiple key performance indicators that measure your business activity and reveal threats and opportunities to drive continuous optimization of your supply chain.

Tame the Bullwhip: Manage the Demand Waves

We offer more context around the Bullwhip Effect in our Supply Chain Masters Digital Event. Watch the webinar today and learn how you can manage demand fluctuations with a responsive supply chain management system:

  • Best practices for collecting, retaining and analyzing supply chain data.
  • Processes that encourage scalability and readinesss for decline, recovery and even growth.

Learn the supply chain strategies that minimize risk and protect your profitability today and tomorrow.