Transportation rates forecast for Q3 2021

Transportation Rates Forecast: Q3 2021

Transportation rates forecast for Q3 of 2021

With capacity constraints at the beginning of the year, on the heels of pandemic, transportation rates challenges from the first half of 2021 should continue into the second half.

  • Capacity demands drive up rates across full truckload’s spot and contract markets.
  • Costs increase in less-than-truckload lanes, even while service declines.
  • Small parcel carriers look ahead to another holiday peak, even though consumers’ e-commerce appetite has gobbled up capacity since the last peak.
  • International shipping still bears the weight of global pandemic, exacerbating global supply chain disruption.
  • And fuel prices are driving up costs everywhere.

Serving your customers in this environment depends on your consistent visibility to transportation activities and costs. Moving freight requires strong partnerships with reliable providers, contingency plans – and patience. Controlling costs relies on ongoing analysis of strategy, compliance and performance, as well as agile course correction supported by experts.

Read on to understand the Q3 transportation rates trends that will affect your transportation management and get advice to help protect your performance.

Economic Conditions: Diesel Fuel Prices Increasing

U.S. diesel fuel prices have climbed 38.5% from a low in November. That is affecting transportation costs. Parcel carriers are escalating fuel surcharges, and fuel costs will be an increasing factor for over-the-road freight, especially during the traditional summer travel and shipping season.

U.S. Energy Information Administration’s Diesel Fuel Prices through June 21, 2021
U.S. Energy Information Administration’s Diesel Fuel Prices through June 21, 2021

The Energy Information Administration (EIA) forecast shows that the average diesel retail price per gallon is $3.29 as of June 21, the highest average since May 28, 2018. Diesel fuel prices averaged $2.55/gal in 2020. EIA’s updated 2021 forecast is an average $3.07/gal., an increase of 13 cents since Q2 estimates. 

Economic Conditions: How Do Transportation Rates Affect Revenue for Goods Produced?

The Producer Price Index (PPI) measures cost trends for everything manufactured in the U.S. This custom performance index reflects the rate of PPI change compared to the rate of change in transportation costs.   

Transportation costs compared to producer prices reflects sharp gains in the price of moving freight.

Performance indices for Parcel, LTL and Truckload increased year-over-year and quarter-over-quarter as capacity constraints persist across all modes. Of note, the Truckload index increased 28.5% YOY and 12.8% since January 2021. LTL increased 9.1% compared to 2020, and 4.1% compared to January 2021. Parcel continues climb as well, rising 7.8% YOY. 

Economic Conditions: E-Commerce Sales Climb Continuing

First quarter 2021 e-commerce sales reached $215 billion, a 7.7% increase over Q4 2020. Year-over-year, the Q1 2021 e-commerce estimate increased 39.1%. While consumers’ return to physical stores may affect some e-commerce activity, analysts expect strong sales to continue.  

: E-commerce Sales as a Percentage of Total Retail Sales 2017-2025
Source: eMarketer

One survey of more than 1,000 consumers in late March and early April by consulting firm AlixPartners LLP showed one-third of U.S. shoppers plan to continue buying clothing online, while 25% intend to keep ordering groceries that way.

U.S. Department of Commerce announces the Q2 2021 e-commerce retail sales estimate August 19. 

How does this affect your cost?

Do you use poly mailers, shipping bags or shrink film? Ongoing domestic demand driven by e-commerce, pharmaceuticals, hygiene, food and home meal deliveries all pressure prices on polyethylene products used in your supply chain.

  • Resin prices up 87% cumulatively over the past 12 months.
  • Suppliers announced 5-7 cent per pound increase in June, following a 5-6 cent increase in May.
  • Supply is extremely constrained, and sales allocations or force majeures remain in place for most producers.
  • Upcoming hurricane season could exacerbate supply constraints as plant operations struggle to reach full capacity.

Transportation Rates Environment: Small Parcel

Ongoing issues will continue into Q3. Capacity constraints will become more pronounced ahead of the holiday peak season as retail sales events such as Amazon Prime Day, back-to-school and Labor Day sales events lead into a holiday peak season beginning in October.

UPS continues to focus on value versus volumes. If a shipper’s volumes are not profitable to UPS, they could either be dropped as a customer, experience capacity cuts and/or higher rates and surcharges. FedEx is also embracing value over volumes and is implementing similar measures.

COVID-related peak surcharges from UPS remain in place apart from surcharge changes implemented on July 4 and continuing through Jan. 15. Based on how much a shipper’s average weekly volume increases compared to the average weekly volume in February 2020, the surcharges could reach $6.15 per package.  

Large package shippers face additional problems with UPS surcharge increases, including a 50-cent hike on “additional handling” effective July 4. From Oct. 3 until Jan. 15, that fee increases to $6 per package, a jump of $3 compared to today’s cost.

FedEx is likely to follow suit with similar surcharge changes for holiday peak season.

Crowd-sourced delivery platforms such as Instacart and DoorDash are expanding their partnerships with retailers and services. Other logistics providers are moving into the parcel management space. We will likely see more moves linking freight brokerage and parcel management as a way to provide a one-stop-shop to manage freight and parcel capacity.

Q3 Action Advice: Parcel Transportation

Diversification of last-mile solutions will be even more important as more carriers limit capacity. Shippers need to quickly lock in capacity requirements with carrier partners for the peak holiday season and also have back-up plans just in case carriers cut shippers’ capacity. A contract will not necessarily save a shipper.

For the rest of this year and likely into 2022, shippers need to be creative in managing their last-mile strategies while keeping a careful watch on their costs. Those with storefronts will prove successful by offering alternative last-mile solutions such as curbside and buy-online-pick-up in-store (BOPIS). Shippers without a physical store may want to consider partnering with a storefront retailer or another operator. 

Shippers will continue to struggle with higher supply chain costs, capacity constraints and delays for the foreseeable future. As a result, regular communications with supply chain partners and customers will be necessary as inventory stockouts, and delivery delays may become the norm versus the exception in the coming months 

Transportation Rates Environment: Less-than-Load

Q3 is busy season for LTL transportation. This year, expect costs to increase and service to decline as capacity gets tighter and temporary targeted embargoes continue.

  • Labor shortages accompany the summer vacation season for LTL drivers and dock workers. Open positions with high wages and sign-on bonuses are difficult to fill.
  • Retail volume is moving in support of the Q4 holiday peak.
  • As parcel service levels suffer, shipment consolidation drives volume into LTL.

Many major carriers are not accepting new business, and others that are taking RFQs will not likely publish until later in the quarter.

National LTL fuel surcharge averages are consistently trending upward.

Expect some carriers to pursue out-of-cycle annual business reviews and implement transportation rate increases, especially if your shipping characteristics are cost-intensive.

Maintain skepticism for carriers’ announced “on-time performance” especially as service delay designations can eliminate shipments from that metric.

The FedEx Freight move to reduce outbound volume for 1,400 customers – and then rescind the service cuts following blowback from large retailers – is indicative of ongoing capacity challenges. Other carriers are asking customers to limit shipment sizes in certain lanes.

Potential Disruption: On July 5, FedEx Freight implements an unprecedented peak surcharge on LTL shipments to nearly 1,000 zip codes, about 2.3% of zip codes in the U.S. Th

Q3 Action Advice: LTL Transportation

Stick with your existing carrier partners. Collaborate with them to work through service issues. Consider an alternate approach to cost control.

  • Blocking a service provider only puts your committed capacity into the hands of another shipper.
  • When many carriers are not accepting new business, you might not find capacity elsewhere.
  • In the current environment, another provider is unlikely to improve service levels.

Allow for more time in transit and plan accordingly. Important steps to take include setting expectations with consignees, adjusting inbound material orders to maintain production and communicating with customer service to prepare for response.

Regional and deferred-service carriers, even local couriers, offer alternatives for small impact moves where there’s no capacity available or you are affected by an embargo (including FedEx Freight’s limit on volume). Expect a slower level of service. which is better than no service. Expect a slower level of service.

Transportation Rates Environment: Full Truckload

All indicators point toward a full truckload environment with tighter capacity, elevated contract transportation rates and astronomical spot rates continuing into Q3.

  • Truck delivery delays
  • Inability to hire drivers
  • Ongoing capacity demand

Recent Purchasing Managers Indexes revealed elevated expectations for future growth in production – and products on the road.

Food and beverage shippers moving freight into grocery warehouses continue to face chargebacks for missing delivery times or not fulfilling an order in full.

Expect a brief “breather” toward the end of July, potentially into August and September, but do not plan for a downward trend in rates and capacity demand ahead of the retail peak season.

Produce season in Q3 creates added strain on capacity in traditional patterns that vary market to market, but don’t expect it to be more than another aggravator in the cost environment.

International shipping disruption continues to waterfall into over-the-road transportation:

  • Smaller shipments are moving into LTL lanes.
  • Increased on-shoring of manufacturing is driving more freight into over-the-road capacity.
  • Intermodal transit times and rates are up, eliminating modal conversion as an option.

While some spot market rate relief may come in late July, do not expect contract rates to follow.

Q3 Action Advice: Truckload Transportation

Be flexible with pick-ups and deliveries – even within shipping hours.

Lead time goes hand-in-hand with flexibility, and it is paramount to tender acceptance.

Maintain a realistic understanding of your capacity consumption and carrier service levels.

Carriers are not chasing higher-dollar freight, generally, but they may be hauling an equal or larger volume of business than last year in a more cost-intensive, capacity constrained environment – especially if your sales are up.

For freight enduring added cost when moving into a facility with a chargeback program for “on time and in full” (OTIF), understand the cause and frequency of the charge and make a business decision of absorbing that cost versus penalizing your carrier partner. Penalizing your partner may mean paying more on every load.

Transportation Rates Environment: International

Coming into traditional peak season in the August timeframe, COVID-driven port closures in southern China are causing severe disruption in ocean shipping. This will have a long-lasting effect on supply and demand for containers, ocean and air capacity. Demand for inbound shipments will continue to surge.

Everything that is moving is moving at a premium and moving with surcharges. Shipping costs are at historically high levels. These costs are going to increase in a substantial way over the quarter, in some lanes by multiples of their cost prior to COVID.

Demand for air freight is increasing, driving up costs as capacity issues build, especially until passenger flights fully resume. This limits further your ability to contingency plan for international freight.

Port congestion on the U.S. West Coast is slowly improving. It is still a challenge, but throughput is gradually getting better. The opposite is true on the Asian side of the balance, but as ports re-open fully returning vessels could make West Coast ports a greater pinch point.

Expect ocean shipping disruption to continue through peak season. This not only affects significant volumes coming from Asia, it affects U.S. exports as well. Container demand in Asia is high and drawing empty equipment back to China without waiting to match with a U.S. export load. This will continue to have an impact into Q4 and 2022.

Q3 Action Advice: International Transportation

Acknowledge the reality, prepare for higher costs, and consider a unique approach. Larger companies with buying power are being extremely creative to solve challenges. Not every business can buy a container ship (like Home Depot), but small- and medium-sized business need to explore outside-the-box solutions.

Be prepared to quickly shift modes, going from ocean to air. Find ways to shift equipment, taking advantage of capacity where you can find it, even if it isn’t your typical container. Can you mix up how you are consolidating? Be flexible about your point of origin.

Strength of partnership is more important than ever. A lot of shippers are fighting for space, and it is not just a cost game. This is where it helps to have trusted providers in place.

Import planning and forecasting is difficult in this environment. Depending on your industry, planning and projections are traditionally complete for the coming peak season. This environment calls for extending that timeline forward where you can, working with vendors and planning on a longer time horizon. This can help avoid disruption and position you to better react when it does happen.

Examine your inventory planning as ongoing disruption strains just-in-time strategies. Conditions in the transportation marketplace may factor into the discussion around a different inventory approach that mitigates risk and buffers some of the impact on the end customer.

Transportation Rates Environment: Indirect Spend

Freight and labor costs, as well as demand, are up in recycled paper and corrugate markets.

  • Paper costs increased $100/ton cumulatively the past six months, but stability is expected until Q4.
  • Recycled paper demand was up 6% in Q1.
  • New grocery bag machines coming online adds additional pressure on kraft paper supply.
  • Two large lightweight kraft paper producers left the market, transitioning to alternate heavyweight kraft and linerboard products. Mills are “sold out,” and inventory is 75% of desired levels.
  • Box shipments were up 6-8% in Q1.

Linerboard costs increase $110/ton cumulatively since November 2020. Carton prices up as much 20%.

  • Box shipments were up 6-8% in Q1, and containerboard mills are unable to keep up with demand increases. Production was up 9% in March, year-over-year.
  • Old Corrugated Containers Prices increased in May for the sixth consecutive month.

Major office paper producers announced increases to take effect July 1 after 6-8% increase in March.

Pallet Prices are up +50%, and supply is very short. Manufacturers are urging shippers to find alternatives.

Truckload Transportation Market Conditions

  • Truckload transportation rates forecast to remain high but steady, then increasing during capacity crunch season, which accompanies the produce season and leads up until the July 4 holiday.
  • Fuel prices are part of the conversation again. EIA forecasts predict summer diesel prices will be higher than last year but then reflect a normal dip.
  • Most equipment types (van and reefer) are experiencing a drop in demand, but do not expect a dramatic effect on rates.
  • Short-term contracts will come at premium rates and so will spot market pricing, but tender acceptance will be good.
  • International Road Check may cause disruption May 4-6 and into the following week. Demand may increase due to reduced freight movement during the highway safety inspections.
  • Advice for Q2: Maintain consistency with your carriers, trying to contract where possible to avoid an elevated spot market. Care­ful procurement practices in the months ahead (contract vs. spot market freight) sets the stage to capture downward price trends in transportation rates during the second half of 2021.

Less-than-Load Transportation Market Conditions

  • Demand on LTL capacity is unprecedented, driving some carriers to decline new or expanded business in order protect service to their existing customers.
  • Expect embargoes to continue in lanes affected by volume spikes and capacity constraints.
  • Carriers continue to scrutinize each piece of business, monitoring payables, escalating collections, limiting credit and diverting capacity to “shipper of choice” customers.
  • Pricing renewals are increasing and so are rates sought by LTL carriers, especially those emboldened by aggressive new price “right-sizing” promised by UPS Freight’s new owners, TFI International.
  • Q2 Advice: Rely on analysis – not rates – to achieve savings. There’s no ground to gain in procurement and rate negotiations, but routing decisions and least-cost carrier selection will maximize your transportation dollars.

Small Parcel Transportation Market Conditions

  • Both UPS and FedEx are taking a more intentional approach to pricing.
  • FedEx rebrand from SmartPost to Ground Economy opens opportunity for broad pricing adjustments focused on improving revenue quality of packages delivered.
  • UPS “better not bigger” approach is emerging: evaluation of customer contracts, volume caps and negotiation of mid-term increases to certain customers.
  • Capacity challenges continue for FedEx, UPS and every major regional small pack­age carrier, allowing each to be selective on the volume they accept.
  • Peak surcharges and certain suspended service guarantees spurred by COVID continue – but for how long? UPS and FedEx re-instated guarantees for some services, but we expect many others to be suspended until the country re-opens more fully.
  • The UPS move to zonal pricing for Additional Handling Surcharge and the Large Package Surcharge will have a material impact for many shippers.
  • Fuel surcharges are escalating quickly since the start of 2021.
  • Advice for Q2: Begin planning for Christmas 2021 today. Lessons learned through expert analysis of your 2020 data can help you design a small parcel program that protects your profit margin, controls cost and supports service to your customers.

International Transportation Market Conditions

  • Lingering effects of the Suez Canal disruption will continue for several months.
  • Port congestion has expanded beyond West Coast backlogs to include East Coast ports, and booking availability is sparse after an over-booked April.
  • Ocean transportation rates remain high, capacity is still extremely tight and the challenges in the domestic logistics funnel (drayage and rail) remain high.
  • Tightening ocean capacity is driving up demand and rates for air freight.
  • Advice for Q2: Reassess your inventory strategy. Global supply chain disruptions highlight the weakness of lean, just-in-time practices and may emphasize your need for additional buffer inventory, especially if your e-commerce fulfillment relies on import/export activity. Contingency planning should be part of each strategic planning meeting as we go through 2021.

Indirect Spend Market Conditions

  • E-Commerce demand is growing faster than capacity and packaging costs continue to climb.
  • Corrugated prices increased 10-12% in March – on top of increases announced in November 2020.
  • Expect stretch film manufacturers to announce another increase in April.
  • Paper board tubes and cores are increasing at least 6%.
  • Lead times are expanding out to 4-8 weeks.
  • Costs are up 17% since November 2020 on recovered paper and old corrugated containers (OCC).
  • Two large office supply providers announced copy paper increases of 6-8% in March.
  • According to the ISM Report on Business, activity in U.S. manufacturing grew for the 10th consecutive month in March, reaching a PMI reading of 64.7 – the highest in 37 years. The U.S. Industrial Production Index registered 104.65 in February – up 13.38% since March 2020.

Economic Conditions: Diesel Fuel Prices Climbing

U.S. diesel fuel prices have climbed 32.1% from a low in November. That is affecting transportation costs. Parcel carriers are escalating fuel surcharges, and fuel costs will be an increasing factor for over-the-road freight. The Energy Information Administration (EIA) forecasts summer diesel prices will be higher than last year.

Energy Information Administration’s Diesel Fuel Prices through May 10, 2021.

Average retail price per gallon was $3.18 on May 10, up 4 cents from May 3, but still below the March 22 peak of $3.19, the highest average since Dec. 3, 2018. Diesel fuel prices averaged $2.55/gal in 2020. EIA’s updated 2021 forecast, as of May 10, is an average $2.97/gal., a 3-cent increase compared to last month’s estimate.

Economic Conditions: Transportation Rates Affect Profit

The Producer Price Index (PPI) measures cost trends for everything manufactured in the U.S. This custom performance index reflects the rate of PPI change compared to the rate of change in transportation costs.

Producer Price Index compared to increasing transportation rates from 2007 through Q1 2021.

Performance indices for Parcel, LTL and Truckload increased year-over-year and quarter-over-quarter as capacity constraints persist across all modes. Of note, costs increased 13.85% YOY for truckload. LTL increased 7.85% compared to 2020, and 9.59% compared to Q1. Parcel continues to lead all indices, climbing 5.84% since last year and 6.52% since last quarter.

Economic Conditions: E-Commerce Sales Climb Continues

Total estimated e-commerce sales for 2020 reached $791.7 billion, an increase of 32.4% from 2019.

E-commerce sales in 2020 accounted for 14% of all U.S. retail sales, which increased 3.4% in 2019.

Fourth quarter e-commerce sales reached $245.3 billion, a 23.1% increase over third quarter 2020. Year-over-year, the fourth quarter 2020 e-commerce estimate increased 32.1% compared to the same period in 2019.

Looking ahead, expect Amazon Prime Day on June 21-22 to drive an uptick in e-commerce activity, as well as a bump in small parcel volume.

E-Commerce Retail Sales as a percentage of retail sales continue to climb, reaching a peak at the start of pandemic in Q2 2020.

U.S. Department of Commerce announces e-commerce retail sales estimates for Q1 2021 on May 18.

Transportation Industry Outlook: Q1 2021

Truckload Forecast: Freight Rate Increases Continue

  • Given ongoing capacity constraints, the truckload market will see rates continue to increase for at least the first half of 2021.
Expect Q1 Truckload rates to increase 3-5% for contracted lanes and 5-7% on spot market bids.

  • More shippers will lock in contractual transportation rates.
  • Expect an uptick in tender acceptance and improved ability to move freight with primary, secondary and tertiary carriers.
  • Stabilization and loosening of West Coast intermodal volume allows shippers with network visibility to seize cost savings. Expect some stabilization after the Chinese New Year.
  • Capacity will improve and alleviate rate pressure following a boom in new equipment purchases.
  • Working with Transportation Insight helps make you a shipper of choice to mitigate increases to transportation rates, strengthen service and improve access to capacity.

LTL Forecast: Freight Capacity Shortages, Volume Levels Increase

  • Expect capacity shortages, service charges and elevated rates to continue.
  • LTL volume levels will maintain or increase throughout 2021.
  • Carriers continue to be selective about the new business they accept.
  • Service challenges will continue in California in the foreseeable future
  • Detention and storage charges have become more common.
  • Shippers who continually switch carriers to improve service may find their efforts fruitless. Conversely, “shipper of choice” practices deliver rewards.

Small Parcel Forecast: Surcharges, Cost Complexity Continue

  • UPS reinstated Pre-Holiday Peak Surcharges until further notice:
    • UPS Ground Residential Service and UPS SurePost, as well as large packages and those that require additional handling.
    • Surcharges on Ground Residential and SurePost packages will apply to any shipper that has shipped more than 25,000 packages in any single week since February 2020.
  • FedEx Peak Surcharges will continue, with new rates implemented for some services until further notice:
    • 75-cent SmartPost surcharge – down from $1-$2 in place for the holiday season, but higher than the 40-cent surcharge in June.
    • $30 surcharge on oversized package – down from current $52.50
    • Additional handling will be reduced from $4.90 to $3.
    • Expect a competitive, but rational parcel shipping landscape to emerge later this year.
  • Look for more parcel competitors to grab opportunities the larger carriers are overlooking. Heightened competition will benefit shippers who can optimize carrier utilization.
  • Make sure you understand how carrier limitations and geographic volume/service trends affect your unique shipments.
  • Coming April 11, UPS changes to zonal pricing for its Additional Handling and Large Package Surcharges.

International Forecast: Record Rates, Equipment Sparse

  • International shipping demand is unseasonably high.
  • Capacity is committed for much of Q1, especially up to and through the Chinese New Year.
  • Equipment availability is sparse in most Asian markets.
  • Expect rates to remain at record levels, even after the Chinese New Year allows the industry a chance to catch up, before looking at any stabilization.
  • New federal administration might eventually bring trade compliance changes, but too early to tell how China 301 will be affected.
  • Port and rail congestion are causing ripples in cost and service across domestic transportation modes.
  • E-commerce demand and vaccine distribution will continue to drive capacity challenges far into 2021.

Indirect Spend Forecast: Packaging Costs Increasing

  • Resin prices continue to push up with major manufacturers Dow, Chevron and Exxon Mobil announcing additional increases in January 2021. Combined with the mid-year 2020 increases, costs of poly-based packaging products are up 20-25%.
  • Linerboard manufacturers pushed through a paper increase of $50 per ton in late November, driving up corrugate prices.
  • The ISM Report on Business closed December at its highest reading for manufacturers in 2.5 years, with a reading of 60.7%. The New Orders Index and Production Index was above 60% for the sixth straight month.

Truckload rates are continuing to increase in Q2 2021

Truckload Rates Pressured by Fuel, Capacity, Wages

Demand for flatbed equipment is high, and while it is declining for dry van and refrigerated, don’t expect truckload rates to follow.]

The news around climbing truckload rates is not all gloom and doom. A combination of factors across the broader domestic transportation marketplace will spur a drop in demand and relief on rates.

You can control some of those costs today by balancing procurement between spot market opportunities with short- and long-term contracts. At the same time, your strategy through the second quarter can position you for cost and service gains heading into 2022.

Let’s examine factors affecting truckload rates during the months ahead, and I will share some of the ways we help Transportation Insight clients respond in the current environment.

Truckload Demand Varies, Rates Remain High

Coming into 2021, truckload rates were at a peak. High, steady pricing will likely continue without many dips as we head through the growing season. Tighter capacity for produce and beverages coincides with increased summer highway travel, and we will see upward rate pressure until the July 4 holiday period when demand traditionally tapers off.

Average Truckload Rates, according to Morgan Stanley Research’s Freight Transportation Report on April 28, 2021.
National average spot and contract rates through April 27, 2021. Year-to-year comparisons (2021 in red) for reefer, dry van and flatbed. Source: Morgan Stanley Research, DAT Solutions.

That demand has not really decreased since the nation started coming out of pandemic lockdowns last summer. Retailers and manufacturers rushed to restock depleted inventories, and the holiday peak season added strain on capacity not just in the truckload marketplace, but also less-than-load and parcel.

Service issues and disruptions in LTL, intermodal and parcel are pushing more freight into the over-the-road world. Shippers facing accessorials (i.e. excessive length charges) or delivery delays with LTL can find benefit in multi-stop truckload shipments. We have customers where modal conversion to rail is usually worth considering, but not in this environment. That freight, too, is also competing for truckload capacity.

Until some of the capacity challenges in other modes work out, capacity pressure will continue, likely until July, when I expect rates will recede. Even if demand declines before that, as it has recently for refrigerated and dry van transportation, do not expect costs to drop. Flatbed demand is still going strong, and while it is down for those other equipment types, prices have not yet followed.

Truckload Freight Indices for Dry Van, Reefer and Flatbed, according to Morgan Stanley Research’s Freight Transportation Report on April 28, 2021
Truckload Freight Index measuring demand for services compared to supply through April 27, 2021. Year-to-year comparisons (2021 in red) for reefer, dry van and flatbed. Source: Morgan Stanley Research.

There are a few factors keeping these truckload rates elevated.

Truckload Carrier Costs, Fuel Prices Drive Up Rate-Per-Mile

Truckload rates have not dropped for dry van and refrigerated due, in part, to the capital expenses some carriers are enduring with new equipment purchases. Insurance premiums continue to go up for operators. Driver retention and training add new costs, and we have seen some dramatic increases in driver wages announced lately.

This all creates upward rate pressure from carriers who are trying to stay profitable.

Now fuel prices are returning to the conversation after a relatively quiet past couple of years. The average price of diesel fuel climbed 34.6 percent between November 2020 and May 10, according to the Energy Information Administration (EIA). We expect prices to plateau, but look for them to increase as the summer months bring more travel for produce growers, beverage producers and North America’s vacationing public. As of May 10, EIA predicts the 2021 average will be about $2.97 per gallon – a 3-cent increase compared to the April forecast. To put that in perspective, in 2020, the average was $2.55 per gallon.

National average diesel fuel prices through May 10, 2021 and forecast through December 2021. Average retail price per gallon was $3.18, up 4 cents from May 3, but still below the March 22 peak of $3.19. Source: U.S. Energy Information Administration.

This uptick will have a cost impact, even if it may not be readily apparent. If you are in the contract-pricing world, you will generally see the added fuel charges broken out, so you can report off of it. When you are in the spot market, however, all of that is lumped into one charge. That makes it hard to specify the fuel impact on spot rates, which are climbing to a higher premium than last year.

Relief is in Sight for Shipping Costs, Truckload Rates

As I mentioned, I think the broader transportation marketplace should experience some rate relief after the July 4 holiday. My colleagues in LTL and International transportation both expect conditions to steady somewhat in their modes by then. That will alleviate some of the added capacity pressure on full truckload transportation.

New equipment and drivers coming online will help, too. We saw Class 8 truck sales increase month-over-month and building throughout the second half of last year.

Orders for Class 8 Trucks spiked at the end of 2020 according to Morgan Stanley Research.
Total Class 8 Net Orders, reflecting a significant upturn in late 2020 into 2021. Source: ACT, Morgan Stanley Research.

Those vehicles should start hitting the road soon – even with many of those orders being delayed up to 60 Days. Driver training programs restarted after pandemic closures will fill more seats. The current rate environment will likely draw out-of-work drivers back into the job market, as well.

All these things coinciding with a demand drop should create a dip in truckload rates. That opens the door for you to explore strategic procurement opportunities, utilizing the benefits of the spot and contract markets.

Balancing Truckload Rates with Spot and Contract Procurement

In the current rate environment, especially with spot rates at a premium, we look strategically at truckload options for our clients.

For instance, we identify freight volume that can be moved from the less predictable spot market into a short-term contract. Even while short-term rates are elevated, they are still below spot rates. There is a chance to capture savings, and, more importantly, lock in rate consistency and capacity for our customers.

It also sets the stage for you to take advantage of the downward trend coming later in the year.

I am a big believer in maintaining your carrier partnerships – and not just when the conditions are in your favor as a shipper. Now is the time to work with your carriers to try to lock in pricing and capacity. Be flexible in accepting lane-by-lane increases in the current tight market. Short-term contracts can help – and they help solidify your relationship. When demand and rates decline, you are positioned to leverage your future volume for savings.

There is a natural temptation to flip everything back into spot procurement and catch rapid savings when the truckload rate swing occurs. Instead, consider putting a lower volume in the spot market, but also prepare for a larger network RFQ to capture a long-term contract at a price point lower than the short-term contracts yielded.

We help our customers achieve consistency with their carrier partners by locking in pricing where possible now. Then, as rate pressure alleviates, we support strategic conversations with your carriers to help you get market-competitive rates while maintaining the capacity commitments that support the service levels you need.

Control Costs in any Rate Environment

Our transportation management team constantly monitors market conditions to keep our customers informed about trends that affect their cost and service.

This proactive approach empowers shippers to quickly deploy strategic adjustments and control budget impacts of a volatile rate environment. For more transportation industry analysis, download our Q2 Industry Forecast.

Read it for actionable guidance that will support timely adjustments to your transportation management and keep your freight moving.

Every seller should have FOB terms defined to determine when the buyer accepts ownership of goods being shipped.

What Does FOB Mean?

Every seller should have FOB terms defined to determine when the buyer accepts ownership of goods being shipped.

What does FOB mean?

I recently visited a prominent shipper, and a high-level purchasing person who called it fob (rhyming with “bob”). At that moment, I knew I needed to write to further explain how this often-misused term is defined.

First of all, FOB – or F.O.B. – stands for Free On Board. It is the point in the supply chain where the seller relinquishes ownership, and the buyer accepts ownership of products purchased in a specific transaction. Every vendor/client relationship should have the FOB terms specified in their PO (that’s purchase order) purchase terms.

Along with purchase terms, shipping terms are equally as critical. Identifying both terms will determine ownership, risk, and logistics cost.

Here is more detail about FOB, beginning with common transportation terms you may encounter. We will also explore steps you can take to deal with FOB issues at your business.

FOB Terms to Know and Understand

Making sure the FOB terms suit your company’s needs is a powerful way to gain a competitive advantage in your day-to-day when shipping and accepting goods.

FOB Terms: FOB Origin, Freight Collect

“FOB Origin” refers to the legal fact that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading (BOL) at the origin pick-up location.

“Freight Collect” refers to the legal fact that the buyer is responsible for all freight charges. The buyer also assumes all risks of transportation. That means they are responsible for filing claims in the case of loss or damage.

FOB Terms: FOB Origin, Freight Prepaid

“Origin” refers to the legal fact that buyer takes ownership at the time of carrier pickup.

“Freight Prepaid” refers to the legal fact that the seller accepts responsibility for all freight charges and freight claims exposure.

FOB Terms: FOB Destination, Freight Collect

“FOB Destination” refers to the legal fact that the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage.

“Freight collect” refers to the legal fact that the buyer is responsible for the freight charges.

FOB Terms: FOB Destination, Freight Prepaid

“Destination” refers to the legal fact that the seller retains ownership until a claim-free delivery is affected.

“Freight prepaid” refers to the legal fact that the seller is responsible for all freight charges.

How can FOB Terms Affect Your Company?

Failure to properly manage and assess risk regarding purchase and transportation terms can affect any company’s bottom line. I visited a distributor that receives many shipments from various vendors on a daily basis.

The policy on this company’s dock is that personnel refuse any order that has the slightest sign of damage. The hassle involved with filing a claim or ordering replacement parts for potential damages motivates this blanket policy to refuse these shipments.

Concerned about who had legal liability, the first thing I wanted to know: the distributor’s FOB terms with vendors. As we discovered, the vendor with most refused shipments set “F.O.B. Origin, Freight Prepaid” terms. This meant that even though the vendor was paying the freight transportation cost, the distributor owned the freight from the time the shipment was tendered to the carrier. That puts responsibility of loss or damage with the receiver. By refusing these shipments, the distributor was returning something that it actually owned.

In this case, the distributor was very fortunate in that the vendor had agreed to accept the goods back into inventory, although they had no legal obligation to do so. The company was grateful for the explanation and took steps to rectify the purchase terms for future orders.

Having an advocate to review your agreements and explain your day-to-day business procedures to each of your vendors provides insight and clarity to all involved. Each department may not know what the other is doing in your organization, but your logistics provider can facilitate the best transition of goods for your company.

How Do You Handle FOB Issues?

A late shipment, a break down, a shipping slip filled out improperly – no matter what it is—a circumstance can arise to challenge the best working dynamic in logistics.

When an incident occurs in the shipping and receiving of goods, it usually causes some level of disruption. With that in mind, it is very important to have proper documentation, especially in regards to FOB terms.

If you are a shipper, make sure the FOB terms are clearly defined, understood and established to properly reflect the needs of the business relationship. You may want your customer to be FOB Origin so they own the goods when they leave your door. Alternately, you may want to own the goods until they are delivered intact. In fact, that is a great customer service selling point. The same holds true with companies that receive a lot of goods.

Knowledge is powerful, and having a great business relationship with your vendors can overcome multiple barriers. The personal relationship will provide flexibility for difficult situations.

What Does FOB Mean Around the World?

According to the International Chamber of Commerce (ICC) standard trade definitions known as Incoterms, FOB means Free on Board. In 2010, the ICC altered the definition to state the seller must load the goods on board the vessel nominated by the buyer.

The cost and risk are divided when the goods are actually on board of the vessel (this rule is new!). The seller is responsible for the goods to be cleared for export. The term is applicable for maritime and inland waterway transport only but NOT for multi-modal sea transport in containers.

The buyer must instruct the seller on the details of the vessel and the port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder. Free on Board is a term has been greatly misused over the last three decades ever since Incoterms 1980 explained that FCA should be used for container shipments.

When developing any business agreement, to avoid a dispute, the buyer should seek to specify in the contract of sale what costs will be borne by the seller and what costs fall on the buyer.

According to the rules established by the ICC, where the buyer has given an indication of the loading point but later wants to change these instructions, the seller is not obliged to cover the expenses of transferring the goods to a new loading point, provided the seller has acted in line with the buyer´s first instructions and the buyer´s new notice arrived too late for the seller to comply without extra cost. It is essential in the contract to make it clear when ownership passes from the seller to the buyer.

Below are four different ways in which F.O.B. domestic terms and the international equivalent are used in a purchasing agreement.

North American domestic FOB terminology differs from terminology used in international shipping.

Each situation differs depending on place, parties, industry, applicable laws and relevant customs and usages. General guidance cannot be expected to determine an outcome in a dispute.

Having a trusted partner with international trade expertise can relieve the headaches and provide insight for future growth.

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.

LTL Freight Shipping Faces Pressure on Capacity and Rates

Some LTL carriers are declining new business – even expanded volume from existing customers. I have never seen that happen. Others are selective about the freight they will move. Even the best LTL freight shipping carriers are missing pick-ups because they lack the equipment and workforce required to keep up with demand.

And hard to believe the constant embargoes that continue to be announced in North America’s largest transportation hubs.

While circumstances seem severe, I believe it is only a matter of time before the market corrects again. Until then, your ability to control your LTL freight shipping costs depends on proactive steps that will also go a long way toward protecting your service.

LTL Freight Pricing Renewals Increase

Carriers continue to closely examine their business, their customers and their operating margins. We are seeing an increase in both the volume of pricing renewals and the rates carriers are seeking in those requests. Double-digit cost increases are even emerging for customers with dense “cubed” freight, often the most lucrative shippers for LTL carriers.

Expect that to continue in the second quarter, especially if carriers try to capitalize by market chatter in the wake of the sale of UPS Freight to TFI International whose CEO is promising to bring a new “level of profitability” for the LTL services provider now branded as TForce Freight. Other carriers may try to capitalize on a rate-increase environment, and that could drive all pricing up.

Beyond renewals, LTL carriers are scrutinizing payables closely. In the 2020 pandemic peak, aging grew for many shipper balances. Remote environments slowed the manual paper trail for many businesses. Leeway granted last year has disappeared, and conversations around outstanding bills are becoming more serious for anyone who slips past payment terms.

Slow- and no-pay shippers are often the first targets for LTL carriers with more freight than they can handle. Customers who don’t pay on time – usually 30 days depending on your agreement – may be put on “cash only” terms until the outstanding balance is resolved. In extreme cases, carriers may hold freight – instead of dedicating LTL delivery capacity to customers who pay on time.

LTL Capacity Drives Freight Acceptance

It is not unusual for LTL freight service providers to be selective about the business they accept or the freight they move. In 2018-19 when capacity was tight, we saw carriers avoid long freight or over-sized shipments. When they accepted loads with unusual sizes, they increased the charges for it.

Now even extra charges will not sway service. Carriers are scrambling to rent trailers, hire workers and move freight. They are doing the best they can, but embargoes are still occurring in lanes where capacity gets too tight.

Ordinarily, Q1 brings a slow period for LTL carriers – a time when they can catch up ahead of the traditional peak months starting in August. Without that recovery time, some are declining new business during Q2 this year. We’ve seen some carriers not accepting any RFQs, even for existing customers adding volume – for new locations or additional business of their own.

Simply put, LTL carriers are concerned about the volumes they face when the traditional uptick in business occurs. Inventories are low for many retailers. Manufacturing and distributors are playing catch-up. If that continues into the fall, a tight capacity environment may continue throughout the year.

If that scenario motivates more carriers to decline new volume, keep in mind they are doing it to protect the service they are providing to their existing customer base.

Internal Steps for Better LTL Service

“How can I become a better shipper?”

The answers to that question can go a long way toward controlling your LTL freight shipping costs in the months ahead. Your LTL service provider knows what to do to take cost out of their business. Your logistics partner can help you find solutions that will remove additional cost.

This is a time when our LTL team is especially focused on mitigating cost increases to our customers as much as possible. You likely will not find savings on rates in a contract renewal right now, so understanding and utilizing least-cost carrier options is essential. That least-cost carrier may not be your primary carrier, but we encounter many shippers who could realize significant savings by choosing that option.

You have to be willing to let your transportation management system (TMS) do its job by recommending the best routing decisions and driving compliance throughout the organization.

It also helps to be a shipper of choice. That is often a conversation in truckload transportation, but this is a time where customers who pay attention to that are seeing dividends. A lot of decisions involving trailer availability are being made at local terminal levels. Those shippers with good relationships, those who treat local terminal drivers and manager with respect, they will be the shippers who get preferential treatment.

LTL Partner Helps You Ship Smarter

The LTL transportation environment faces unprecedented challenges, but the pendulum always swings and shifts control from LTL carriers back in to the shippers’ hands. It is just a matter of time. Can you afford to wait it out?

A partner who can help technology that supports optimal routing decisions can help you ship smarter. Analytics of your LTL delivery data, transportation trends and customer demands can help you improve network design and mode selection to protect cost further – and improve your customer service.

For forecasts and analysis across transportation modes – including truckload, parcel and international shipping – be sure to watch Supply Chain Forecast 2021: Q2 Transportation Trends. Our transportation management experts share their predictions, industry analysis and actionable guidance to support your business performance.

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.

Transportation Costs in 2021: Less-Than-Truckload

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.