Time to Squeeze Carriers for Better Rates?

By Adrian Gonzalez

Various data points related to the trucking industry suggest we’re entering a shipper’s market. For example, the ATA Truck Tonnage Index dropped 1.4 percent in January, while the Cass Truckload Linehaul Index increased only 0.4 percent year-over-year in January, “a fifth consecutive month of waning truckload pricing strength.” Here’s what ATA Chief Economist Bob Costello had to say:

“Clearly, 2016 started soft for truck tonnage. There was a deceleration in freight volumes during the second half of 2015 which continued into the first month of 2016. The winter storms that hit in January likely suppressed volumes some, but by falling 1.4%, I doubt tonnage would have been positive without the storms. So, that tells me that the inventory situation continues to weigh on truck freight volumes. The sooner the supply chain cleans out the excess stocks, the better for trucking.”

The Freight Transportation Services Index (TSI), which is based on the amount of freight carried by the for-hire transportation industry, dropped 0.4 percent in December from November, with December 2015 freight shipments down 2.0 percent from December 2014. For the fourth quarter of 2015, the Freight TSI was down 1.2 percent compared to Q4 2014.

As reported in the Wall Street Journal earlier this month, “freight truck orders plummeted 48% in January,” according to data from ACT Research. “The data stream continues to trend negatively in regard to freight, capacity, and freight rates,” said Kenny Vieth, ACT’s president and senior analyst.

A blog post published last Friday by Transplace CEO Tom Sanderson, Truckload capacity-demand balance favors shippers, highlighted the latest figures from Morgan Stanley’s dry van truckload index (see post for chart):

Morgan Stanley’s dry van truckload index indicates that van capacity is more readily available now than it has been in each of the last 7 Februaries, but is slightly tighter than during the recession year of 2009. Capacity is much more readily available than last year at this time. While there were seasonal regional shortages of capacity early in 2015, in general capacity became more readily available in the second half of the year. Three factors are driving excess capacity: weaker freight, hours-of-service rollback, and actual capacity additions. We do not expect capacity to tighten in 2016 unless the economy regains steam.

Other data sources, however, suggest the market is in good balance. For example, FTR’s Trucking Conditions Index for December reflects stable conditions for carriers likely to continue through 2016. Jonathan Starks, Chief Operating Officer at FTR, commented:

“The trucking environment is still quite healthy. There is no doubt that growth has slowed for certain segments, and there are increasing uncertainties surrounding growth prospects for the U.S. economy. However, contract rates are still rising, albeit slowly, and there is very little capacity that is exiting the system. You can see this in the Truck Failures figures that are reported by Avondale Partners as they sat near historic lows throughout 2015. Falling fuel is clearly helping cash flow for small carriers, but declining spot market rates are negating some of that improvement. Overall, the trucking industry seems to be in a relatively stable environment as we move into 2016.”

But if you believe we’re indeed entering a shipper’s market, how should shippers respond? Should they start squeezing their carriers for rate reductions or should they hold steady knowing the pendulum will eventually swing in the carrier’s favor down the road?

For some shippers, the answer depends on how carriers treated them the last time the market was in their favor.

A few years ago, when the market was similar to today, I wrote about a Fortune 500 company that could have saved millions of dollars in transportation costs by putting its freight out to bid. But after much internal debate, the company decided to honor its current rates with carriers. Why? The company knew that capacity would tighten again down the road, and when that day came, it expected its carriers to maintain their commitments to them and not abandon them for other shippers offering a cent or two more per mile.

When that day came, when truckload capacity tightened, I reached out to the logistics executive to see what happened: “The jury is still out on whether our strategy has worked or not,” the logistics executive told me. “We don’t know yet if we are going to have an advantage [relative to other shippers] or if carriers are going to decide that the temptation for quick outsized profits is just too hard to resist. How the carriers respond will ‘train’ the buyer for the next time this changes.”

Depending on how you view it, shippers and carriers either have short memories or they never forget about getting burned in the past.

How should shippers and carriers respond to the ebbs and flows of the transportation market? We’ve produced several Talking Logistics episodes related to transportation procurement (see links below), with each guest providing great insights and advice on the topic. But I believe this quote by Richard MacLaren, President & General Manager North America at Unipart Logistics, from a presentation he gave many years ago on Vested Outsourcing sums it up nicely:

“Have the courage to manage for the long term against the pressures we face today for instant results.”

Having such courage, however, requires trust — and trust is something that, unfortunately, is in short supply in many business relationships, including between shippers and carriers.

So the better question to ask today is not whether the time is right to squeeze carriers for better rates, but whether the time is right for both shippers and carriers to examine the foundation of their relationship.

How much do we trust each other today? Why don’t we trust each other more? Can we achieve greater things together if we work on strengthening our trust? How do we get there?

Questions to think about this week. Then post a comment and share your perspective on this topic.

Talking Logistics episodes related to transportation procurement: