Outsmart the Next Recession: 2 Key Factors that Will Impact Logistics
The United States economy is experiencing growth right now.
After a slow recovery since the recession, consumers and businesses alike are feeling (cautiously?) optimistic about the near future.
FTR Transportation Intelligence provides extensive forecasting and market intelligence for transportation professionals. In our (economic outlook, (Link to blog will go here when published) post we talked about the leading indicators that influence the economy and help to provide strategic direction for logistics services. FTR takes that macroeconomic data and focuses specifically on industrial production to provide reliable information for logistics professionals to consider, and possibly use to direct business decisions.
Industrial production influences the supply and demand of trucks and drivers. Simply speaking, if consumers are spending more, manufacturers are making and transporting more product, resulting in an increase in the demand for more trucks and drivers.
The economic outlook predicts slow growth during the first half of 2016 and accelerated, stronger growth in the second half of 2016; additional growth continues in 2017 and 2018 and then an economic slowdown and recession at the end of 2018 into 2019.
Armed with this forecast, and added data from FTR, logistics experts are able to plan accordingly and create solutions for anticipated challenges. What key market factors need to be considered for successful supply chain management that include logistics and transportation?
Key Factor #1: The Driver Shortage
Increasing demand for transportation services mean an increased need for trucks and drivers. At the moment, most trucking companies have the available credit to purchase any number of new trucks or specialized equipment to meet demands. The challenge for logistics professionals right now and into the future is the demand for drivers.
There are a number of reasons why the supply of drivers is diminishing. According to the American Trucking Association (ATA,) the following reasons account for the shortage:
- Age of drivers– many drivers are at retirement age, and replacing retiring truck drivers will be the largest factor in the increase in driver shortage, accounting for nearly half of new driver hires (45%).
- Driver gender– females make up 47% of all U.S. workers, yet only account for 6% of all truck drivers, according to the U.S. Department of Labor. This is a large, untapped part of the population.
- Lifestyle– new drivers are typically assigned routes that keep them on the road for extended periods of time before returning home. This lifestyle doesn’t always meet expectations or fit with everyone’s needs.
- Additional job alternatives– merely a few years ago, the trucking industry was one of the few industries that was hiring people. The job market has since improved and more jobs for truck drivers or would be drivers are available. The construction industry, for example, provides competitive pay, local work and carries much less responsibility.
- Regulation changes– The effect of increased regulation on the logistics industry will be significant over the next 3 – 5 years. In general, any change in regulation affects overall productivity within the supply chain. Changing requirements such as hours-of-service pulls drivers out of the available “pool” to use and further challenges the demand for drivers. According to FTR’s recent report, added regulations will increase the driver shorter to a 210,000 driver deficit.
Graph provided by FTR Transportation Intelligence
Key Factor #2: Increased Economic Growth
Assessing truck utilization depends on both supply and demand. According to the latest FTR report, industry utilization is at 96%; and slow demand growth is expected to continue at 1-2% in the first half of 2016, and 2-3% growth in the second half of 2016. These percentages seem small, but as the economy improves and as the active truck utilization increases to 100%, the market gets tight.
This economic growth combined with the driver shortage and increases in regulations will affect the ability of logistics companies to supply enough drivers and trucks for expected capacity. Demand will be greater than supply, and in turn the price of transportation increases dramatically.
Knowing that prices will potentially start rising at the end of the year and into 2017 is information that needs to be communicated to stakeholders and customers. Through strong partnerships, logistics companies need to offer their customers supply chain solutions that account for the increased demand for drivers, while keeping costs at a minimum.
To address challenges related to the driver shortage and the increased economic growth, customers should consider a dedicated capacity or dedicated contract carrier solution that enhances the performance of their business, increases efficiency and reduces overall costs.
In a dedicated capacity relationship, shippers negotiate with a carrier for a specific amount of delivery capacity; there are a finite number of assets or resources that are deployed. This relationship is contractual, but there are usually no minimums, no specific requirements and no penalties. In a dedicated capacity situation, the logistics company agrees to provide a certain amount of trucks at a certain price.
Dedicated Contract Carriage
The dedicated contract carriage option is a more formal contractual relationship. In this instance, the logistics company deploys both employees (drivers) and assets (equipment) for the exclusive use of the shipper for a specific period of time. This relationship is typical when there are specialized needs or requirements of the shipper that cannot be met in the open “you call-we haul” market, or the price of service is too high. In addition, the shipper must promise a certain amount for freight. These requirements of both shipper and logistics company cannot be satisfied by a dedicated capacity relationship; therefore, the dedicated contract carrier is the best option.
Both of these options give manufacturers what they may be lacking in the long-term; a secure supply of drivers to haul their product, at a price that doesn’t fluctuate with tightened capacity.
It’s critical for logistics professionals and supply chain managers to assess their business, communicate clearly with their customers and determine the smartest, cost-effective logistics solution based on the above key factors.Contact us to learn more about our dedicated services.