Real Talk: The Capacity Crunch and What You Can Do About It
Capacity constraints can have a significant impact on a company’s transportation and logistics activities. While 2015 is faring better than last year, we all know it can be fleeting. And with produce season right around the corner, capacity is going to start tightening up again. Effectively planning for short-term and long-term capacity restrictions can mean all the difference when it comes to service and transportation costs.
LEFT TO RIGHT: GEORGE ABERNATHY, DAVE MADDOX
Given this timely topic, we tapped two transportation experts to discuss current capacity conditions as well as best practices. One of these experts is George Abernathy, who has 30+ years of experience in transportation including working at asset-based companies such as J.B. Hunt. Currently, he is President and Chief Commercial Officer for Transplace. Our second expert is Dave Maddox, Vice President, Sales for Capacity Services, who has both asset and non-asset based experience including stints at Southern Freight, National Freight and Hogan Transports among others.
Below you’ll learn what they both think about current capacity conditions and what their recommendations are for how to best balance your freight.
Q: Compared to last year, how do you see 2015 shaping up in terms of capacity challenges?
George: Right now, the capacity in the current market is relatively available as compared to last year. However, I think it’s going to tighten up in the near future, especially in the South when we hit produce season.
Dave: The good news is the economy is better. The bad news is it’s inevitable that we’ll see capacity constrained again in 2015. Currently, we’re seeing a ton of bids come in and carriers have rated everything, knowing there’s not enough capacity to be able to take it on. While shippers may have nice routing guides in place, they are already deteriorating in the current market. Why is this happening? Because carriers are finding themselves positioned on multiple routing guides of shippers on alike lanes. This becomes an issue when the same carrier or carriers are on multiple routing guides, but don’t have multiple trucks to handle shipper requests. At the same time, the acceptance rate when tenders come down from shippers starts high for carriers and then goes down. And when it is down, shippers start looking to non-asset based providers. These issues start to impact capacity and can really impact planning.
Q: What can shippers do when capacity tightens up?
George: Regardless of current conditions or moving into seasons that cause capacity constraints, shippers should look for mode shift opportunities to take freight off the road and put it into intermodal. In addition, you should maintain a percentage of freight with a broker or two so you can go under the market average and secure rates lower than your contracted rates.
Dave: You have to be prepared. Preparation is going to lead to execution that will be most effective during a tighter market. No matter what, there are going to be routing guide challenges so you’ve got to have a broad-based portfolio of carriers that includes a non-asset strategy. You’ll be better off accessing a much broader group of carriers. By having a non-asset strategy, you can be thoughtful and strategic in your mode shifts and conversions. Especially if what you’ve been doing isn’t working, a dedicated pop-up should be considered vs. trying to obtain success the same way you’ve always approached your transportation. And like George mentioned, you have to consider alternative modes. For example, maybe incorporating a rail strategy east of the Mississippi becomes a standard practice.
Q: What is the best strategy for approaching a capacity constrained market?
George: Ultimately, there is no set formula or right answer. But I do think there should be a strategic balance of asset and non-asset providers to handle a shipper’s freight. Forward-thinking shippers build into their procurement strategy an appropriate percentage of freight to be managed by brokers. Capacity has tightened the requirement for shippers to be flexible around non-assets. You want a broker on your routing guide. Why? Because whatever percentage a shipper’s identified by the broker to handle, needs to be included in the routing guide scenario so that their costs can be controlled. There is an ever expanding number of brokers. Contracting with a broker or two and a non-asset provider or two is a best-in-class strategy and makes good sense.
In addition, you want to avoid the spot market and unappealing pricing as much as possible, so use reputable brokers that will be responsible and required to meet rates and service levels. These brokers can help you avoid the spot market. Equally important is having access to small and medium sized carriers. This is what the non-asset provider can give to the shipper – access to very broad and deep carrier relationships. It’s hard to manage a routing guide effectively with 1000 to 2000 carriers vs. 100 providers. It’s these brokers that can provide access to those thousands of carriers that are small and medium-sized carriers. It’s a balancing act that is really dependent on your strategy.
Dave: 2014 was a rough year. One that I’m sure many don’t want to repeat. In order to not let that happen again, work with a non-asset provider to be better protected. Look for providers that have relationships with carriers everywhere across the U.S. For example, we’re helping our customers that have a back-log on the West Coast due to the recent port congestion to leverage a non-asset approach. One of our shippers has had some issues with a current asset provider to execute their drayage and export goods from Los Angeles to elsewhere overseas. This shipper needed to better protect themselves and not place all their eggs in the proverbial one type of asset basket. So we’re assisting with their freight movement from a DC in San Diego to the port in L.A. Remember, your movement of goods doesn’t have to just be by standard traditional truckload. Look for ways to incorporate non-traditional strategies to move goods and protect yourself when capacity tightens.
Q: Final thoughts and recommendations on how to weather capacity constraints?
George: Bottom line – no matter what your strategy is in navigating the balance between service and rates, a non-asset strategy is an absolute requirement. A prudent shipper with the right balance of asset/non-asset providers will be much more capable of reacting to whatever capacity is in the market. What we’ve seen are the shippers who are prepared no matter what happens do much better. Maybe a few years ago they gave up a little bit of savings on looser capacity, but it served them well when it tightened up in 2014. Short-term gain wasn’t worth the long-term loss. And that’s important in this industry.
Dave: Most of the transportation economists describe a high likelihood that capacity will be similar to 2014 over the next 2-3 years for a number of reasons. Our experience tells us that a non-asset strategy and better balance is the right thing.
To learn how companies are taking advantage of capacity opportunities now to better balance their freight, visit capacityservices.com.
How do you feel about current capacity conditions? How are you prepared if it tightens up? What will be some of the short-term as well as long-term effects on your business?