In a perfect world, inventories are balanced, production lead times are aligned with purchased materials and transportation planning windows are one week in advance allowing for perfect alignment of your shipment to your chosen carrier when and where you want your shipment picked up. The last 7 months have shown that the perfect world we strive for is fraught with factors well out of our control as logistics professionals.
What we can do is get ahead of the slope through a series of steps designed to mitigate risk. The first step is to identify risks. The most prevalent risk for shipper supply chains in the coming 4th quarter is freight budgets careening out of control. Identifying the impact of the risks is the second step in developing your risk mitigation strategy. In our example, the risk can include lower operating margins, lower carrier performance due to an expanded carrier base brought on by diminishing truck capacity and additional resource requirements to manage the load planning processes. After identifying and understanding the impact of the risks, prioritization of the risks should be categorized from most to least critical. Lastly, the creation of your risk mitigation plan that includes monitoring, communication and implementation of a risk mitigation strategy should a key trigger point be met.
As we have seen in the last nine months, a perfect storm has been brewing and it has created an environment of higher truck rates due to a lack of capacity. The slow roll of this storm began well before truck rates illustrated an upward slope when production halted in Asia and state economies began shutting down.
Unlike Newton’s 3rd Law where for every action, there is an equal or opposite reaction, the supply chain illustrates a multitude of actions creates multiple singular reactions. When viewing a lightning strike, we see the movement from the ground up as a reaction while the action of the negative charge from the cloud to the ground is the part we cannot see. Supply chains are similar, with visibility of the order life cycle existing only within our own sales order. The key objective is gaining visibility to the reactions happening outside of our own order life cycle that will be impacting our supply chain.
State economies are shut down, creating a reaction to bolster the economy with economic stimulus. This, in turn, works to prevent an economic downturn that paralyzes the economy well beyond 2020. The reaction is pent-up demand as store shelves and inventory levels shrink through e-commerce. Couple the coronavirus shutdown in China with the Chineses New Year, and imported goods are delayed until summer’s arrival. The result? Congestion occurs within the West Coast ports foretelling the arteries of transport become prime targets for rate increases as capacity across transport modes dries up.
Rockfarm’s truckload index continued its steep incline in August, hitting $2.41 average cost per mile as capacity tightened. The $2.41 average is the highest average rate per mile since late 2018. Contributing factors within our resurgent economy extend across multiple points in the supply chain from inventory depletion to import resurgence, all contributing to more freight shipments and not enough trucks to haul the loads.
As seen in the chart below, the Institute for Supply Management’s (ISM) key indexes for August illustrate inventory depletion in both manufacturing and customers’ inventories from 2.6% to 3.5%. Coupled with the increase in manufacturing and a 2.5% increase in imports, August was a challenging month as companies worked to meet production and consumer demand.
U.S. imports from Asia grew from 1.23 million TEU in June to 1.65 million TEU in August, according to PIERS.
Adding to U.S. shipment activity and the sharp increase in truckload rates was the increase in ocean containers imported in August. Imports from Asia increased 34% in August from June volume. As a result of the influx of imports, congestion began creating delays at and around major west coast ports, which began trickling into railheads and intermodal hubs such as Chicago and Dallas. The result? Truck rates began increasing as shippers looked for other modes to move materials, parts, components and finished goods to major markets in the eastern half of the U.S. The outcome was capacity tightening in major markets. Looking ahead, there are mixed forecasts with some claiming we have seen the peak with September leveling off while other forecasts illustrate the holiday surge and pent-up demand will continue to drive higher import volumes thru year-end. Retailers still reflect empty shelves, and the sure bet is on imports holding strong to year-end.
Reflective of the increased demand for trucks is ISM’s supplier delivery index. The index showed delivery performance of suppliers was slower in August, posting a 58.2% index compared to July‘s 55.8% and June’s 56.9%. We’re midway through September and the Rockfarm Truckload Index shows no relief, coming in at $2.65 rate per mile.
The one factor not impacting freight expense has been fuel, as the national average has remained consistent over the past four months with August maintaining a $2.43 average cost per gallon for diesel. The short-term outlook on oil prices through 2020 is stable with the current prices, however, forecasts illustrate oil prices in 2021 will rise 13% indicative of inventory levels balancing out with production in the first quarter of 2021.
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Brad’s journey into logistics began as a Marine Officer and transitioned from the LTL docks to the non-asset side within the logistics service provider arena. As a co-founder of Rockfarm, Brad drives our business development efforts and delivery of our promise. An Arizona native, Brad enjoys spending time outdoors in his home state with his wife and family.
“Our approach to the market allowed us an opportunity to push forward in 2008 and enable our mission, “lower the cost to serve” to stand as a cornerstone to our company today.”
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Bill Mongelluzzo. (2020 September). Summer surge shows in US August imports from Asia.
https://www.joc.com/maritime-news/container-lines/summer-surge-shows-us-august-imports-
asia_20200908.html
https://www.ttnews.com/articles/rls-expands-national-network-gress-refrigerated-services
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-
business/pmi/august/
William B. Cassidy. (2020 September). Loss of US truck drivers tightening capacity, raising rates.
https://www.joc.com/trucking-logistics/labor/loss-us-truck-drivers-tightening-capacity-raising-
rates_20200909.html
Ari Ashe. (2020 August). UP levying $3,500 surcharge on small ships out of LA
https://www.joc.com/rail-intermodal/class-i-railroads/union-pacific-railroad/levying-3500-surcharge-
small-shippers-out-la_20200820.html
https://www.overdriveonline.com/cargo-theft-numbers-rose-during-second-quarter-covid-slowdown/
Thomas Black. (2020 September). FedEx to Increase Peak Hiring 27% for “Unprecedented” Season
https://www.ttnews.com/articles/fedex-increase-peak-hiring-27-unprecedented-season
