Global Logistics and Supply Chain Strategies - April 2008 - (Page 63)

OPINION because of their preoccupation with setting up new, segmented, good-freight operations and in part due to the freight recession’s downward pressure on prices. Note that this situation is largely limited to asset-based carriers. They provide the capacity certainty that formed the core of the traditional unwritten rule. Conversely, brokerage providers, who operate in the spot market, have no bias toward good freight and have stepped into the breach. This is not to say that the eventual solution is limited to brokerage. Capacity certainty remains a shipper value, and assets are the ultimate guarantee of capacity certainty. Recognizing that, a few asset-based carriers have maintained their commitment to capacity certainty for bad freight, even as they expand bad-freight supply chains now support well over half of all margins in most retail sectors. In the production sectors, orders to prevent a plant shutdown can generate daily savings in the millions of dollars. It is clear that badfreight pricing is generally less elastic than good-freight pricing. So, when the next upturn kicks off, badfreight customers will pay. Because the crisis will probably produce actual shortages, retailers will compete aggressively for capacity in order to be the one chain with all the goods on the shelves. These powerful market forces will rapidly increase the price spread between good and bad freight, taking the premium for bad freight from the current range of 5 to 20 percent range to 20 to 40 percent. Such spreads will change the market. reverberate back through the supply chain. Shippers and their carrier partners who want to mitigate that shock would be wise to start their preparations today. Here’s what shippers can do: 1. Educate their organizations about the change. (Remember the shocked disbelief when capacity tightened in 2004.) 2. Identify their bad freight and its value, and understand what is at risk and how much they can spend to solve any problems. 3. Identify carriers with a lasting commitment to this segment and build relationships. Relationships will count in the frenzy caused by missed deliveries. 4. Adjust budget projections upward – you don’t want to be impeded by outdated forecasts during a crisis. A few asset-based carriers have maintained their commitment to capacity certainty for bad freight even as they expand options. These farsighted carriers will increasingly stand out when growth returns to the truckload market. options. These farsighted carriers will increasingly stand out when growth returns to the truckload market. At that point, watch out! When capacity tightens, carriers focus on their highest margin freight. Since today that is good freight, the market will withdraw even more capacity from the bad freight. There will be a critical shortage in bad-freight capacity. Prices will rise rapidly. As margins improve, bad freight will be newly recognized as “good freight.” It is possible, moreover, that the natural market overreaction will make it higher margin business than today’s good freight. We may get the ironic condition where today’s labels of good and bad are reversed. What about shippers? We know one thing for certain. The economic value of North American trucking is so large that in the short term, customers will eat price increases without volume decreases. This is especially true in the bad-freight market. For retailers, seasonal surges, product introductions and promotions generate 30 percent higher margins than baseload sales. Orders to prevent stockouts may double that advantage. As a result, First, shippers will turn their attention to the bad-freight carriers. Those shippers with the most critical service needs will favor the asset-based providers. Second, shippers will revive unwritten rule contracts, bestowing an advantage on large, asset-based carriers with positions in both good and bad freight segments. It is certain, however, that pricing will be more careful than in the past. “If you really want standard pricing, I need to know that my total margin covers the full cost of the bad freight I am committing to.” Third, the pressure of the increased price will eventually work up the supply chain to retail marketing economics. When markets bear the full, true cost of badfreight logistics, the propensity to emphasize seasonal and promotional tools will decrease. Those tools will still dominate, but the next upturn will be the tipping point between their growth and stability or modest decline. The market will now resist the prevailing culture of seasonal and promotional marketing. There will be a large emotional shock to marketers that will 5. Identify the key trigger points that announce that the crisis has arrived. Most shippers will be late reacting; the first to adapt will get their product delivered. Of course the most aggressive shippers can lock up capacity now, if they are willing to invest a modest premium to avoid much greater costs two to three years out. It is worth noting, however, that the steps above do not require financial investment. They ask only that the shipper invest the management time in preparation. Such modest investments promise great payback because few shippers will take the time during the current period of favorable rates and capacity surpluses. It takes significant forethought to invest today when the bad freight is moving at attractive rates. For those shippers with that forethought, the payback will be great as their product will be on the shelves, while their complacent competitors’ products will not. To access this article online, visit The Digital Edition at www.SupplyChainBrain.com. www.SupplyChainBrain.com GLOBAL LOGISTICS & SUPPLY CHAIN STRATEGIES 63 http://www.SupplyChainBrain.com http://www.SupplyChainBrain.com

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Global Logistics and Supply Chain Strategies - April 2008 Contents Editorial GL & SCS Exclusive Fast Forward Up Front Cover Story: Continuing to Add Ever More to Their Offerings, 3PLs Are - At Your Service Over the Long Haul Opinion: Freight Audit Bill Can't Show All Mistakes that Hurt the Bottom Line Opinion: The ‘Good-Freight’ and ‘Bad-Freight’ Trucking Customers Industry Voices

Global Logistics and Supply Chain Strategies - April 2008

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