To remain profitable during times of lower sales volumes, businesses must restructure their operations to improve efficiencies. Final sales to domestic purchasers decreased for two consecutive years during the deep recession of 2008-'09. The economy's recovery has been and will continue to be moderate, leaving pressure on businesses to continue restructuring to improve efficiencies in order to increase profits. These changes have large implications on for-hire carriers as well as the services provided by private fleets.
Wal-Mart Inc. recently announced plans to deploy its private fleet to haul goods from suppliers to distribution centers just as Wal-Mart's private fleet currently hauls goods from distribution centers to individual stores. (See “Logistical Shuffle” story, pg. 10.) Hauling freight to and from its distribution centers will increase Wal-Mart's fleet costs, but Wal-Mart expects it can provide transportation services at a lower cost to its suppliers than its suppliers are currently paying. The resulting efficiency, Wal-Mart believes, will be the acquisition of goods from suppliers at a lower cost. Those lower costs will more than make up for an increase in Wal-Mart's private fleet expenses, resulting in a decrease in total business expenses, the company believes.
Not all companies can apply Wal-Mart's strategy because they do not have large private fleets that serve large service areas. The Wal-Mart example, however, shows businesses are under extreme pressure to deliver their products and services at a lower cost.
The inventory-to-sales ratio graph (below) shows businesses have been reducing inventories in relation to sales for years as a way of reducing expenses — obsolescence/spoilage risk, financing expenses, and warehousing expenses. Businesses, however, are not willing to reduce expenses at the risk of missing sales opportunities due to products being out of stock.
Strategies to minimize inventories are causing businesses to demand higher transportation services, such as time-definitive LTL service and team driver operations. As businesses design logistics systems to further decrease inventories in relation to sales, complexity within the supply chain increases, causing carriers to form closer relationships with shippers and receivers in order to tailor transportation services to meet logistics systems. This will cause dedicated transportation services to expand at faster growth rates than those of traditional common carriers.
As for-hire carriers and shippers form closer business relationships, Commercial Motor Vehicle Consulting (CMVC) predicts for-hire carriers will assume more transportation and logistics services traditionally provided by the shipper and the businesses' private fleets.
In conclusion, recessions cause businesses to restructure operations to reduce operating costs and remain profitable. The restructuring of business operations has led to increased complexity of the supply chain. In turn, this presents for-hire carriers an opportunity to develop customized transportation services to reduce businesses' operating costs and for those carriers to perform transportation services traditionally provided by private fleets.
CMVC predicts businesses are more likely to adopt strategies that reduce the reliance on services provided by private fleets rather than adopt strategies similar to those of Wal-Mart. For-hire carriers will penetrate shorter-haul lanes and provide more services typically performed by private fleets.
What is certain about the future is a moderate economic recovery is putting continual pressure upon businesses to reduce expenses, and this will have large implications on logistics and transportation services.
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at [email protected] or 516-869-5954.