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State of Logistics: Looking good for now

June 23, 2015
Yet trucking rates expected to stay flat into 2017

The freight industry experienced a “banner year” in 2014 according to data collected and analyzed for the 26th annual State of Logistics (SOL) report – issued by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics – in the face of ongoing “headwinds” such as a growing shortage of warehousing personnel and truck drivers.

However, the continued shortage of truck drivers will be at the heart of the single biggest problem the freight logistics industry will face over the three years - a lack of freight capacity - noted Rosalyn Wilson, senior business analyst with Parsons Corp. and author of the annual SOL report.

“Freight volume is expected to continue at a moderate rate, but capacity is not going to keep pace, with 2015 sure to be fraught with shortages and bottlenecks for almost every mode,” she explained. “[And] truck drivers will be the limiting factor for the growth in trucking capacity.”

Wilson stressed that rates should rise faster in 2015 to cover the higher costs faced by motor carriers and to cover needed investment.

“Based on orders placed and announced investment plans, carriers are working to overcome capacity problems,” she added. “They are, however, doing so with caution to make sure that they do not end up in the over-capacity situation they found themselves in prior to the Great Recession.”

Unveiled at the National Press Club in Washington, D.C., the SOL report noted that the cost of the U.S. business logistics system increased 3.1% in 2014 to $1.45 trillion, up $43.4 billion from 2013, as inventory carrying costs (up 2.1%), warehousing costs (up 4.4%) and transportation costs (up 3.6%) all increased in 2014.

Wilson added that 2014 “was the best year for the supply chain industry since the Great Recession” as consumer demand began to not only drive the U.S. economy but starting to re-shape logistics networks as well.

“Same-day delivery models and expanding e-commerce are reshaping warehousing needs,” she explained. “New operating strategies and warehouse location requirements are changing the face of this sector.” Wilson pointed out, though, that the warehousing industry is also experiencing some of the same labor issues that are prevalent in the trucking industry.

“Turnover is high and companies report difficulty in recruiting and keeping employees,” she added. “So expect warehouse costs to rise as companies offer higher pay and benefits to prevent workforce shortages.”

When it comes to truck drivers, Wilson noted that turnover remains very high for TL carriers – pointing out that on an annualized basis in the fourth quarter of 2014, turnover rates for large and small TL fleets were 96% and 95%, respectively.

“For large fleets, this is actually a decline of 1% over 2013, but [turnover at] smaller fleets grew from 90% in 2013 to 95% at the end of 2014,” she emphasized. “The growth in the small fleet turnover rate is primarily due to the larger fleets attracting drivers away with higher pay, bonuses, and better benefits. LTL fleets are faring much better, with an average turnover rate for the year of only 11%.”

Still, Wilson pointed out that the American Trucking Associations (ATA) believes the industry remains short some 35,000 to 40,000 drivers and while trucking employment is on the rise, it’s not at the levels needed to replace aging Baby Boomers who are exiting the market.

As a result, looking forward, she believes the trucking capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.

“Be aware that a trucking shortage allows carriers to be selective in who they do business with,” Wilson stressed. “They are interested in maximizing driver pay and satisfaction, which means more time actually driving to deliver or pick up goods since drivers are generally paid by the mile.”

Thus shippers who hold drivers for long periods of time waiting to load or unload, or who do not treat their drivers well, will fall to the bottom of motor carrier lists.

“Maximum equipment utilization, quicker turns, and fewer empties go right to the bottom line,” she added. “Shippers willing to work with carriers to accomplish this will fare better than those who neglect these issues.”

Wilson emphasized that with freight volume expected to continue increasing at a moderate rate, capacity is not going to keep pace.

“Thus if the U.S. economy expands at its current rate or better in 2015, we could face the same problems in 2016,” she said. “Assuming slower, but strong, economic growth in the second half of 2015 and into 2016, the industry should make some positive gains in matching capacity to demand. This will be especially true for the trucking industry, assuming the driver shortage can be managed.”

Though Wilson stressed that “there are no indications at this time” that trucking rates will rise significantly by 2017, however, with carriers still firmly in control, rates are not expected to fall, either.

She also highlighted several other “macro” issues that could affect the freight logistics industry going forward:

  • Changes in the global economy, either up or down

  • Increased modal regulation

  • Changes in product sourcing—especially locating manufacturing in the U.S., Canada, and Mexico

  • Rate structure for the new Panama Canal

  • Drastic change in fuel prices

In the end, Wilson told Fleet Owner that the outlook for the freight logistics industry is “still good” for 2015 and 2016.

“Have many economic indicators been less that positive over the last few months? Absolutely,” she said. “But they haven’t impacted the freight transportation industry tremendously. Overall I am not too terribly worried. In general, things still look good despite the industry dealing with ongoing headwinds like the driver shortage.”

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