By Patrick Burnson, Executive Editor Supply chain management review, January 14, 2014, SCMR.com
Stifel Nicolaus analyst John Larkin agrees that supply chain managers should take a look at the big picture and should closely monitor the “fiscal cliff” negotiations and broader economic data reports in early 2013.
“If a rational solution is reached in Washington, chances are that the private sector will be more inclined to hire, invest, and grow at a faster rate than we have witnessed the past couple of years,” he says. “A better than expected economic scenario, along with significantly higher freight rates, could then result.”
Conversely, he says, if no deal is reached, or if war breaks out in the Middle East, or if China’s growth prospects dim – domestic economic growth could disappoint. In that case, rates could weaken as demand wanes.
“Rates, particularly spot rates, could decline to very attractive level,” says Larkin. “So rather than reviewing a checklist, we think that shippers should remain diligent in their evaluation of the health of the economy. That discipline will best prepare shippers to respond to the changing landscape while lining up sufficient capacity at reasonable market-based prices.”
Larkin and other analysts note that trucking rates are closely related to supply and demand in the marketplace. Assuming that the economy continues to grow at an annual rate of between 1½% to 2%, shippers would expect supply and demand to remain roughly in balance.
“This is the same situation we have experienced for the better part of two years,” he says. “Under this scenario, truckers should be able to eke out 1% to 2% annual increases in raw price in 2013. Carriers may be able to improve on the range by 100 to 200 basis point harnessing a process we like to call ‘yield management.’”
Yield management is nothing more than selecting the highest rated customers and the highest rated freight offered by particular customers. Furthermore, Larkin believes it is possible that the mid-year change to the hours-of-service-related restart rule could effectively eliminate 2% to 4% of the industry’s capacity. This alone could set up a capacity shortage which could drive significant upside to the modest rate increases mentioned above.
“Shippers can help themselves tremendously by working collaboratively with carriers to improve the carriers’ equipment utilization,” says Larkin. “Whether a shipper can open his facility for nighttime delivery, quickly load and unload trailing equipment, or communicate equipment needs well in advance – carriers will be more inclined to work with the collaborative shipper on price, because some of the margin needed by the carrier can be derived from turning the assets and the drivers more quickly.”