Capacity Crunch Already Here, Say Logistics Experts

June 24, 2010

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You'd never guess that economists disagree on the state of the economic recovery based on the capacity crunch being seen by transportation and logistics providers. The capacity crunch was a key topic of concern and conversation at this week's Eyefortransport 8th 3PL Summit in Atlanta.
Flatbed capacity was tight this spring, according to speakers at a logistics conference. (Photo by Jim Park)
Flatbed capacity was tight this spring, according to speakers at a logistics conference. (Photo by Jim Park)

"You are seeing an uptick in how much tonnage is moving through the system, on trucks or through the warehouses," said Sid Brown, CEO of New Jersey-based logistics and trucking company NFI. "I was talking to one of my competitors, a large trucking company, larger than us, and he said his load board was almost double what it was a year ago."

Flatbed carriers are one area where capacity is tight. Wayne Johnson, director of logistics for American Gypsum, said the market for flatbed equipment was tight for the previous three months. Although it's eased up now, he's expecting a seasonal surge in the August/September/October time frame.

"If you're a flatbed carrier, you asked for an increase in March, April and May when we were begging for loads," Johnson said. "Shippers, if we were smart, we gave you that increase, because we beat you down pretty bad in 2008 and '09."

Vic Springer, director of supply chain for Atlanta-based White Birch, the second largest manufacturer of newsprint in North America, said his company has had to back off of the "core carrier" concept. "The carriers just don't have the capacity now. We're seeing a lane where in the past we might have used just one carrier, now we have two or three."

"I think we've seen some tightening of capacity over the last 6 months and that will continue," said Kevin Fletcher, executive vice president of logistics at Landstar. "One of the things we're seeing with a number of customers, if you took a look a year, ago, it about took an act of congress to have something expedited through air freight. Today a lot of that questioning that had taken place a year ago, has freed up with a number of our shippers."

Ships and planes

The same is true for ocean and air freight, said speakers and panelists.

Landstar's Fletcher said they're finding that if you really need to get freight on the next possible sailing or flight, the existing contract rates aren't enough. "So we have to make a decision at that point whether to bite the bullet or roll over to the next flight or sailing."

The Journal of Commerce reported this week that the start of the peak shipping season at the ports is still more than a month away, but the ports are already struggling to meet demand. Terminal operators that downsized during the recession were caught unprepared by the double-digit growth in cargo volume. Imports, JOC reports, show no signs of letting up between now and the fall peak season.

Lucas Kuehner with Panalpina, a major freight forwarder, said the industry is definitely seeing surges in transportation demand. At the company's major gateway from China to the U.S. in Beijing, he said, traffic quadrupled in April compared to last year. "No one was prepared for this," he said. "We weren't." Customers forecast 300 tons; Panalpina went out on a limb and purchased capacity for 600 tons, but they ended up moving about 1200 tons.

The troubling thing, Panalpina said, is that customers don't seem to be able to explain these unexpected surges. Is it really more consumption as we come out of recession, is it more related to restocking of inventories, is it tied to new model launches? How much of the crunch is due to capacity that was driven out of the system by the recession?

Driver shortage

Whatever the current reasons, many predicted that the capacity crunch will only get worse, because even if companies buy more trucks (which many are reluctant to do), they will have problems getting drivers to put in them. The driver shortage is only expected to worsen as the Federal Motor Carrier Safety Administration's new CSA 2010 enforcement program takes full effect next year.

"What I find amazing is that there's 10 percent unemployment, yet carriers are struggling right now to hire quality drivers," said NFI's Brown. "And that's today, let alone when [CSA 2010] takes effect at the end of the year. It's a little bit of a scary proposition. The net result is we're going to have to raise the level of pay to attract more people in to the industry, and when your raise that level of pay it's going to put pressure on carriers to raise the rates to shippers."

Leo Suggs, CEO of Greatwide, said he believes CSA 2010 is going to disqualify a lot of drivers. "I think the idea of CSA 201 is a sound proposal; I think if the government is capable of administering the program, it can in fact improve highway safety. But short-term, it's going to put a tremendous amount of pressure on the driver workforce."

Higher rates

Many shippers and third-party logistics companies already are seeing higher rates, especially in certain areas or types of transportation. Spot rates are already up 10 to 40 percent, depending on the geographic area, said Paul Newbourne, vice president of operations for Pennsylvania-based LXP Managed Freight Solutions. For instance, refrigerated capacity coming of the West Coast is tight right now.

"I think we're only in the second inning of a nine-inning game as to where rates are going to go," said NFI's Sid Brown.

A number of carriers pointed out that shippers who stuck with their transportation providers and didn't try to beat them to death on rates during the downturn are now seeing the fruits of that attitude.

"I'm sick and tired of dealing with companies that do nothing but beat you down, beat you down," said Brown. "We've had a lot of shippers that over the past couple of years that didn't beat us down because they've been through these cycles before. You remember those folks. If [as a shipper] you're strictly looking for a transactional type relationship, you're going to be beholden to supply and demand in the market."

Landstar's Fletcher expressed similar sentiments: "We've had a number of customers that worked very well with us during the downturn, and we are working with them now with the uptick in the economy."

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