Freight market looks good for buyers, but carriers show signs of stress

Lower freight rates could result in fewer options for shippers down the road.

How you characterize the current state of the logistics industry depends a lot on your role within the supply chain. While carriers and logistics service providers across the modes report lower volumes and increased financial pressure, logistics buyers are reporting lower rates in many contract negotiations and, finally, decreasing fuel costs and surcharges.

But while lower rates are good for buyers in the short-term, an overly stressed carrier base reduces a buyer's choice of providers in the long-term, and could reduce carrier investments in capacity and the infrastructure required when demand for freight comes back. With that in mind, logistics buyers need to analyze the current fundamentals in each mode before taking a sourcing strategy.

Trucking
Trucking carriers, often considered a bellweather for the U.S. economy, may be the mode hardest hit by the current economic slump. According to estimates by Avondale Partners, more than 1,800 trucking firms have left the market in the first half of 2008, on top of the 2,000 that left the market last year. While much of that carrier base shrinkage is due to slumping demand for trucking and tightening credit markets, Rosalyn Wilson, a panelist at the Council of Supply Chain Management Professionals (CSCMP) in Denver last month, pointed out that much of that equipment has left the U.S. market permanently to be sold in other regions and won't be back when the trucking market does rebound.

"We can expect some very tight capacity constraints when the market comes back," Wilson said. Panelist Thomas Escott, president of third-party logistics provider Schneider Logistics in Green Bay, Wis., added that despite the steep decline in trucking demand, the first quarter of 2008 "felt tight" due to the surprising lack of equipment.

"Pricing has become more competitive" as truckers compete in a dwindling market, said Wachovia Securities analyst Justin Yagerman in a recent report.

Stifel Nicolaus analyst John Larkin said in a recent note that next year, "Rising demand layered on top of declining industry capacity...should create a veritable bonanza for freight transportation companies that are able to provide capacity into the marketplace."

How to approach the spend: Use current trucking market to negotiate improved service levels and access to capacity from carriers, but be very leery of cutting too hard on base rate. Also work to improve visibility into carriers' financial status if at all possible. Full Story.........