By Gary Girotti | Global Executive Vice President, Supply Chain Intelligence & Technology Products Group, Chainalytics | and Olga Rissin | Product Manager, FMIC Europe and Russia, Chainalytics|
How do you prepare for reduced or unavailable trucking capacity to minimize the impact of a local capacity crunch on your operations? In this case, the old adage holds true: Failing to plan is planning to fail, so let’s begin by distinguishing between the different types of capacity crunches:
- Cyclical Freight Markets: Some periods have abundant capacity and low rates followed by times when there is less supply and increased rates. Part of what affects this cycle is simple market dynamics: Idle equipment and costs associated with it make providers cut down their operations or force them completely out of business, reducing the supply.
- Regular Market Cycles: Some capacity shortages are the result of regular trucking demand, for example, a seasonal shortage of trucks in South Europe during harvest seasons. These types of market cycles are slow and are easier to foresee than:
- Smaller Scale Capacity Crunches: These situations–like the one we discussed in our previous blog–are our main focus here.
Most local capacity imbalances are a result of spikes in demand or other regional economic changes (for example, several companies plan to move their operations into a country as a result of economic concessions, or new regulations directly affect the carrier and the driver community).
While it is very difficult to anticipate such events, that does not mean you cannot be prepared to best deal with the impact by having:
- Good links to market information, other than from carriers
- Strong relationships with core carriers to protect your capacity
- Well-thought-out processes for being nimble when the market turns
The Importance of Solid Market Sensors
Strong lines of communication with other shippers and trusted advisers are critical to be able to quickly assess the nature, breadth and extent of a capacity issue.
We often see that one company believes there is a capacity crunch, but in reality they are the target of a carrier rate increase attempt that the carrier portrays as a general capacity crunch. Here’s where links to the market are critical: They will help you understand if other shippers are seeing the same supplier behavior and to what extent. The worst move in these situations is to give in to a carrier request for a rate increase to secure capacity when one is not required.
Why You Need to Build Carrier Relationships Before Things Get Tight
Once you determine the true nature of a capacity crunch, the best defense is to be able to leverage the strong carrier relationships that you have ideally already fostered in the normal course of doing business before the market turned.
It is important to understand that when a carrier has many shippers to choose from, the only advantage you have is your strong relationship, which will essentially be the only guarantee you have that you receive the service you expect at a reasonable (for this situation) rate. If carriers know that you prioritize and value them as well, they are often more motivated to invest in their relationship with you at any time. You can’t expect your contract carriers to take loads well beyond their committed capacity level during a capacity crunch without a price increase. But you should expect them to take all loads up to– and hopefully a little over–your contracted rate. Beyond that level, a reasonable rate increase is fair.
The exhibit below shows that during the carrier capacity crunch in Poland late last year, contracted carriers raised their rates in August-September to an average of 7 percent above regular market price. However, over the same period the new carriers joining the mix had much higher rates, averaging ~30 percent above the regular market price.
Prepare To Work the Spot Market Before the Crunch Hits
When all else fails, you need to have processes in place to be both nimble and proactive. What this means is in the good times, like now, when rates are down and carrier capacity is loose, transportation departments should be reviewing their processes for finding spot carriers when capacity changes:
- Identify who in the organization is clearly responsible for finding capacity by lane or region
- Ensure those employees have clear channels for quickly approving spot rates to seize opportunities
- Investigate the implementation of spot rate auctions and other advance contracting strategies
- Ensure each lane owner has an up-to-date carrier surplus list and is working those relationships
- Develop ties and possible contracts with the brokerage community
As you can see, there are many proactive steps you can take to cover all your bases. Assuring you have all these elements in place will maximize your preparedness make you maximally prepared and ability able to navigate a local capacity crunch. You’ll sleep better for it.
Gary Girotti is a global executive vice president, Supply Chain Intelligence Products and EMEA Transportation Consulting at Chainalytics. Olga Rissin is product manager for Chainalytics’ Pan-European Freight Market Intelligence Consortium across Europe and Russia.