Why analysis, planning, and carrier relationship building are about to become a whole lot more important
August 13, 2010
August 13, 2010
I’ve been at this transportation reporting gig for going on 20 years now and I can’t recall a time when an economic recovery was being faced with so much trepidation, uncertainty and conflicting opinion about the future.
Our own research has been revealing this uncertainty for some time now. We find the majority of motor carrier executives, for example, being more pessimistic about freight volume growth and their ability to charge higher rates than their own customers. The uncertainty and conflicting opinion also surfaced at the two workshops we put on for shippers and carriers earlier this summer, in partnership with Dan Goodwill and Associates. I think I’ve lost track of all the different theories about the shape of the recovery and their assigned letters– V, W, U, L. Heck, there is even a √ (square root) shaped recovery scenario. There’s no shortage of economists worrying about a slip back into recession yet Carlos Gomes, senior economist at Scotia Bank and the opening speaker at both of our workshops, sounded awfully convincing in his assertion that the economic fundamentals are sound. Little wonder then how we ended up at our workshops with Dan Einwechter, the charismatic head of Challenger Motor Freight predicting come September “it is going be busy as hell” while fellow carrier panelists Peter DiTecco of Armbro Transport and Doug Munro of Maritime-Ontario Freight Lines did not see recovery for their industry for some time.
What gives? And, just as important, what does it mean for transportation and logistics?
Of all the commentary I’ve read this year, I’ve been most influenced in my thinking by Noel Perry, a partner with the FTR Associates freight forecasting group and author of The Challenge of Deep Economic Cycles.
Since 1980 the North American transportation and logistics industry was buttressed by relative economic stability which allowed both shippers and carriers to focus on their operations. After enduring four recessions from 1970 to 1982 the industry experienced only two from 1983 to 2007. But Perry believes the US economy (and therefore the North American economy overall) has entered into a pattern of high cyclicality, which will erode the economic stability our transportation system has come to rely upon.
Perry warns that it is time for the industry to clearly recognize this reality and begin its adaptations.
There have been a lot of bubbles burst the last few years — consumer credit, home prices and financial risk taking – and the North American economy collapsed with them in 2008. Perry believes the reason we will be stuck in a period of rapid economic cyclicality is because there is a fifth bubble yet to burst: governmental debt, most visible in Europe but present in our largest trading partner as well. He figures creditors will prick that bubble sooner rather than later and the resulting shock to the governmental system will create “a wave of chaotic regulations, taxes and spending policies that will add another level of volatility to the transportation environment.”
The recoveries of the 1980s and 1990s lasted 25 and 28 quarters, respectively. That’s the environment both shippers and carriers have become used to operating in. But if we look across a longer time span, the reality is that the average for the rest of the recoveries is less than 10 quarters. If we return to a period of short cycles, as Perry predicts, the time for growth we’ve become used to would be cut in half.
And short recoveries are bad for transportation for a simple reason, as Perry explains: The benefits from an upturn take about a year to come in. It takes six months or more for the average manager to realize there has been a turn; it takes another six months for that manager to take advantage. Four lost quarters out of an eight- or 10-quarter cycle is a significant fraction. Operating in an economy with such high volatility requires shippers and the carriers who service them to respond much faster to changing market conditions than before.
Initially there may seem to be an advantage to shippers if carriers can’t move fast enough to reduce capacity when the economy cycles downwards. Savings in the range of 15-25% were common during the past year as the capacity overhang depressed prices. But if carriers are equally slow to add capacity during the upturn, the penalty the shipper pays for not securing adequate capacity is lost sales, product obsolescence and plant shutdowns.
High volatility will place an emphasis on analysis and planning. Carriers and shippers who do it, and do it well, will pick up on market changes earlier, respond to them faster, and developed relationships with each other that address the entire economic cycle rather than just the latest upward or downward phase.
With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics. All posts by Lou Smyrlis