Hundreds of challenges face American CEOs every day, but the most pressing challenge is the one that is least talked about and most misunderstood. This crisis is in a chronic shortage of long-haul truck and rail transportation which is already pushing up costs, and resulting in uncertain delivery times, shrinking margins, and profit warnings.
The transportation crisis will only become more intense as fallout from new tariffs and trade wars cause manufacturers to re-think their supply chains. Not addressing this challenge could affect a corporation’s earnings, customer service, and even its very survival.
Where did it come from?
The phrase “perfect storm” comes to mind. The looming transportation shortage isn’t the result of one single factor, but many, which are all converging at once. First, beginning on April 1, new federal regulations started requiring drivers to electronically log their hours – something that would, at first glance, seem to be a positive factor in making transportation more efficient, but there are always unintended consequences. Freight costs will increase. At the same time, drivers are leaving the industry in record numbers, not just because of the added regulation, but also because younger workers are choosing to move into different sectors, such as construction, where wages are higher.
To make it even stormier, new tariffs on commodities like steel and aluminum, and revamped trade policies are causing manufacturers to re-think their supply chains. The goal of these new policies are to drive more business to domestic companies, but if successful, it will put tremendous pressure on shipping and logistics – and neither over-the-road trucking nor rail will be able to keep up. Even if there were enough drivers and trucks available, new shipping routes and carrier relationships take time to ramp up. Manufacturers, facing these challenges, won’t have the time – putting domestic industry at a critical breaking point across all modes of transportation.
“Long-term, CEOs will face a serious crisis which will cause further problems as customer service decreases, delays become chronic, and transportation costs increase.”
How does it impact US companies?
Besides the immediate impact of not being able to move goods from here to there, indirect impacts will be no less worrisome. A freight crisis will cause an increase in inventory levels as backlogs stack up, causing a chain reaction of added warehousing and logistics costs. Lagging delivery times will not only cause problems for the manufacturers, but for their customers as well, who will in turn find themselves unable to meet demand for their own goods simply because the products they need are not available on a timely basis.
Long-term, CEOs will face a serious crisis which will cause further problems as customer service decreases, delays become chronic, and transportation costs increase as manufacturers are forced to re-evaluate their transportation mechanisms. Sustained corporate growth – even if macroeconomic factors are otherwise positive – will be impossible, which in the long run will cause eroded revenues and profitability, share prices and possibly even trigger a recession.
What can we do about it?
The logistical challenges require a more strategic approach to achieve more reliability and fewer disruptions, and calls for an end-to-end supply chain optimization, leveraging relationships, and creating a better relationship between carrier and shipper. Presently, many companies are not adapting adequately to face these challenges and CEOs will be under pressure to continue delivering value to investors and shareholders, even as these factors make that difficult.
It is possible for the CEO to continue optimizing value and profitability, even in the face of this transportation crisis – but it requires a very specific strategy. Optimizing the supply chain is difficult in an environment in which there are simply not enough trucks and drivers to move the goods on a timely and efficient basis. The first step is realizing that we are now at a critical juncture, and action must be taken immediately.
Part of it will be negotiating new relationships with new shippers, but that will only look at the problem superficially. Even with new shippers, the same old problems will still exist. Rather, a new approach is called for across the entire buy-make-move-fulfill supply chain. Rather than manufacturers seeing carriers as merely a source, they will have to become a more integral part of the manufacturer’s ecosystem. A closer relationship between carrier and shipper – part of a process called Total Value Optimization – companies will have to do a better job in partnering with their supply base and shipping ecosystem. The second major solution will be a greater focus on data and analytics. Currently many CEOs still struggle to gain meaningful value from data – but timely, accurate and consistent data will be a key factor in better understanding the transportation crisis and potential solutions.
In some ways, carriers and shippers will become one, at least in their overall goal and approach. Carriers and shippers taking a traditionally inward-looking approach may have worked when there was a booming economy and a surplus of capacity, but given this perfect storm of events, that approach will only exacerbate the economic crisis described above. Business has long been described as a zero-sum game, and in times of shortage, it is our instinct to circle the wagons. That seldom yields positive results. Rather, total value optimization forges that tighter alliance between all partners. Carriers will need to gain a deeper understanding of shippers’ strategies before committing resources. Shippers will have to develop a logistics strategy that takes the needs of the carriers into consideration. Only through this heightened level of collaboration will an organization be able to anticipate and meet demand and continue on the road to profitability.
Read more: Who’s Calling The Shots In Your Supply Chain?