In this Discerning Distributor episode, Alex Chausovsky spoke with Samantha Jones, Vice President of Revenue at Rocketshipping, about the past two years of supply chain disruption – and where things sit now.
Jones’s experience in logistics coupled with a passion for understanding the cyclical nature of global supply chains result in key insights and guidance on how distributors can optimize their 2023 strategy.
Alex Chausovsky: What is the status of the supply chain as it stands today?
Samantha Jones: To understand where we are, we need to understand where we were. When you see year-over-year comparisons, rates are down 6%. But down from what? Any graph in the trucking-related sector or employment graph will show a deep V at the beginning of 2020. When the pandemic hit, we went into lockdown and everything from trucking volume revenues and employment levels plummeted to some of the lowest levels we’ve seen in a long time. We laid off a lot of the workforce. Then, we immediately rebounded to record high levels and the workforce couldn’t keep up.
We’ve been in recovery mode ever since. How do we manage elevated levels of consumer demand and demand for trucking to move these goods? 2020 was a year of survival, forget operational and pricing efficiencies. 2021 was still a crazy year with the highest rates people have ever paid for multiple modes in logistics, a year of elevated rates and minimal capacity.
But in 2022, the landscape changed. It was the year of stabilizing capacity and operations.
Hopefully, things are stabilizing, you have your operational efficiencies locked in and can fine-tune them in 2023, and you’ll begin to look at pricing now for the first time since 2019.
Chausovsky: As we look to the future and begin to create pricing efficiencies, what does it mean for the distributor looking to renegotiate their contract or a manufacturer looking to get better rates?
Jones: Some people say a supply chain is more like a supply web because it’s more complex than a straight chain, with a lot of moving parts. In the different modes of transportation, you have ocean, air freight, truckload and rail. Just because one rate is down doesn’t mean another is. That’s to say different ways of contracting rates (contract versus spot) may look drastically different even within the same mode.
I recently pulled some numbers for a market update for total rates for truckload year over year. 2021 was at an astronomical level and it’s only down 0.6% in 2022. That’s excluding fuel. Fuel is up this year from 2021. Some people may not have seen a break at all, despite dropping rates in the truckload line haul space. When you are negotiating with your providers, it’s contracted. Contracted rates were up 8% in 2022 while spot rates were down 12.7%. When people see these averages, they say the rates were down. Realistically, they were only down in the form that most people are not utilizing consistently.
That’s why you always have to dive into the data and go beyond the headlines to understand and unpack those numbers. There are ways to try to save money in 2023 but you’re going to have to be tactical and pay attention. It’s going to require involvement and commitment to go out and work with your partners. No one is handing them (discounts) out.
This is the time to start thinking about being more strategic and involved in your request for proposals (RFP) with different providers. You can do that in several spaces, for instance: in managed warehousing, rail contracts or truckloads. There are RFPs in all these spaces and it’s a way to force your partners to compete for your business.
Asking people to continue to compete for your business is always a good idea. It holds them accountable and keeps you in line with the market. You get an understanding from multiple providers of what is fair market pricing. And if you’re bidding with 10+ providers, you’re going to know what a fair market is based on the results that you see.
For the last three years, you just needed to survive. You weren’t in the position to ask people to compete for your business. Now, it’s time for negotiations, to optimize networks and start looking at the RFPs that are out there.
Chausovsky: What are some specific points of advice that you could offer to companies if they want to be viewed as good customers in the eyes of the shippers? What do they need to focus on to get the preferential rates rather than the ‘difficult customer’ rate?
Jones: When you hear things like, “It’s going to be a shipper’s market,” that does not mean you can stop making yourself attractive. Your number one priority when you are contracting with anyone in the logistics and supply chain space is to be their shipper of choice. You’ll see it show up in your pricing. If you have bad detention times or dwell times, single shipments, using paperwork as opposed to electronic documentation or have short lead times, those things directly affect carriers’ operational margins. That’s how they price freight. The way you affect their operations gets built into the way they price your quote. If you are difficult and have a lot of requirements for how they pick, pack, ship and communicate with you, you’ll probably get priced higher than someone who is a simple pallet-in/pallet-out.
I encourage everyone to be talking with their providers and ask for honest feedback on how they can improve.
C.H. Robinson did an internal data study and found shippers and/or receivers with long dwell times are directly correlated with higher tenure rejections and higher rates. The worst thing you can do is make your carrier wait — their time is money. If they are not moving that truck, they are not making money. You have to be efficient with your loading times at your loading docks. There are a lot of ways you can get creative. Maybe you need to have multiple shifts. A lot of carriers run 24 hours. Drop trailers have also become big because of their flexibility. You can have a carrier come in, drop their trailer in your yard and you have all night to load it. Then, they come back the next day to pick it up. Meanwhile, they get to do something else.
The challenging part is if you are a shipper or distributor and using a third-party warehouse that is notoriously bad at that, you pay for it. It can be problematic in the distribution space when leaning on third-party providers. What if they don’t care how long the carriers wait because they aren’t paying the freight? If you have problematic shippers or receivers, you will start to see rejections. Then, you find yourself spot shopping with a bunch of different carriers. You increase the likelihood of mistakes because there is no consistency in your relationships.
Chausovsky: When you consider the economic data and the landscape, what is a good gauge of future conditions for freight markets in distribution?
Jones: Naturally, people look at freight as a predictor of what is about to happen because everything moves on a truck. If we see freight volumes declining, we probably know we’re headed for a slower economy. However, our freight volumes are just as high as they were last year, which were record levels. For that reason, I like to keep tabs on consumer spending on goods, you can filter that in a variety of ways. Industrial manufacturing and production account for about 60% of truckload freight movement, domestically. The majority of what’s moving on trucks is not consumer goods. That’s a big indicator I learned to keep an eye on. What’s cool about that is there are economic measurements for future orders placed but not fulfilled. So, you can keep tabs on what’s coming down the pipeline for those companies, not just what they are doing today.
Chausovsky: These data sources oftentimes are freely available. You can download the latest data such as new orders, whether it’s durable goods or non-durables, housing starts or housing permits. If you put in the required work, you can get a pretty good picture of what the future demand looks like.
Jones: There are great people out there already putting in the work for you and all you have to do is listen. I do a quick monthly market report where I compile all these resources and put them into one video.
Chausovsky: You mentioned the need to consider different types of shipping, not just truck, but rail and other means. I read river traffic is down because of the water levels. Talk to me a little bit about the capacity that you’re seeing in the different markets and what the latest data says.
Jones: We can run through a few different modes, but I like to start with ocean freight because a lot of goods that move domestically probably started on a container unless it was manufactured domestically. We have seen a significant drop in future bookings for imports. You’re going to hear a lot about rates falling in the ocean space and spot rates are down significantly. Spot rates are very attractive right now compared to contract rates. But that’s going to change. The steam lines and providers know it and will start renegotiating those as volumes drop off. Steam lines have already pulled 15% of their capacity out of the market to change the supply and demand balance. They’re taking their ships out of commission and letting them sit, creating less available space for the people who want to compete for it.
We’ve seen a modest decline in ocean rates on the contracted side that’s going to continue to play out over the next couple of years. Rates to the west coast are very attractive but no one wants them because there is so much risk in labor negotiations. You get your containers into the west coast at great rates and then they sit there due to a strike.
Rail got the short end of the stick in some sense. They had the same experience as everyone else did when the economy shut down. They had to let people go, they had issues with labor and still do. It’s harder to have trained rail staff than it is to have a warehouse worker. It used to be that 60% of our stuff poured into L.A. and Long Beach and then moved across the country on rail. Suddenly, you have stuff pouring into Savannah, Charleston, Houston, New York, New Jersey and the Port of Virginia. These ports are now receiving containers. People are moving stuff to the Midwest to try to find a central point of distribution. These rail hubs and warehousing are a nightmare in those areas. We’re working through that congestion but until it is considered operationally efficient again, you won’t get a true optimization in costs because inefficiencies are a direct contributor to higher costs.
Chausovsky: You said there is risk in the west coast ports and negotiations for rail contracts were not going all that well. I thought President Biden announced that was taken care of. Is that not the case?
Jones: No. The White House does have the ability to make an executive order for an extended negotiation time. We have already done that twice and it’s set to expire on November 19. I just read that six of the 12 rail unions have not ratified their recommended contracts. The main ones that have not ratified are the conductors and the engineers. It’s the most important groups that we see represented that have not ratified those contracts. Without them, you don’t move your trains. So, there’s a potential for a strike that would start November 19 moving forward if that’s what the unions decided to do.
Chausovsky: Is the situation in the ports a little bit better?
Jones: Last time I saw, they were already 120 days past due to ratify, still operating but have not found agreements. The biggest thing to note is that this is not isolated to the U.S. Germany and the U.K. have also experienced labor negotiations and the unions use strikes effectively there. They did implement strikes to get what they wanted to be done in those contracts. I think it would be crazy for the U.S. ports to not look at that and say, “If that’s what we have to do to get pushed through what we want to be pushed through, then that’s what we’re going to do.”
We need the rails. If the rail shut down for one day, that’s 400,000 trucks that need to be brought in to move the goods that run on our rail systems. We don’t have 400,000 trucks and we wouldn’t come close to finding enough capacity.
The barge situation is unique. This is harvest season and 90% of our exportable agricultural goods from the Midwest move on the Mississippi River. Right now, the water levels are so low. Think of the river and the barge system as a two-lane highway with stuff coming and going. We’re down to a one-way and we can’t have two barges cross the river at any point at the same time. So how do you do that? You have to wait for one to travel down to a pocket and then one can come up. It’s super inefficient and they’ve had to reduce the tonnage that the barges can haul just so that they don’t sink too low in the water levels. Last I saw, barge rates were up over 200% just to move it. We talk about inflation in food. Those rates are the raw inputs for food.
I’ll wrap it up with this: The media outlets and the White House were hopeful that as supply chain stressors eased, inflation was going to come down. My biggest caveat to that was that every union had record pay increases and those are not temporary like inflation. These higher cost of living increases are 3-5 years contracts that won’t be going down in 3-5 years. Every single person, truck and equipment type that touches one of your goods have increased by double digits, mostly in the cost to handle. That’s what we’re going to see passed down to the consumer, passed through to the end users for distributors. I don’t see a full reversal of inflation because of this fixed cost.
Chausovsky: I would love to hear the pertinent insights you’re sharing with your clients right now, particularly when it comes to the optimization of the supply chain. What can people do to make a noticeable difference?
Jones: Try to consolidate. Number one, be a shipper of choice. Be the person that your partners want to work with, not just when capacity is tight but when it is loose. Number two, have data and understand it. Without data, you can’t effectively negotiate. You are powerless without understanding your own data.
Alex Chausovsky is a highly experienced market researcher and analyst with more than 20 years of expertise across economics, industrial manufacturing, automation, talent and workforce issues, and advanced technology trends. For the past two decades, he has consulted and advised companies throughout the U.S. and Canada, Europe, South America and Asia.
Alex has delivered hundreds of keynote presentations and webinars to small businesses, trade associations and Fortune 500 companies across a spectrum of industries. He is currently overseeing a suite of analytics products focused on talent for the Miller Resource Group. Alex is also consulting with companies to help them become better at attracting, hiring, and retaining the impact players in their industry.