Trucking companies only generate revenue when they are hauling freight. Miles that trucks run empty are doubly wasteful. The motor carriers’ fixed costs of truck payments and insurance grow by the day, and variable costs like fuel still must be met. From the shippers’ perspective, empty miles are a waste of potential trucking capacity — the needless reduction of available capacity introduces artificial scarcity and drives up prices. It’s a negative on both sides.
According to data in FreightWaves’ SONAR platform, the trucking industry’s empty mile rate averages between 12% and 13% across equipment types. Dry van trailers, the most abundant and commoditized type of equipment, average little more than 10% empty miles while reefer and flatbed trailers deadhead more often. In an industry with operating margins often below 10%, empty miles are a serious drag on motor carrier profitability.
Trucking companies have every incentive in the world to reduce deadhead, but they’ve been unable to move the needle. Why? There are two reasons: freight flows are inherently unbalanced, and carriers have limited customer bases.
A Closer Look at Freight Flows
Freight flows in North America — and globally — are inherently unbalanced. Some freight markets produce freight in excess of what they consume while other freight markets consume freight in excess of what they produce.
Trucking companies call productive markets ‘headhaul’ markets: these markets, which tend to always run short of trucking capacity, pay higher outbound rates to trucks and are attractive to carriers. Carriers call consumptive markets ‘backhaul’ markets: these markets, which tend to always run short of freight, pay lower outbound rates to trucks and are unattractive to carriers.
Los Angeles and Memphis are quintessential headhaul markets, with outbound freight flows nearly always exceeding inbound flows. The Los Angeles market, of course, includes two enormous ports that together account for 23% of the continent’s container traffic, much of it Asian imports. In Memphis, the country’s third-largest rail hub connecting the eastern and western railroads is in a fairly poor city that does not consume much freight.
Miami and Seattle are quintessential backhaul markets, with inbound freight flows nearly always exceeding outbound flows. South Florida is populated by upper middle class and wealthy retirees who consume goods but do not produce them; the tourist, financial, and entertainment economies of the region likewise do not produce significant outbound freight flows.
Similarly, Seattle is a wealthy city whose economy is powered by the technology industry: even the Tacoma port does not bring in enough freight to flip Seattle into a headhaul market.
So, one of the problems contributing to waste in the trucking transportation industry is rooted in the uneven geographic distribution of freight production and consumption. The other problem has to do with how carriers sell their capacity, their limited number of dedicated customers, and the bets they place on the spot market.
How Capacity Plays a Part
When trucking capacity is tight, carriers make more money by taking ad hoc freight on the spot market, sacrificing the coherence of their networks for lucrative rates per mile. When trucking capacity is loose, carriers make more money by servicing dedicated customers with predictable volumes and lanes. In other words, carriers manage their capacity according to changing market conditions — and they normally lag market conditions, over-exposing themselves to downside risk without fully capturing the upside.
Without being able to fully commit to a strategy — dedicated or spot — motor carriers face structural obstacles to optimizing their networks. Dedicated customers may use their capacity to ship freight from Chicago to Atlanta, but not in the other direction.
Furthermore, sales teams siloed from operations and chasing commissions based on revenue, not profitability, sell capacity to customers who don’t fit into the carrier’s existing network, creating further inefficiencies.
The combination of inherently unbalanced freight flows and specific, limited customer bases create inefficiencies in carrier networks that reduce profitability and drive up costs for shippers.
Surging spot rates don’t make up for sloppy asset utilization, and large enterprise trucking carriers know it. That’s why publicly traded trucking carriers often report the proportion of loaded miles to empty miles run by their tractors.
Take Knight-Swift (NASDAQ: KNX), the country’s largest truckload carrier, as an example. Knight-Swift recently reported its financial results for the first quarter of 2019, and some of the operating metrics included in the release highlight the importance of asset utilization. KNX’s gross revenues dropped 5.2 percent compared to the first quarter of 2018, even though revenue per loaded mile (or rate per mile) increased 9.4 percent. Why?
Digging a little deeper into the numbers revealed that Knight-Swift’s miles per tractor were down 8.7 percent and the carrier’s percentage of empty miles increased to 12.9 percent. Despite significantly higher rates, Knight-Swift brought in less money than it did a year ago because its trucks ran fewer overall miles and ran more empty miles.
A Tale of Empty Miles
Meanwhile, small and regional carriers without extensive networks of facilities, market data, load-planning software, or diverse customer bases are forced to fixate on rates per mile. Owner-operators and drivers for small fleets congregate in Facebook groups like “Rate per mile masters” and “Trucking: Rates and Lanes” to compare notes and share market information in manual, error-prone communications processes.
It doesn’t help that the equipment types commanding the highest rates per mile have the highest percentage of empty miles. Reefers tend to run more empty miles because food production is highly concentrated while food consumption is highly distributed.
Flatbeds tend to run more empty miles for a variety of reasons: they handle one-off projects like specialized equipment moves, active construction sites are always in new places, and rarely do commodities like building materials have balanced two-way freight flows.
Again, the waste of trucking capacity drives up costs for shippers and makes it difficult for carriers to calculate the true profitability of any single load.
Furthermore, the electronic logging device mandate has narrowed the time span in which small carriers and owner-operators — who had lower rates of ELD adoption than enterprise carriers before the mandate — can run miles and generate revenue. The waste of trucking capacity, then, occurs on both a distance (empty miles) and time (nondriving hours) basis.
How to Address It
Trucking companies should look for a platform that optimizes for asset utilization based on both of empty miles and nondriving hours; deadhead miles and hours of service, in order to increase its carriers’ revenue per tractor per week by about 20%.
Creating a ‘dedicated’ experience for both shipper and carrier requires dynamically managing capacity and freight volumes across an array of regional players. An advanced platform builds dense circuits and adds or subtracts loads and trucks on an on-demand basis, integrating upstream supplier information with carrier data sets like preferred destinations and HOS availability.
Freight platforms need two things in order to achieve asset utilization: critical mass and data. Transportation companies need something that enables both shippers and carriers to optimize their operations.
A good platform will effectively serve as integration layer between many shippers and many carriers to automate the process of matching the right load with the right truck at the right price. There are two primary ways technology can do that, by making truckload transportation more efficient, and driving shippers’ costs down while increasing carrier revenues.
The first is by optimize for asset utilization. Automated freight matching can solve for different problems. A platform designed for shippers may be geared toward finding the cheapest available truck, while a carrier-centric platform might be built to send trucks to markets with high spot rates or to find loads that will reposition the truck closer to a driver’s home.
A 3PL handling critical freight may want its algorithms to find the nearest available truck regardless of cost. In short, for a load-matching algorithm to decide which truck is the right truck for a load (and vice versa), it has to be trying to solve a specific problem—it has to define what ‘right’ means. Solving for asset utilization makes sense for carriers because a lower rate per mile, say, $1.80 per mile versus $2 per mile, is far more desirable than deadheading at $0 per mile. Solving for asset utilization also makes sense for shippers because it frees up capacity and lowers its cost.
The second way that technology drives efficiencies in truckload transportation is by building virtual ‘dedicated’ customers and virtual ‘dedicated’ fleets out of multiple shippers and multiple carriers. Doing so requires systems to look deep inside customers’ supply chains to gather and analyze upstream data, so that it can help position assets where they are needed even before loads are tendered.
Shipper facilities are also analyzed so that customers learn how detention times at specific nodes in their networks are correlated with transportation costs. Improving scheduling at docks, so that the notification of an early or late shipment actually causes on-the-fly adjustments to be made, maintaining constant throughput.
Let’s put this in simple terms. Imagine two freight marketplaces: the first has a combined 100 trucks and loads; the second has a combined 200 trucks and loads. Metcalfe’s law states that it is actually four times easier for the second marketplace to match freight than the first marketplace, not just twice as easy. And the best way to address that is through technology. Welcome to the future of freight.
from Quick Transport Solutions Trucking Blog https://ift.tt/30aOCIm
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