Rising shipping costs-it's not a new story. Everyone has heard the facts-fuel costs have escalated at lightening speed, carriers are oversold, and transportation rates are increasing almost daily. But what's really happening out there? Are things really that bad?

According the to American Trucking Associations (ATA), absolutely. Today, over two-thirds of goods in the U.S. are shipped on trucks, yet shippers today are facing higher costs than ever before. The constantly rising prices at the pump have brought fuel issues front and center, but shippers are also feeling the effects of increasing driver wages, greater insurance costs and huge increases in equipment expenses.

The ATA reports that in 2005, the trucking industry expects to spend $85 billion on fuel, which amounts to $23 billion more than in 2004. The U.S. Energy Information Administration predicted in September that the price of diesel for this year will average out to $2.41. This has repercussions not simply for operating budgets, but for the survival of many of the industry's smaller carriers. “Fuel represents about 25% of the operating costs for a carrier,” says a spokesperson for the ATA. “That's the second highest operating expense after driver wages. And for smaller companies, the percentage is higher.” It's not a pretty picture. A large part of the industry, approximately 90%, is made up of small operators with 20 or fewer trucks. These small businesses are losing the cost game, and are closing up shop, which leads to the next issue-lack of drivers and tight supply of services.

The fuel increases are compounded even further by a rampant driver shortage. The ATA says that there is a current shortfall of 20,000 drivers, a number that they expect will grow to 111,000 over the next ten years. This is due to a number of factors-changing demographics, drivers leaving the industry, smaller carriers closing up shop in the face of rising costs-but the results are the same. There will be fewer drivers, higher demand, and consequently, still higher costs.

What does this translate to in terms of dollars? A recent survey (July 2005) by the Grocery Manufacturers Association (GMA) showed that in that industry, transportation costs had increased 23% to an average of $1.69 per mile in the past three years, and that transportation now accounts for 62% of all logistics costs for manufacturers. All this is happening at a time when companies are facing pressure to streamline operations and drive costs out of their supply chains. What's a poor shipper to do?

The answer, according to most carriers, lies in choosing the right transportation partners and working closely with them.

“Every day customers are coming to us for help,” says Vickie O'Meara, President, U.S. Supply Chain Solutions, Ryder. “They look to us to manage costs and to help take costs out.” According to O'Meara, the recent cost increases are forcing companies to look further back up the supply chain. Savvy transportation companies are helping their customers determine the most effective and efficient way to move their goods. This may involve using their own assets or those belonging to other transportation partners, but the bottom line is clear- get the goods where they need to be when they need to be there using the most efficient means possible.

It's the transportation planning aspect that's critical. “It involves industrial engineering, logistical engineering, and an enormous amount of data to achieve optimization,” says O'Meara. “It's complex, but the customer can achieve significant savings.”

Pitt Ohio has seen the same response from customers. “Many are enthused about entering into a strategic relationship with Pitt Ohio that enables them to re-engineer shipper-carrier processes, gain share savings and gain cost certainty,” says Geoff Muessig, Vice President, Sales, Pitt Ohio Express.

Muessig reports that he has seen “customers' transportation budgets shredded by rising fuel costs” and that the costs often cannot be passed on to their customer base. “It makes no sense to engage in a spiraling cost relationship that results in less business for both the carrier and the shipper,” comments Muessig. As a result, Pitt Ohio has focused on improving performance to reduce costs associated with the shipper/carrier business relationship and streamline processes wherever possible. The company has looked at improving driver productivity at time of pick up and delivery. As well, packaging improvements can be made that improve equipment utilization and lower dock handling costs.

Another area of investment is information technology. Pitt Ohio has invested in improving information systems so that administrative time is reduced and the costs associated with the interchange of invoices, bills of lading and delivery receipts is minimized. Systems that allow the collection and sharing of shipment and transportation data have also become critically important. “We are spending more time understanding our customer's network,” says Dan Van Alstine, Senior Vice President, Enterprise Sales, Schneider National. Van Alstine says there is a need to access and understand the customer's data and to use that data to create shared delivery goals that benefit both the customer and the carrier.

As one of the country's largest carriers, Schneider National has made significant changes to improve processes and drive out costs. “Over the past few years we've been able to pull out much of the costs related to miles,” says Van Alstine. What that means is that the company has addressed issues such as fuel efficiency, technology and driver wages. “What we're doing now is looking at the cost areas associated with time,” says Van Alstine. Schneider is focusing on things such as the length of time trailers sit idle at facilities. If a trailer is sitting empty, the carrier is carrying the costs for that asset when it's not in use, so in order to optimize the use of the equipment, keep their own costs down, and consequently the shipper's, Schneider is working to ensure their assets are being utilized to their full potential.

Another aspect to consider is the customer's timelines. Not all goods need to be shipped using the fastest methods available. For goods that are not time critical, intermodal transportation is an option that could offer savings to the shipper. “It reduces the cost if you're able to introduce more time,” explains Van Alstine. Intermodal is an option that is growing, and many customers are looking at it as an alternative to total road transportation. For companies such as Schneider that have their own assets and can guarantee equipment availability, it is another way to address customer's cost concerns.

Ryder's O'Meara is also looking at streamlining the time factor. “To deal with congestion in urban areas, we get involved in route design,” she says. Ryder is able to work with their customers to develop detailed routing plans that are adaptable and flexible. This is especially important for companies operating in a just-in-time environment. These companies typically rely on trucking because it is the most flexible and customizable transportation service. Delays caused by congestion can wreak havoc on these businesses so optimal routes are critical. Although Ryder has been involved with route design for about 15 years, O'Meara says that it is within the past year that the service has become a major focus.

One of the most obvious and commonplace cost increases is the fuel surcharges that carriers are charging shippers. “It is a mechanism for carriers to re-coup fuel costs, but they absolutely do not recoup 100% of the cost,” says a representative from ATA. Van Alstine agrees, but says that part of the carrier's job is to explain the charges and the reasons for them. “We've spent the last three months educating clients and helping them understand the new realities,” comments Van Alstine. Part of the new reality has been the unpredictability of the fuel increases. Because no one was able to predict the extent to which fuel prices would soar, carriers were unable to plan in advance nor were they able to prepare their customers for the increases. As a result, fuel surcharges have been an unplanned, significant expense for shippers.

Along with the recent cost increases, shippers are still dealing with a hangover from the days of industry regulation-the General Rate Increase, which was a fairly common industry practice. With customers being barraged by increases pretty much everywhere they turn, Pitt Ohio has taken a step back and reconsidered how they charge their customers. “We have developed sophisticated costing applications that enable us to identify cost on an account specific basis,” explains Muessig. Because of this, the company has not enacted a general rate increase since 2003. “It's unfair to target all accounts for a one size fits all rate increase…We take the time to learn about [the customer's] specific business needs and shipping patterns and we price each account on an individual basis,” says Muessig.

Another complaint commonly heard from shippers relates to lack of capacity and reliability. With lanes frequently congested, and trucks operating at capacity, getting goods on the road on time is becoming increasingly difficult. In order to help ensure reliability, Schneider is looking to retain more owner operator fleets in addition to its own assets.

There is only so much a carrier can do, however. The issue is not a shortage of equipment, but rather a lack of drivers, and this is a situation that will not be solved quickly. Internally, almost all carriers are developing driver retention plans that include wage increases and work environment improvements. Schneider reports that this year their drivers received the largest overall pay increase in the company's history.

But all is not lost, according to O'Meara. “With road, there is a greater variety of transportation management solutions,” she says. Carriers can look to optimize the movement of goods by starting at the beginning and planning the most efficient way to move them. Once again, the answer lies in strategic partnerships and route planning.

“Ultimately the question is how can we as partners deal with mutual issues and create shared objectives,” says Van Alstine. Not long ago, these types of partnerships were only common with long term customers who had years of experience and trust working with their carrier. It's a different reality today, say the trucking companies. Client-partner relationships are a key element in cost-effective, best practices shipping. “Most companies are looking for full partners who can offer reliability and commitment,” says O'Meara. Relationships tend to require a long-term commitment on both the part of the client and the carrier if the best solutions to transportation issues are to be found and cost savings gained. O'Meara says that the time to establish this kind of relationship is becoming much shorter. In fact, says O'Meara, some Requests for Proposals (RFP) are coming in with the requirements for materials management and transportation planning right up front.

Although 2005 may stand out as the year of fuel increases, there are many significant challenges facing the transportation industry as a whole. Issues such as driver shortages, fuel supply and increased demand for services are long term, fundamental issues and will continue to affect the economy for years to come. Yet carriers are striving to achieve innovative, cost-effective solutions just as customers are looking to their transportation providers for guidance. It's an interdependent, mutually beneficial relationship that will be critical to success of the industry. After all, “it's the collaborative approach that gives us the opportunity to do things differently,” says Van Alstine. wt

Sidebar:

10 Ways Land Shippers Can Get More for the Money

Understanding the carrier's realities can go a long way in maximizing the services you get for your transportation dollar. If you understand ways in which you carrier can minimize costs, savings can then be passed on to you. Here are a few tips:

1. Work with your carrier to plan your routes. It's inefficient for carriers to run empty trucks, or to have trucks sitting in traffic. By working with your carrier, you can plan efficient routes that meet both your needs.

2. Driver-friendly freight makes it easier for drivers to pick up the goods and get on the road! Arrange for immediate loading and unloading, or have trailers loaded and ready to go.

3. Find gaps in the carrier's network. If you can find areas where the carrier needs return to loads, you may be able to strike a deal.

4. If time isn't a critical factor, investigate alternate modes of transportation, such as intermodal.

5. Are your goods seasonal? If not, you could be in luck. Goods that flow opposite the regular freight surge times (such as the Christmas build up), can have lesser shipping costs.

6. Forecast your freight patterns accurately. If you tell a carrier you need 25 trailers, be sure you do.

7. Make commitments to your carrier. If freight is guaranteed, carriers can plan more accurately.

8. Consider a dedicated option. If you are consistently running freight along the same route, you could consider using a dedicated service that uses the same drivers, tractors and trailers.

9. Schedule accurately. Time is money, so don't leave drivers waiting for freight. Make sure the loads are ready when you said they would be.

10. Understand the costs involved and work with your carrier. If you can do things to minimize the carrier's costs, yours will be lower too.