In today's transportation environment, the perfect storm is brewing. Carrier capacity growth is lagging significantly behind demand growth and shippers are paying a premium for service that is sinking below previous performance levels. In the past three years, 11,300 carriers have gone out of business. The driver shortage is worse than it has ever been and is expected to continue to deteriorate. The cost of diesel fuel is at record highs. Facing exorbitant increases in the cost of doing business, carriers are being forced to pass these additional costs on to shippers through rate increases. Freight rates are expected to rise approximately 5-7% in 2005, excluding surcharges. Factor in fuel surcharges and other incremental charges and shippers may face rate increases in the range of 10-15%.

If the state of the transportation industry is not bad enough as it is, consider other changing market forces: customer demands for shorter cycle times, improved service, and more frequent deliveries. Consider as well the impact on the global supply chain of outsourced manufacturing to off-shore organizations. These factors combined are a recipe for the perfect storm.

Transportation professionals are being forced to adopt new strategies for managing their transportation operations more efficiently in a demand-driven supply chain that is operating in a severely constrained environment. This current environment calls for creative, unconventional procurement and capacity planning strategies. Shippers who do not adopt such strategies are likely to find that their hard-earned cost reductions and operational efficiencies of the 1990s are being marginalized or, rather, vaporized.

One transportation professional, speaking on the strategic sourcing of transportation services, has said, "Based on today's landscape, I'm not sure that strategic is really relevant. It's better to suggest that the current state is more aligned with praying that any truck shows up to pick up your freight." Many shippers hesitate to bid for transportation services for fear of taking rate increases. However, there is significant value in engaging your carriers in a truly collaborative, comprehensive capacity planning program that gives them ownership and accountability in the process.

Proactively implementing a strategic procurement process in conjunction with a collaborative capacity management program may help to minimize shippers' exposure to rate increases and help to ensure capacity is available when needed. Additionally, such programs will help to reduce carrier turndown rates, thereby reducing freight cost and helping to reduce order cycle time, which contributes to lower safety stock levels.

The Five Stages of Carrier Capacity Management, as summarized below, begins with the use of future demand forecast and supply planning data to drive true transportation requirements and concludes with measuring your compliance and your carriers' compliance to the capacity plan. However, Carrier Capacity Management is never complete, because near-term volume forecasts and collaboration with your carrier community allow you to dynamically adapt your capacity commitments as your demand changes.

One: Forecasting Long-Term Transportation Volume

In organizations where capacity planning occurs at all, it is often based on historical transportation volumes. This level of planning may suffice in an environment where the product mix has low demand variability; however, for those organizations that manufacture or re-sell products with high seasonality, causal factors or promotional activity shipment history alone will not provide accurate forecast information.

The most accurate transportation capacity plan is one that is based on a forecast that accounts for sales, promotions, seasonal spikes and also understands how promotional activity on one product may cannibalize the capacity requirements on another product line. Just as in supply planning, forecast accuracy is essential. As demand triggers change, it is critical that the transportation capacity plan adjust to those changes. So, although the demand forecast is not required for rudimentary capacity management programs, using an accurate forecast is a best practice that is emerging to drive the most accurate capacity plan.

Two: Portfolio Management and Capacity Planning

Once the transportation forecast has been derived from the demand and supply plans, a shipper must make decisions about the portfolio of available carriers. The shipper must make decisions about what types of relationships should be established and where those relationships make sense in the shipper's network.

Most large shippers need to employ a spectrum of relationships from one-off, spot market associations to owning the assets associated with a private fleet. Spot market and broker relationships are leveraged for sporadic lanes or in distressed situations. Although it is unlikely that these relationships can be eliminated, the goal of implementing a Carrier Capacity Management program is to minimize these situations. Alternatively, private or third-party dedicated fleets are utilized primarily for consistent, repeatable traffic flows.

Bringing private or dedicated fleets into the mix adds another level of complexity to capacity planning activities. Where a private or dedicated fleet already exists, shippers must determine how to 'right-size' their existing fleet and where in their network it makes the most sense to place those assets. Where a fleet does not already exist, shippers may want to evaluate where it makes sense to switch from contract to fleet carriage.

Three: Adjusting for Demand Variability

At this point in the capacity management process long-term transportation requirements have been forecasted, the best mix of fleet and contract carriage for your business has been determined, a bid for capacity and rates has been performed, and carriers have been contracted to handle the business. What now?

As we all know, consumer-driven supply chains are extremely dynamic. Most long-term forecasts are never firm-they are 'slushy' at best.

At this point, you may be saying that you already share minimum and peak capacity requirements with your carriers today. But ask yourself these questions: Do you ever go back to your carriers and adjust those forecasts two, three, or even four-plus weeks in the future to give them a more accurate understanding of how much equipment you will actually need? If your preferred carrier can tell you that they won't be able to meet your unanticipated spike three weeks from now, do you have the ability to proactively resolve capacity deficits weeks in advance? Do you have the collaborative framework in place to even allow this type of communication with your carriers?

As part of the carrier capacity management program, shippers are encouraged to work with their carriers on a regular basis and adjust their projected capacity requirements near-term as requirements get less slushy. At the lane and equipment level, shippers and carriers can collaborate with carriers in an easy-to- use, web-based application that alerts the appropriate participants when new data or deviations from defined business rules require action.

Four: Daily Planning and Execution

Many organizations have purchased Transportation Management Systems (TMS) as a means to lower overall transportation costs through load consolidation and low-cost carrier selection, among other things. Likewise, they have awarded carrier contracts to those carriers that can best service the business at the right price. As noted earlier, the capacity-constrained environment today threatens cost savings; so now the organization implements processes to achieve collaborative capacity planning programs with carriers in order to protect some of that savings. However, the carrier who can best support your business may not be the lowest-cost carrier on given lanes but, based on your commitment for cost, service and capacity, is the best overall carrier choice at the macro-level. Essentially, you are almost always willing to trade off 'some' cost at the microlevel to ensure that at the macro-level your business is operating effectively.

Five: Analyzing Performance Against Capacity Commitments

Now that a reliable transportation forecast has been established, a means to collaborate with carriers on committed capacity is in place, and those commitments are factored into daily planning and execution processes shippers can more effectively measure carriers' compliance and their own compliance to those contracted volumes. You now have much more reliable and meaningful data to provide input for an overall carrier scorecard program. You can not only measure and analyze the carrier's acceptance ratio but also measure the incremental cost associated with those loads that are declined, which can help in future negotiations with your carrier. Likewise, you can better understand where you are not holding up your end of the commitment and not allocating the appropriate number of loads to meet your commitment.