Here is a bone of contention amongst my trucker friends and clients. As we discuss ways to improve the sales relationship between carrier and shipper, the term “commodity” always comes up. I believe most carriers feel that being considered a commodity diminishes the services they provide their shipper customers. I would suggest that trucking truly is a commodity, and that shipper customers prefer it that way. The evidence to support my comments is clear:
1. Most shippers have their carrier vendors bid their business every year;
2. The contracted freight agreement has marginal daily and weekly commitments of volume guarantees;
3. The contracted business is piecework priced – carriers are paid by the mile;
4. A complete side business to discern and drive pricing comparisons has been added to this supply chain mess – the third-party logistics (3PL) industry; and
5. Finally, the fragmentation of the carrier base only reinforces the opportunity to commoditize the transaction.
While we have clear evidence that the shipper–carrier business is a commodity transaction, it seems pretty evident that trucking is currently a “scarce” commodity. Like most scarce commodities, inventories will start to reduce, the manufacturing process will be stressed, costs will increase, and finally there will be less choice for the consumer leading to higher prices. All of those conditions are impacting trucking today — the number of available drivers has reduced, the costs of training drivers have definitely increased, shipper choice has eroded, and the prices have risen. However, our data is showing that the carrier costs of recruiting, training, retaining, incenting drivers has far exceeded the price increases found in the market. Once again, the dynamics of a fragmented industry that don’t share the same cost structures compete in the marketplace with different cost structures for now and into the future. The shipper few have the leverage over the multitude of carriers in the market. The predominant negotiating strategy will follow historical trends, the shipper will remind any carrier that is raising rates that “their day will come” when the tide turns. My carrier friends are also very attuned to this negotiation reality, and thus massage their pricing strategy to be “fair.” While trucking is currently a scarce commodity, the market will change (maybe not quite so quickly as it has historically) and that commodity will get repriced to meet economic and market challenges. What is interesting to me is the lack of net profit my carriers reap during times like this where there is scarce supply of the commodity we sell. How does the rail business generate sub-80 operating ratios, and my trucking groups barely break 95 operating ratios during these scarce times? Maybe it’s the strong shipper negotiating power? Maybe it is the privately held hard-working fragmented structure of the carrier base? Maybe we have too many players in the supply chain – 3 & 4PL’s adding their profit margin in an already tight supply chain? Maybe it is just a combination of all those things? What does a strong shipper-carrier partnership really look like?