In December of 2017, the electronic logging device (ELD) mandate officially went into effect, ending all efforts to delay the law and the anticipated trucking price hikes that were certain to come with it. In fact, trucking service prices rose about 6% this January, despite the fact that transportation prices typically drop after surge pricing during the holidays. At the beginning of April 2018, enforcement of the ELD rule officially began, and inspectors have already ordered noncompliant vehicles to be taken out of commission, further reducing shipping capacity. This directive, combined with rising diesel fuel prices, high demand for freight transportation and the unrelenting shortage of qualified drivers, has created a perfect storm of price growth. With no real substitute for truck transportation, businesses and consumers across the country can expect the price of many raw materials, MRO supplies and other purchased goods to rise as well.
Colliding Cost Increases
The ELD mandate is not the sole cause of trucking service price growth in 2018, although it has been a major pain point for carriers. The devices themselves are not prohibitively expensive; a truck driver can purchase and install a basic ELD for as little as $100. However, each device must be able to report a driver’s activity in real time, for which drivers must also pay a monthly service fee of roughly $25 to $60. When combined with rising fuel prices in 2018, which have been driven by an expected 9% increase in crude oil prices, these higher costs for trucking companies have laid a solid foundation for service price spikes.
The ELD rule also adds to a trucking company’s costs indirectly. Drivers can no longer cheat on their time spent driving, forcing many drivers to cut their standard routes short by a few hours, especially when no rest stops are available near their new stopping point. These factors are estimated to reduce trucking companies’ productivity by up to 5%, extending lead time and boosting the cost of every long-distance shipment.
Capacity Woes Stretch Prices Further
The trucking industry faces an ongoing shortage of qualified drivers, especially for specialized and national trucking services, which are key markets targeted by the ELD rule. Long-distance trucking positions are generally considered less attractive than other unskilled positions because drivers frequently spend days away from home. Moreover, the qualifications required to drive a commercial vehicle across state lines are stringent, and drivers must be at least 21 years old, making it impossible for unskilled workers to start in positions immediately upon entering the workforce. Thus, the industry’s workforce consists mostly of older drivers, and with few young people entering the trucking labor market, the industry’s workforce is shrinking each year as more drivers reach retirement. Although trucking companies pass up to half of every price increase through to the driver’s wages, the American Trucking Association (ATA) estimates that there is still a shortage of more than 50,000 drivers. This figure will likely continue to grow in the coming years, as the industry shows no sign of increasing wages enough to entice new workers to enter the market. With low capacity and high demand for freight trucking services, carriers were forced to raise spot rates by more than 20% in the first five months of 2018 alone, and ProcurementIQ expects contract rates to experience double-digit growth this year as well.
Stress on Shippers and Supply Chains
No sector, industry or business is expected to be immune to the effects of rising freight rates. Although industrial shippers rely heavily on slower, cheaper modes of transportation, including rail and waterborne shipping, every shipment requires last-mile truck transportation to pick up or deliver the cargo to the buyer’s own facilities. To buyers’ benefit, price growth is expected to be slower for drayage and local freight trucking services, which are not subject to ELD requirements. Nonetheless, many manufacturers, wholesalers and retailers rely on trucks as the primary mode of transportation for raw materials and finished products. Thus, most businesses can expect to pay more for their purchased input materials, MRO supplies and other consumables. Such growth will expand buyers’ purchase and depreciation costs, cutting into profit margins or forcing them to raise prices and become less competitive.
Rising costs for businesses is expected to have a ripple effect on downstream markets, with consumer product markets expected to bear the brunt of the price hikes. Major food and consumer products manufacturers like General Mills, The Coca-Cola Companies and Proctor & Gamble have cited rising transportation prices as a factor in the increased cost of production. Most companies are expected to pass through their increased costs rather than watch their profit margins narrow. Retailers including Walmart, Amazon and other consumer goods and grocery stores will also feel the pressure of higher delivery costs and will be forced to make similar decisions regarding their product and shipping prices. Because truck transportation is used at virtually every step of a product’s supply chain, these pass-throughs may compound to hit consumers’ wallets hard enough to impact sales for some vendors.
Mitigating the Effects
Although consumers will have no option but to pay more for the products affected by trucking service price growth, carriers and shippers have some recourse to minimize the cost increases that the trucking industry now threatens to bring. Trucking companies can utilize fleet telematics systems to increase fuel efficiency and optimize new routes based off of the driving hour restrictions. Trucking companies can also invest in more fuel-efficient vehicles, including compressed natural gas (CNG) trucks, to reduce their fuel expenses. Additionally, some trucking companies are running more routes with teams of two drivers to reduce the truck’s downtime and decrease the shipment’s lead time.
Shippers, on the other hand, can optimize their inventory management to reduce the number of shipments required in order to cut down on costs. Buyers can also use a freight forwarding agency or broker rather than working directly with a carrier. Forwarders and brokers typically arrange shipments using a load board, which matches the buyer’s shipment with available owner-operators and can thus garner a lower per-mile price than a trucking company would charge. Trucking costs and prices are anticipated to continue rising in 2018 and the years beyond; carriers and shippers can, therefore, benefit greatly by taking steps to reduce the impact of market woes on their own operations.
- Shipping capacity will be constrained as carriers grapple with the full roll-out of the ELD mandate, which may extend the lead time for deliveries.
- Buyers will face unavoidable increases in the price of trucking services as rising fuel costs and a shortage of eligible drivers pressure carrier costs upward.
- Higher shipping prices will be passed down the supply chain to a variety of goods, forcing businesses to pay more for their MRO supplies and other consumable materials.
- Buyers should consider working with trucking suppliers that utilize strategies to reduce their fuel costs, ensure capacity and improve the overall efficiency of their fleet.
Sign up to our newsletter
USMCA & Three Tough Markets for Procurement in Canada
For Canadian businesses in the construction, automotive and healthcare sectors, USMCA and trade barriers threaten to challenge procurement departments. In this report, we take a closer look at the dangers to businesses in these three sectors.
Macroeconomic Update: January - March 2019
ProcurementIQ's quarterly updates are intended to help professionals better understand the broader purchasing environment and make strategic buying decisions. The January - March 2019 update focuses on commodity prices and trade.
Landowners Adapt to Construction Labor Shortages
As the construction sector faces heightened demand brought on by low interest rates, an expanding economy and more natural disasters, landowners have been forced to rethink sourcing strategies that were once the norm. This increased demand has left subcontractor firms stretched thin, leading to surging costs and a rise in project delays.