Shortening supply chains may create a new reality for trucking sector

There’s a fundamental shift underway in the transportation and logistics sector that could shorten the supply chains for shipping companies during the next few years, according to John Larkin, managing director at Stifel Transportation & Logistics Equity Research.

An increase in demand for faster delivery of “last-mile goods” is leading to tighter supply chains with shorter truck trips. Larkin said there are major dynamics at play that start with competitive near-shoring of manufacturing in the United States and Mexico from Asia that is changing the direction of truck traffic to more north-south routes and less of an east-west trajectory.

He said the dominant supply chain model for the past three decades has been to ship products and raw materials from Asia passing through the West Coast ports in containers that are carried Eastward via rail intermodal/trucks to regional distribution centers and then by dedicated truck services out to the retailers.

As labor costs in China have soared in recent years, more North American firms are moving manufacturing closer to their consumer base. The main reasons for onshoring or near-shoring include lower freight costs, improved speed to market, lower inventory costs and better quality control.

Larkin also credits robotic application uses in manufacturing with boosting productivity and efficiencies among U.S. and Mexican factories that help to make them competitive with Asian manufacturers.

E-COMMERCE GROWTH
He adds that a shift in consumer shopping behaviors from in-store to more online will continue have an impact on the trucking sector for several years to come.

The dominant retail model is changing from the Big Box model to include the e-commerce fulfillment models that take goods shipped in container from the ports via intermodal out to fulfillment centers located closer to end users and consumers. These online orders are then shipped to the customer via final-mile carriers such as FedEx and United Parcel Service.

E-commerce sales have seen rapid growth and are now about 10% to 15% of sales today, according to ComScore.com.

Amazon is testing the build out of fulfillment centers located in large metro areas. Larkin said this test model allows consumers to get the product delivered the same day it’s ordered. The delivery is made by the final-mile carriers or in one of Amazon’s delivery trucks. He said this test is being closely watched because it could be a fundamental shift away from the dedicated carrier service provided by most trucking firms.

HUNT REACTS, LOCAL AND 3D
Lowell-based J.B. Hunt Transport, one of the nation’s largest carriers and intermodal providers, launched a final-mile business two years ago delivering and installing equipment ordered online to the end-user homes. The service was expanded to commercial freight hauling everything from pharmaceuticals to restaurant equipment.

Hunt officials said the company saw a niche opportunity to take singular bulk items – treadmills, dishwashers and furniture and other large items that don’t fit on a pallet – the last mile in smaller trucks with well-screened and qualified drivers.

Hunt execs said in 2013 they expected to see e-commerce orders grow and they planned to take advantage with final mile deliveries to the end-users. Logistics insiders said Hunt may have a head-start in the final-mile leg over competitors.

Larkin said the desire for “fresh” particularly in locally grown produce and meats is also likely to reduce the number of miles for carriers in the coming years. He said Wal-Mart is leading this charge because consumers want to buy locally grown products.

And while 3-D printing is still in its infancy, Larkin said it could also reduce the need to move products that could be created on-site and on-demand in the years to come.

“This technology already exists and it’s just a matter of time before more manufacturers began using it,” Larkin said.

IMMEDIATE IMPACT
Some of Larkin’s theories are already being felt in the trucking industry, according to Dan Murray, vice president of the American Transportation Research Institute.

Shippers in the third and fourth quarters of last year decreased their use of truck-rail intermodal and moved more to truck. He said 55% or more of truck trips are 50 miles or less.

“Declining truck trips is not going to mean any sort of decline in economic activity; it’s going to mean a substantial increase in the number of trucks moving goods, particularly in urban areas for shorter distances,” he added.

Murray also noted that going forward there will be a larger demand for local delivery capacity.

“Density in neighborhoods is going to be important. It will be interesting to see if UPS and FedEx will be able to offer product to meet this demand,” Larkin said.

He cautioned that it is more difficult for trucking companies to generate revenue for shorter-haul moves compared with long haul given that the rate formula in place is based on loaded mile. Carriers, Larkin added, will have to use caution not to underprice the short haul moves and it will mean revamping their pricing models.

POSITIVE AND NEGATIVE IMPLICATIONS
Industry analysts agree that there are positive implications for trucking as this shift continues. Larkin said drivers often prefer regional routes that allow them to be home. He said this might help carriers with recruiting and retaining drivers amid the ongoing shortages trucking companies continue to face.

He said the industry will touch the freight six to eight times more frequently as manufacturing comes closer to home. He said there will be more trucks needed for shorter routes which could further stress local and urban highway networks.

Larkin predicts intermodal shipments will continue to decrease as more products are made in North America. This is likely to mean a decrease for the drayage industry – pick up at a port to a nearby warehouse or other facility – amid reduced demand at ports and intermodal facilities.

As e-commerce orders grow to a larger market share, Larkin said dedicated and private fleets will see less miles. 

“Mega trends such as these are often slow to develop but they are already underway. This does provide some big opportunities for regional carriers, bulk carriers and last-mile delivery carriers going forward,” Larkin said.