Fuel Surcharges
The entire investment of a small carrier can be in motor trucks. Even for the largest carriers, by far the greatest share of investment is in trucks. For this reason, fuel costs are second only to labor costs as a percent of total variable costs. Truckload carriers can have fuel costs as high as 30 percent of their total costs, while LTL carriers usually are closer to the 10 percent mark. The reason for the difference is that LTL carriers have higher fixed plant and labor costs associated with the consolidation of many smaller shipments for each trailer loaded. Fuel prices for LTL carriers represent a smaller percent of greater total costs.
The most unusual thing about the implementation of fuel surcharges by motor carriers is that the carriers with the highest ratio of fuel costs to total costs have not been the first to implement the surcharges. These surcharges have been instituted first by the LTL carriers.
One explanation for this is that the LTL pricing structure is more conducive to the acceptance by shippers of these extra charges. The complex system of LTL freight classifications, combined with regular base rate increases, has created an atmosphere of acceptance of charges that are imposed by all carriers in the LTL market simultaneously. The truckload carriers that charge on a per-mile/lineal foot basis are in a more competitive situation. With no base rates to increase as a group, they individually decide when to add fuel surcharges. For this reason, they usually follow the LTL carriers in implementing fuel surcharges. However, the smaller profit margins of the LTL carriers probably also contribute to their being first to implement fuel surcharges.
Although motor carrier deregulation has been good for the economy in general, it is agreed that there are instances where regulation is good for everyone. I propose that government-mandated fuel surcharges would benefit all parties. They would make the motor carrier industry more competitive by leveling the playing field for all carriers, by weakening the fuel surcharge advantage of certain carriers. Mandated fuel surcharges would bring uniformity of fuel surcharges and predictability for both shippers and carriers.
Are surcharges bad for the economy? At worst they fail to protect the U.S. consumer, in the short run, from the inflationary effects of oil supply shocks. Fuel surcharges actually may be good. Passing price increases quickly down the economic chain causes the adjustment mechanism of decreased demand for oil to occur more quickly. Protecting consumers from the effects of oil price shocks simply prolongs the crisis. Mandated fuel surcharges make good sense.
Thursday, August 27, 2009
Monday, August 24, 2009
Asset-Based LTL Companies and Short-Haul Brokerage Services
Asset-Based LTL Companies and Short-Haul Brokerage Services
Because neither rail service nor air freight present LTL trucking companies with a significant threat as substitute products, there are really no good substitutes (other than same mode competitors and the third-party logistics industry) for the services provided by asset-based LTL trucking companies in the United States. For this reason, many LTL trucking companies have created third-party logistics or brokerage divisions in order to counter the threat posed by 3PLs.
Third-party logistics services usually own no assets, but instead act as brokers of asset-based transportation company’s services. These logistics services rely upon their technical expertise with computers and software, as well as their bargaining power with asset-based transportation companies, to provide shippers with a variety of low-priced transportation alternatives.
If all services offered by the company are sold by every salesperson, there is no danger of cannibalization of an asset-based company’s LTL business when providing a brokerage service of this kind. By acting as a broker, the company can offer low pricing for “out of area” shipments, as well as for large volume LTL and truckload shipments (using another trucking company’s equipment) thereby ensuring that their own capital equipment is used for more profitable business.
Between 1993 and 2002, the total amount of freight transported in the United States grew 18% to 16 billion tons, and the value of that freight grew 45% to $10.5 trillion. Of that amount, trucking moved 64% by value and 58% by weight. It is sure to have grown since that time. I apologize for the dated information.
The majority of shipments made by the average U.S. shipper are less-than-truckload (LTL) shipments that require next day service within approximately a 300 mile radius of the origin terminal, or second day service within 500-600 miles, but not at a specific time of day. There is a great demand for this type of service, but also a great number of companies able to provide it.
The majority of tonnage hauled by motor carriers today travels fewer than 500 miles. Regional trucking was the fastest growing segment of the trucking industry in terms of change in net spending between 2001 and 2002. During that same period, spending on national LTL service declined by 4.4 percent. Since then, the situation cannot have changed completely.
Brokering short-haul truck shipments presents a great opportunity. Destinations that might be otherwise difficult to serve because of their location in remote rural locations (for instance, half-way between break-bulk terminals), can be more profitably served in this way. The company’s geographic area covered can also be expanded. At start-up, the company can simply obtain rate quotes from various LTL companies (letting them know that they have competition). Hopefully, the company can eventually use their volume of business to convince other asset-based trucking companies to conform to a standardized bid process, while keeping a searchable database for rate comparison purposes.
Establishing services such as this, that increase switching costs and discourage substitutes, should be a key strategy for any company. Offering the customer multiple services helps to increase switching costs and discourages the customer from seeking other out other transportation companies. However, each of the products sold must be clearly defined (in order to prevent cannibalization of other products/services) and each individual shipment must be profitable. The company must gain competitive advantage through an integrated offering of differentiated, profitable services.
Because neither rail service nor air freight present LTL trucking companies with a significant threat as substitute products, there are really no good substitutes (other than same mode competitors and the third-party logistics industry) for the services provided by asset-based LTL trucking companies in the United States. For this reason, many LTL trucking companies have created third-party logistics or brokerage divisions in order to counter the threat posed by 3PLs.
Third-party logistics services usually own no assets, but instead act as brokers of asset-based transportation company’s services. These logistics services rely upon their technical expertise with computers and software, as well as their bargaining power with asset-based transportation companies, to provide shippers with a variety of low-priced transportation alternatives.
If all services offered by the company are sold by every salesperson, there is no danger of cannibalization of an asset-based company’s LTL business when providing a brokerage service of this kind. By acting as a broker, the company can offer low pricing for “out of area” shipments, as well as for large volume LTL and truckload shipments (using another trucking company’s equipment) thereby ensuring that their own capital equipment is used for more profitable business.
Between 1993 and 2002, the total amount of freight transported in the United States grew 18% to 16 billion tons, and the value of that freight grew 45% to $10.5 trillion. Of that amount, trucking moved 64% by value and 58% by weight. It is sure to have grown since that time. I apologize for the dated information.
The majority of shipments made by the average U.S. shipper are less-than-truckload (LTL) shipments that require next day service within approximately a 300 mile radius of the origin terminal, or second day service within 500-600 miles, but not at a specific time of day. There is a great demand for this type of service, but also a great number of companies able to provide it.
The majority of tonnage hauled by motor carriers today travels fewer than 500 miles. Regional trucking was the fastest growing segment of the trucking industry in terms of change in net spending between 2001 and 2002. During that same period, spending on national LTL service declined by 4.4 percent. Since then, the situation cannot have changed completely.
Brokering short-haul truck shipments presents a great opportunity. Destinations that might be otherwise difficult to serve because of their location in remote rural locations (for instance, half-way between break-bulk terminals), can be more profitably served in this way. The company’s geographic area covered can also be expanded. At start-up, the company can simply obtain rate quotes from various LTL companies (letting them know that they have competition). Hopefully, the company can eventually use their volume of business to convince other asset-based trucking companies to conform to a standardized bid process, while keeping a searchable database for rate comparison purposes.
Establishing services such as this, that increase switching costs and discourage substitutes, should be a key strategy for any company. Offering the customer multiple services helps to increase switching costs and discourages the customer from seeking other out other transportation companies. However, each of the products sold must be clearly defined (in order to prevent cannibalization of other products/services) and each individual shipment must be profitable. The company must gain competitive advantage through an integrated offering of differentiated, profitable services.
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