ELDs will put supply chains in a vise. And maybe that’s a good thing.

by Sean Kilcarr
Oct 03, 2017

For as long as I’ve covered both the trucking and logistics industries, they’ve functioned under a freight philosophy called “just-in-time” delivery or “JIT” for short.

Put simply, JIT is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

So how does trucking and the now infamous electronic logging device (ELD) mandate play into this JIT philosophy? In short, JIT delivery costs should increase significantly once the ELD mandate hits, simply because truckers will no longer be able to “bend” their operational hours to meet the tight freight scheduling demands of JIT-based supply chains – which, frankly, describes almost all supply chains now.

Here’s the combination of trucking, ELD, and freight demand factors that will create something of a “Bermuda Triangle” for shippers from here on out:

  • Trucking moved roughly 10.42 billion tons of freight last year; some 70.6% of all tonnage by mode in North America;
  • Trucking is an industry made up of small business: 91% of all trucking companies operate six trucks or fewer while 97.3% of them operate 20 trucks or fewer;
  • There is a growing shortage of truck drivers, a shortage that will reach 239,000 in five years if current trends persist;
  • Most industry analysts expect the ELD mandate will reduce trucking capacity by 3% to 5% as motor carriers and drivers exit the industry rather than comply with the new electronic logging rule;
  • Trucking capacity is now under further pressure due to the freight demand being spurred in the wake of hurricanes Harvey and Irma – storms that also removed a lot of trucking capacity from the overall supply chain system.

John Larkin – managing director and head of transportation capital markets research for Stifel Capital Markets – added some further depth to that thesis in a presentation he made last month at an Iowa Motor Truck Association meeting.

“These storms which attacked South Texas and Florida really have created a severe tightening of supply and demand [and] may have accelerated the tightening of supply and demand about six months,” he explained.

“We were thinking [that tightening] really wouldn’t become evident until early next year when we had the at least partial impact of the ELD being factored into the equation,” Larkin noted.

“[But] here we are; there aren’t enough trucks, turned-down loads are way up, spot rates are astronomical in some parts of the country, [and] trucks are flocking to the high rates – which [is] leaving other parts of the country with too few trucks,” he pointed out. “I think this is the wakeup call that shippers needed, especially those that were so harsh on everyone back in 2015 and 2016.”

Larkin bluntly addressed what he dubbed “Neanderthal practices” on the part of shippers in the not-so-recent past and illustrated how that behavior is now starting to come home to roost.

“A couple of people sent me letters from shippers at that time which said, ’We’re so grateful for all the great service you’ve provided to us over the years; however, we’re notifying you that we’re going to take our [freight] prices down 10% effective the Monday after next. If you’re willing to absorb that price discount that’s great, we’d be happy to have you in our carrier mix; if not we’ll put your business out to bid and you may win some of that, you may lose all of it. The likelihood of you winning it all back is zero,’” he noted in his remarks.

“That’s pretty harsh,” Larkin stressed. “That’s treatment of somebody who’s supposed to be your partner and I think some of those folks are going to see the other end of that here very shortly. It’s hard to feel too sorry for them.”

So what are the factors that are going to make shippers feel so “sorry”? For starters, spot rates are spiking fast, Larkin said, initially due to the hurricane recovery efforts – bringing in water and other needed supplies to folks who have been forced out of their homes.

“Then you’ll see the next wave of rebuilding ... particularly of South Texas,” he said. “There’s a lot of carpeting, a lot of electronics, a lot of furniture, a lot of wall board that needs to be replaced and all that has to be moved in over the next 12 to 18 months.”

It’s not going to be something that’s fixed immediately, he added. “It’s going to have a nice tail to it [and] you have some of the same problems down in Florida. Puerto Rico had a direct hit [from Hurricane Maria] and there’s going to be a lot of material moving down there as well,” Larkin pointed out.

So that is part one – hefty freight demand, pretty much scaling up for a year to a year and half.

Now for part two: the impact of the ELD mandate on JIT delivery schedules.

First of all, Larkin warned that all the talk about “soft enforcement” regarding ELD or related systems after the December 18 compliance deadline isn’t as “soft” as many truckers might believe. “You’re still going to be dinged on your CSA [Compliance Safety Accountability] score if you don’t have one and you’re still going to be fined,” he explained. “The only thing that won’t happen is you won’t be put out of service until there’s a violation on April 1 or later.”

That’s going to have some impact Larkin believes, but more regarding the elimination of what he calls “marginal carriers” than it will be on reduced productivity of those that don’t have ELDs now.

And here comes the kicker, as Larkin sees it: “The way some small carriers have competed is to cheat. People didn’t use to like to use the word cheat, but that’s essentially what they’re doing. They’re running 14 hours when they’re supposed to be running 11 hours.”

He said that brokers give such carriers freight that gets hauled between Chicago to New York in one day – an 800 mile length of haul that you cannot make in 11 hours unless your average speed is 87 miles per hour.

“I don’t think the New York State Police would allow you to do that on the New York State Thruway,” Larkin stressed.

Thus the time required to legally carry freight shipments by truck is going to expand – and thus it will take longer and cost more to conduct such shipments. And that is not a bad thing, especially if the end result is a driver that is getting paid more and also operating their rig more safely at slower speeds.

There’s also another regulatory hurdle to consider in all of this, Larkin added: the national drug/alcohol database or “clearinghouse” that is so far on track for implementation in early 2020.

“That will be a mechanism to see if an applicant failed a drug test somewhere else; whether he [or she] has any DUIs or DWIs. That is, for most carriers, a non-starter [and] for most insurance companies a nonstarter,” he explained.

“Some people think this rule here will have a bigger effect than ELDs with all the substance abuse that we have in this country – which is another sad story maybe for another day,” Larkin noted.

That is very true – with an out-of-control opioid crisis affecting large swaths of the nation, it’s not a stretch to realize that the labor pool from which truck drivers are being hired is being affected.

All in all, it adds up to a need to change our supply chain practices; placing a higher value on the services truckers large and small provide.

This is a reckoning that is long overdue.

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