Throughout the past several years, the movie It’s a Mad, Mad, Mad, Mad World, starring Spencer Tracy, Jim Backus and several comedians, has reflected the transportation issues of today.
The comparison makes sense: In today’s transportation world we are all trying to race across the country, looking to find the treasure of reliable carriers at reasonable rates.
Seeking the treasure is more than a diversion, however. It’s a necessary part of doing business.
REASONABLE DEFINITION.
Let’s try to determine what "reasonable" really means. Webster’s New Collegiate Dictionary defines reasonable as "not extreme or excessive." Extreme is defined as "exceeding the ordinary," and excessive is defined as "exceeding the usual."Great. Maybe that’s why we can identify with the movie when one group of characters rents a plane while others face tire damage, deep water or a mother-in-law from hell.
As in the movie, where the four groups are trying to reach their goal of finding a buried treasure, we are trying to do the same. The "treasure" to a broker of nonferrous material is to service each customer’s needs while managing material sales, marketing and movement—all while using current transportation rates, reliable carriers and on-time plant deliveries.
This daily ritual is repeated over and over again, balancing what we have as current transportation costs vs. what they might be in four or six weeks from the date of purchase. The last 12 months have been truly remarkable, with transportation providers experiencing unprecedented demand in the United States.
Once you are able to secure a carrier, there is a sense of relief. You would think your problems might be over, but this is just the beginning, as transportation rates are a slippery slope. Diesel fuel costs and additional fuel surcharges have driven up the cost of transportation.
Trucking companies report that for a time this year fuel came close to surpassing drivers as their highest cost. Christopher Lofgren, president and CEO of Schneider National Inc., Green Bay, Wis., says, "Once fuel hits $80 per barrel, fuel will replace labor as the industry’s top cost."
In a meeting last October, the Council of Supply Chain Management Professionals indicated their concern regarding long-term transportation issues. Anyone who is moving goods and services is aware and increasingly worried about the shortage of freight capacity, as trucks carry 70 percent of consumer goods across the country.
Throughout the years, many of us had grown accustomed to a plentiful supply of trucks, intermodal containers and railcars at reasonable and competitive rates, but this situation has evaporated, leaving those in the freight game scrambling for carriers to haul loads.
Truckers’ costs have moved higher in part because of fuel costs. From 1994 to September 2004, diesel prices have tracked closely with unleaded regular gasoline, sometimes a little higher, sometimes a little lower. But in September 2004, diesel prices got more expensive than unleaded regular and, for the most part, have stayed there, according to Energy Information Administration statistics.
| ATA Revises Diesel Fuel Costs Estimates |
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The American Trucking Associations (ATA) , based in Alexandria, Va., has revised the trucking industry’s 2004 fuel costs and projected an increase in the amount expected to be spent on fuel in 2005. Despite recent dips in diesel and gasoline prices, the ATA says in a press release that the trucking industry will have spent $87.7 billion on fuel in 2005. This marks a $2.7 billiohn increase from the previous estimate of $85 billion issued in September of 2005. ATA also reports that motor carriers spent $65.9 billion on diesel fuel in 2004, $3.3 billion more than the $62.6 billion originally calculated. The association says that it reconfigured the numbers after the government issued new data on fuel consumption. ATA President and CEO Bill Graves says that despite recent fluctuations in energy prices, diesel costs remain the number one concern of motor carriers. For many motor carriers, fuel represents the second-highest operating expense, accounting for as much as 25 percent of total operating costs. Higher fuel costs are affecting the trucking industry as it prepares to accept Ultra Low Sulfur Diesel (ULSD) fuel, scheduled to hit the market in mid-2006, and a new round of lower-emission diesel engines mandated by the Environmental Protection Agency in 2007. These market changes are expected to affect the trucking industry, driving operating costs still higher. ULSD could add between 5 cents and 13 cents to the cost of producing and distributing on-road diesel fuel, according to the ATA. New engines, meanwhile, are expected to cost more and to burn more fuel, the agency says. |
Diesel fuel prices peaked nationally at $3.24 per gallon in October 2005. This is also reflected in the Weekly Retail On-Highway Diesel Prices, which have increased, affecting the East and West Coasts with fuel pricing problems.
ADDITIONAL FACTORS.
To exacerbate the problem, in January 2004, the federal government’s Motor Carriers Safety Administration’s revised the hours of service in the transportation industry, adding further stress to the supply of drivers and trucks.Additional equipment imbalances have occurred in light of recent natural disasters—Hurricanes Katrina and Rita—along with the busy in-bound seasonal movement of holiday goods.
The painful transportation problems of today are not just tied to fuel and truck capacity. We must address regulatory requirements that raise the cost of operating and maintaining equipment, which is typically the third-highest expense. Shippers who have traditionally moved material on trucks are experiencing capacity issues and are now looking to other forms of transportation. More shippers are switching to intermodal and rail options to control transportation costs, but some are unpleasantly surprised that the railroads cannot always handle the demand.
In past years, the rail system was able to act as the shock absorber for the supply chain, but today it is much different. As stated by a Union Pacific official, "Right now we’re in a position where customers want to move a lot more freight with us than we have capacity for." Fred Draper, vice president of business development for BNSF Railway said earlier this decade. "We need to expand to handle today’s volume, never mind volume that will triple by 2005."
Wait—there’s more! Besides truck shortages, fuel costs and rail capacity problems, add driver shortages, driver safety, security and declining conditions of roads and bridges to the list.
Many carriers cannot find experienced drivers. According to Douglas Duncan, president and CEO of FedEx Freight, "[Trucking companies] themselves bear part of the blame. The industry is not doing enough to attract good workers."
The biggest obstacles in attracting workers to the industry appear to be lifestyle and economic issues. Trucking companies must compete with many other companies for the same workers. Potential workers are lost to the construction industry as the trucking companies are not able to compete with the better pay offered in many parts of the country. In addition, truckers serving the scrap industry in particular are worried about equipment damage from scrap yards and road conditions.
Even the methodology of moving material has changed. We are now looking beyond the business of independent carriers posting loads at truck stops. Now, many independent firms are building strategic alliances through larger over-the-road, intermodal, rail and barge companies.
Shippers are now demanding that the transportation industry do more than provide transportation. They are requesting and obtaining technology and equipment to upgrade existing operations through better coordination of outbound shipments, bar coding of material, voice technology to load trucks and software for planning, execution and reporting capabilities.
All of these efficiencies give us the ability to meet the customer’s time frames and plant delivery schedules while helping to decrease transportation costs. At present, we hear that there is a trend by those traditionally moving material at the plant level to off-load the transportation coordination to the shipper. Some plant locations are considering turning a large portion of their non-contract transportation business to FOB (free on board) destination freight prepaid.
Transportation is notoriously volatile, and during 2005 we experienced it first hand. We have heard many explanations, but as we continue to see capacity, global economic and energy issues continue in 2006, costs will remain a vital role in the movement of nonferrous material to the end users.
Once again, bringing us back to the movie, instead of a wild race to locate the buried fortune under "the big W" in Santa Rosita, every day recyclers play the transportation game in search of reliable shipping. We all try to control the things that happen to us, but life has a crazy way of turning the tables on us. Whether it’s humorous at the time or not, our trials can sometimes seem as bizarre as those of the characters in the movie. It truly is a mad, mad, mad, mad transportation world!
The author, owner of Golden Metals Trading LLC, is a broker of nonferrous metals based in Littleton, Colo. He can be reached at mkirk@goldenmetals.com.
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