Today, the world is confronting one of the greatest health crises in a century. COVID-19 has significantly impacted the world’s economy, trade, and shipping. However, it is important to note that the COVID-19 pandemic was not the origination point for the capacity crisis in logistics. Rather, it heavily compounded an existing capacity issue that was already affecting shipping in the United States. In truth, the capacity crisis became glaringly apparent to the general populace in late 2017, during the hurricane season, when both Hurricane Harvey and Hurricane Irma severely impacted both Texas and Florida. The two states required a lot from the domestic logistics sector during this time, resulting in significant retail and agriculture capacity shortages felt elsewhere in the country.
This tangible reality was brewing even before 2017; however, logistics professionals would tell you that the capacity crunch began almost ten years prior to 2017. One of the major catalysts for today’s freight capacity crisis was the 2008 Financial Recession. In 2008 alone, more than 5,500 fleets around the country filed for bankruptcy. And by 2012, more than 18% of the entire American trucking capacity disappeared. Over the following years, freight volumes began picking up again. Still the remaining logistics providers were far too cautious about adding extra capacity to make up the difference, fearing a replay of 2008.
So, when the 2017 hurricane season came along, the existing freight capacity became overwhelmed, and transport trucks became difficult to find. As a consequence, rates began to skyrocket. Under normal circumstances, when there was a tight capacity within the trucking industry, logistics providers would simply purchase more. However, the lengthy capacity crisis had made this option unfeasible.
Understanding The Current Capacity Crisis In Logistics
To fully understand the impact of today’s freight capacity crisis, we must first understand all of the factors that play into it. Aside from the 2008 Financial Recession, the 2017 Hurricane Season, and the 2020 COVID-19 pandemic, other variables have negatively impacted the trucking industry. Among them are these leading causes:
- Extreme Weather Conditions – As a result of climate change, hurricanes and other harsh and unpredictable weather events have become commonplace. That has provided for the additional, consistent strain on the logistics and transportation industries. For instance, the “Nor’easters” event hit the United States four times in March 2018.
- Licensed Driver Shortage – Even though trucking companies are continually looking to recruit and train newly licensed drivers, there is a massive shortage going on. It is estimated that over the next five years, there will be a truck driver shortage of over 100,000 drivers. The American Transportation Research Institute calls it the foremost concern for the health of the logistics industry.
- Driver Coercion Laws – Issued by the U.S. Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA), the Driver Coercion Law will take action against all trucking companies that knowingly jeopardize the safety of the driver and general public. In other words, no truck driver should be coerced into violating the provisions of the Federal Motor Carrier Safety Regulations (FMCSRs), Hazardous Materials Regulations (HMRs), and the Federal Motor Carrier Commercial Regulations (FMCCRs).
- Hours of Service Government Regulation – Another government regulation is the Hours of Service. These refer to the maximum hours a truck driver can be on duty before taking a break. This particular government regulation aims to ensure that drivers are awake and alert at all times.
- Electronic Logging Devices (ELD) – These electronic logging devices have been in effect since December 2017. They ensure that truck drivers will comply with all government regulations. However, many drivers have failed to comply, which means that thousands of vehicles could also be put out of service given the chronic driver shortage. While ELDs, Hours of Service, and Driver Coercion laws have definitely helped keep truck drivers and other motorists safe in traffic, they have indirectly added to the already-existing problem of the logistics capacity crisis by lowering the overall hours that trucks are on the road.
- Fleet Deterioration – After 2008, trucking companies all across the United States started scaling down their operations just to stay afloat. Many were unable to upgrade or even maintain their trailers, rigs, or other equipment. Vehicles were also reassigned to less rigorous tasks, while others were sent into retirement. Simply put, the 2008 Financial Crisis forced many of those logistics companies that survived to scale down their fleets.
- Increase in eCommerce – It should go without saying that eCommerce was the biggest winner of the COVID-19 pandemic as more and more people began ordering online. But even before 2020, there was a significant increase in equipment demand, which coincided with the continuous rise of eCommerce retailers, like Amazon, among others.
These factors have led to a massive influx of demand on the already overburdened freight capacity, which has led to increased costs across the entirety of the supply chain.
Supply Chain Capacity Management in Times of Crisis
Only a few people were able to predict the capacity crunch. Similarly, only a handful of people expected something as disruptive as the COVID-19 pandemic. When things are running smoothly, companies find it easy to conduct their operations. But when things become volatile and uncertain, companies need to be able to demonstrate agility and flexibility in order to survive. Shippers and third-party logistics providers need to stay on top of the situation and manage their internal processes, systems, supply chain capacity, and partner relationship management to anticipate and survive crises. This can be achievable through supply chain capacity measurement and capacity planning.
Measuring Supply Chain Capacity
Depending on the service type of a given logistics firm, companies need to be able to measure their supply chain capacity in terms of the material they can clear from the inbound trailers or based on the amount of product they produce.
Companies should also measure capacity from a theoretical and a rated perspective. A theoretical capacity implies the maximum capacity possible during output that doesn’t consider any other variables such as downtime, accidents, and the like. Rated capacity, on the other hand, represents the output capacity based on a long-term analysis of actual capacity. While both the theoretical and rated capacity are necessary, it’s the latter one that is the more realistic form of measurement since it’s based on actual measurements taken over a long period of time.
To make the proper measurements, companies will also need to use adequate technology solutions such as transportation management systems (TMS), warehouse management systems (WMS), and enterprise resource planning (ERP). These will help calculate throughput as well as other supply chain metrics needed to meet one’s business goals.
Developing a Capacity Plan
An advisable course of action would be to create a capacity plan to help businesses identify any existing capacity still available within their supply chain network. The capacity plan will look into:
- Supplier Capacity – This includes everyone, such as tier 3 and tier 4 suppliers, and the supply markets. These all have a part to play in a company’s potential to import or produce goods.
- Production Capacity – Many different variables and constraints will affect the company and its contractors during the production process.
- Transport Capacity – Either during transport or at cargo handling facilities, all sorts of inefficiencies can arise and have a negative impact on the delivery times, customer experience, and overall service levels.
- Distribution Capacity – Throughput and storage can impact the facility or third-party suppliers in terms of their deliveries and costs.
Freight Capacity Developments During COVID-19
While, hopefully, things will come back to normal in the foreseeable future, the COVID-19 pandemic has already made some significant changes to both society and the global logistics industry. To that end, there are several key considerations when dealing with today’s freight capacity crisis in light of the pandemic.
Building Higher Inventories
During periods of crisis and logistics disruptions, companies that have stretched supply chains and low inventory levels will be particularly affected. The pharmaceutical industry is a prime example. As a consequence, many will choose to increase their inventory levels to create safety buffers. In addition, analysts will favor businesses with less stretched supply chains and better liquidity ratios, as these are strong signs of resilience and sustainability.
Successful trucking companies will take the COVID-19 crisis as an opportunity to build up their own freight capacity by buying up smaller rivals in serious financial situations. In the end, there will be a greater concentration of capacity spread around fewer companies. As such, we can expect more consolidation in the logistics industry, with fewer overall forwarders and airlines. Unfortunately, fewer companies and a higher concentration of power will lead to less efficiency, less competition, and, eventually, higher overall prices.
As remote work is becoming more commonplace, office work and physical meetings will be less frequent. And while some jobs will not be able to be done remotely, there will be less traveling overall. These changes will have considerable effects on the automotive industry, leading to fewer gasoline-powered cars sold. However, even before the COVID-19 pandemic, this trend was already underway due largely to the growth in popularity of electric vehicles, which have fewer components overall. Nevertheless, the continued disruption to automotive supply chains generated by the COVID-19 outbreak and some manufacturers having to close down, for the time being, means that single sourcing in the automotive industry is quickly coming to an end.
Diversification and Securing Logistics Capacity
Very few companies will risk single-sourcing for the foreseeable future even if many of the pre-COVID-19 providers will still have a part to play. While, for example, some are looking to reduce their dependence on China and look towards other Asian countries, these countries’ supply chains are still inextricably linked to China. As such, businesses will look to source much closer to home.
Just looking at antibiotics, China alone makes up over 80% of its active ingredients’ global supply. However, that’s soon to change as the EU is considering relaxing its 20-year-long patent laws in order to increase its ability to produce generic drugs.
It’s also possible that as far as global health insurance companies are concerned, they will start imposing quotas on products and ingredients from national and regional suppliers. That said, there will still be a large share of the non-critical generic drug market that will be produced in China and India due to cost considerations. It’s important to mention that, as Chinese wages are now increasing, and robotics and automation drive more cost-effective manufacturing, dependence on China will decrease.
As far as most businesses are concerned, they should consider conducting scenario capacity planning on the implications surrounding a prolonged lockdown. They should assess the impacts of what such a lockdown will have, based on their available capacity, and have their sales and operations planning process determine which products will provide them with the most strategic value.
During periods of crisis or the sales and operations planning process, businesses also need to understand the future of logistics capacity in terms of the different modes. The same thing can also be said about prioritizing their own logistics needs in terms of needed capacity and product delivery. In these situations, companies will often need to prebook their freight capacity to minimize the risk of sudden price increases, especially during periods of peak demand. Working alongside trusted third-party logistics partners will go a long way in increasing capacity while also taking advantage of more favorable terms.
Managing the Logistics Capacity Crisis
While there are no easy ways of managing the current logistics capacity crisis, building strong relationships with carriers based on honest, transparent, and constant communication will definitely go a long way. That said, shippers used to have the upper hand when negotiating rates with shippers. But given today’s freight capacity crisis, the tables have somewhat turned. As such, they need to look into building strong partnerships that offer better concessions. As mentioned, creating trust is crucial in solidifying such a relationship.
Investing in Modern Logistics Technology Solutions
Companies that still rely on old-fashioned manual processes in their daily supply chain operations need to consider upgrading to more modern technology solutions capable of giving them an edge over their competition. Warehouse Management Systems (WMS) and Transport Management Systems (TMS), as well as other relevant business intelligence tools, will greatly help streamline logistics operations, as well as increase supply chain visibility, and improve communications with partners.
Making Use of the Right Data
Another equally important tool is the data that these logistics technology solutions can generate. By having access to these actionable insights, companies will be in a far better position to manage the capacity crisis and take advantage of the cost-saving benefits they provide. It’s essential to keep in mind that during this time, shipping costs have increased. In some cases, prices have increased by as much as 30% when compared to the pre-capacity crisis period.
Also, third-party logistics providers and shippers will need to look into their own existing inefficiencies that may exist in their trucking lanes, loading docks, and warehouses. As studies have shown, around 19.5% of trucking miles are non-revenue, indicating that many trucks are running empty for a significant portion of their routes. For private fleets, that figure can even be as high as 28%. But by improving their efficiency, logistics companies still have the opportunity to increase their capacity without actually having to invest in additional trucks.
Finding A Valued Partner
Transportation capacity crisis planning for logistics has become too complicated, even for the most seasoned analysts. In order for businesses to get their deliveries on time to their end-customers while also cutting costs and mitigating any of the associated risks, they need to partner with a professional supply chain logistics expert. To do so, they will need to look out for the following qualities:
- Someone who is dedicated to the continued development of their employees’ knowledge and skills. This is particularly important in today’s freight capacity crisis, and their employees’ skills should be proven.
- They should also be making use of state-of-the-art logistics technology solutions such as transportation management systems.
- As mentioned earlier, you will also need to form a long-lasting relationship based on trust and communication. You want someone who is willing to listen to your needs and help you find the best solutions.
- Lastly, they need to provide you with the proper capacity planning strategies that will help you improve your supply chain.
Navigating the current capacity crisis can indeed be a challenge for everyone. But by using a trusted and professional third-party logistics provider, you will be able to alleviate many of the pressures, as well as gain additional capabilities, and maximize efficiency.