What CFOs Need To Know About The Trucking Industry’s Pricing Overhaul

Just when CFOs thought their roles couldn’t possibly become more complex, yet another variable has entered the mix.

A nationwide truck driver shortage, which some have argued has been in play for years but was masked by the Great Recession, is threatening to disrupt supply chain costing efforts. According to the American Trucking Associations, approximately 25,000 driver jobs remain unfilled; consequently,  carriers are gaining more leverage over shippers.

For example, shippers such as FedEx are pricing now based on dimensions—a trend known as density-based rating, and fueled by the rise of big data.

In a recent interview with the Wall Street Journal, the CFO of one of the largest trucking companies in the world, Jamie Pierson of YRC, summarized the issue at hand:

Shippers will always have pricing power, but I think the balance is in the carrier’s court for the first time in a long time. A carrier’s capacity is defined by its terminal, dock doors, trailers, tractors or drivers. Those are the things you need to run the business. But drivers are very short right now, and that’s driving some of the pricing power back into the carrier’s court. If you have all the tractors you need, but you don’t have the drivers to drive them, that’s going to be a capacity constraint.

So, what does this mean for CFOs in the short and medium term? We asked this question to one of our most trusted partners and knowledge sources on the issue: Brad Stewart, president of Rockfarm, and leader of the firm’s overall supply chain value initiatives.

As a CFO, you need to know about density-based ratings. In particularly, Stewart says CFOs and companies need to keep a few key factors in mind as they confront this shifting dynamic. First, less than truck load carriers need yield, and National Motor Freight Classifications “have not kept up with the changing packaging and commodities.”

“Good carriers are always looking to grow their business and the desire for consistent business enables them to do so,” Stewart says. “So as growth occurs, the necessary drivers will be added to the marketplace to fulfill (that demand). Cost is mitigated with consistency and strength in the carrier partnership. If a shipper views freight as a commodity they will pay commodity type prices.”

As a result, here are six questions Stewart says CFOs should be asking themselves about the driver shortage problem.

  1. Do I have customer expectations clearly defined in my customer contracts as it relates to packaging, on time service and routings?
  2. What are my shipment cycles? Do I push month end/quarter end volume out to make numbers?
  3. Do I have a carrier management program in place that manages the carriers and performance metrics?
  4. Do I contract my rates directly with the carriers with volume commitments?
  5. Is my product packaged for potential LTL Transit and Handling? Facilitate potential TL movements to LTL as TL capacity tightens at month end.
  6. What is my planning window? (Meaning the time between the ability to dispatch and expected pick up window.) The greater the planning window the greater the opportunity to secure capacity.

Question: How will the move to density-based rating affect your supply chain costs?

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photo credit: reynermedia via photopin cc


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