Chief financial officers this year are saying their top priorities must include cost management and cost reduction. Naturally, this raises the question of where to start. The first target has to be within the supply chain.
There is no way to avoid it: the trucking and freight industries are in a recession, with no clear visibility as to when business will rebound. Where there is risk, however, there is reward, and leaders and customers of those trucking and freight clients are well positioned to drive value within their supply chains. Leaders who think and act strategically — and so right now — can improve the competitive position of their companies’ supply chains, and enhance future profitability when the economy bounces back.
Trucking executives have seen the writing on the wall and are navigating a difficult 2023. During a conference call with investors and analysts discussing 2023 Q1 financial results, Knight-Swift Transportation CFO Adam Miller said freight demand “was below expectations and more persistently soft” and that weak demand, pressured volumes and pricing in the face of ongoing inflation was a further headwind on operating income.
J.B. Hunt Transport Services President Shelley Simpson took it a step further and confirmed the industry’s worst fear: “Simply stated, we’re in a freight recession,” she said. Even future indicators — such as trailer orders being substantially down — are setting up the industry to ask themselves, are we at the bottom yet? Retailers are major buyers of freight, and they are gearing up for a discount-heavy, slow holiday season.
How the trucking and supply chain industries got to this point is pretty straightforward. Stubbornly high inflation and rising interest rates have caused consumers to cut back on spending. Retailers have followed suit by working through excess inventories. Softer consumer demand has cascaded down to B2B and to industrial companies, which have trimmed new orders, resulting in declining freight volumes.
When times get tough, the natural reaction is for leaders to fall back on conventional thinking and reduce expenditure. The better approach is to strengthen relationships with your vendors while simultaneously tweaking key areas of your supply chain, and deploying capital where your company will get the biggest bang for the buck.
There’s proof the slash-and-burn approach during a recession does more long-term harm than good. Harvard University researchers, for example, found that businesses that cut expenses more than their peers during a recession had only a 26% chance of becoming leaders when the economy improved.
That finding dovetails with my own experience as a corporate consultant. We have found that winning companies turn market volatility into a competitive advantage. They retain critical talent wherever possible, while driving expense reductions through targeted investments and operational improvements in key areas of the business.
Here are three ways businesses can maximize returns on supply chain spending and investments to position their companies for a rapid rebound when the economy improves.
1. Use Technology to Create Real-Time Forecasting and Planning
During the pandemic, many organizations responded to surging demand by adding distribution centers to handle the traffic. However, consumer behavior and spending have materially changed in our post-pandemic world.
Now is an ideal time to move away from Excel spreadsheets to analyze supply-chain network performance — and artificial intelligence (AI) and machine learning (ML) tools can help. Such technology can improve demand forecasting and decision-making so your business can realize immediate value through enhanced transportation efficiency and reduced costs.
2. Review Current Pricing
Everyone knows that spot rates have dropped significantly this year. The rates you are currently paying, however, may not have fallen in tandem on a percentage basis. If your business has a dedicated transportation fleet with a carrier, you likely have already negotiated lower rates or at least have had greater control of your cost structure. Companies in brokered relationships, however, have an enormous opportunity to realize significant cost savings.
When negotiating rates in today’s environment, we advise clients to tread carefully, and not play hardball, trying to squeeze your transportation partner. It is essential to maintain a positive working relationship with your provider. Sometime in the future, your business will face a transportation emergency, and the goodwill you generate now will pay dividends down the road.
3. Maximize Backhaul Efficiency
Deadhead mileage can greatly lower transportation profitability and efficiency. In its 2022 “Analysis of the Operational Costs of Trucking” report, the American Transport Research Institute trade group calculated that about 15% of non-tanker carrier miles were deadhead trips.
Amid the supply chain disruptions during the pandemic, maximizing backhaul efficiency often took a backseat in favor of speed of delivery. The demand equation has now changed, which means you need to view the number of deadhead trips so you can realize additional cost savings. You will be surprised at how much money you can save.
There is no getting around the fact that the rest of this year will put a material financial strain on your supply chain and transportation operations. But by acting now, you can have the best of both worlds: build stronger relationships with your transportation partners and safeguard profits while positioning your company for sustainable success.
Tyler Higgins is a managing director at AArete.
