The US economy seems to be chugging along in the right direction. 2017 real GDP growth was 2.3%, compared to 1.5% in 2016. Retail sales for the all-important holiday season were the highest since 2010 and ended 2017 with an annual growth rate of 4.2%, compared to 3.6% for 2016. But underneath this great news is an industry under serious pressure that can potentially knock the US economy for a loop: the transportation industry.

    So far, 2018 is continuing along much like 2017. The port of New York/New Jersey reported a record January and the port of Los Angeles a record in February, both in terms of twenty-foot equivalent units (TEUs). In regards to air, the International Air Transport Association (IATA) reported that North American airlines’ freight volumes expanded 7.5% in January 2018 year-on-year, and based on the American Trucking Association calculations, truck tonnage is up 7.1% for the first two months of the year.

    Good times for all, right? Wrong. Cracks are appearing. Capacity has become a problem. The trucking industry is working to alleviate the situation within its market. Freight analysts with FTR report that in February, North American fleet owners ordered 40,200 Class 8 trucks, a 76% jump compared to the same month in 2017. However, in the short-term, while also feeling the constraints from declining drivers and the ELD mandate, trucking firms have raised rates to meet the increasing demands for transport.

    Likewise, the air freight market has also raised rates to keep up with demand. In January, North American airlines added 4.2% capacity according to IATA. UPS and FedEx are among the providers adding such capacity to meet growing demand for cross-border trade as well as intra-North American trade. In February, for example, UPS announced it had placed an order for 14 Boeing 747-8 cargo jets and four new Boeing 767 aircraft to provide additional capacity in response to accelerating demand for the company’s air services. According to the company’s press release, the aircraft will be delivered on an expedited schedule, building on the company’s 2016 order of 14 Boeing 747-8 freighters. All 32 of the jets will be delivered by the end of 2022, adding more than nine million pounds of cargo capacity. This follows FedEx Express’ 2017 purchases of 30 ATR 72-600F aircraft with options to purchase up to 20 additional ATR 72-600Fs as well as 50 Cessna SkyCourier 408 aircraft with options to buy 50 more from Textron Aviation Inc.

    UPS and FedEx are not only facing rising airfreight demand either. Record peak seasons for both companies saw average daily Ground volumes increase 5.4% for UPS for the financial period ending December 31, 2017 and 5.5% for FedEx for the financial period ending February 28, 2018.Slight hiccups were noted by UPS during the peak season when an unanticipated surge in cyber-volume occurred. The resulting delivery delays were ultimately handled in time but meant additional transportation costs for the company.

    As constraints are felt throughout the transportation industry, shippers are faced with passing increased rates to their suppliers and/or customers. The e-commerce giant, Amazon, is not immune by this trend. Bloomberg reported that it is raising transportation fees for suppliers of beverages, diapers, and other heavy, bulky products that are expensive to ship. Indeed, for fourth quarter 2017, Amazon’s shipping costs increased 31%. General Mills reported that its freight costs in North America were near 20-year highs in February. As such, General Mills will follow other food makers including Tyson Foods Inc., Hormel Foods Corp., and B&G Foods Inc. in raising prices to offset higher freight costs.

    Collaboration between shipper and transportation provider will be necessary in order for shippers to mitigate shipping costs as much as possible. Planning in advance in order to reduce any unnecessary risks is also a necessity. Most important for shippers, an optimized supply chain that includes a robust transportation management system will likely help ease unforeseen costs, allowing for greater collaboration with transportation providers of all modes, route planning, and cost management.

    Furthermore, as e-commerce takes a larger chunk of retail sales, shippers should ensure their small parcel spend is optimized to include the right service levels, delivery options beyond the customer’s front door, and one that does not neglect customer service.

    For both transportation provider and shipper, collaboration and creative thinking will be the order of the day as capacity constraints place limits on supply chains.

    Melissa Runge is Vice President of Analytical Solutions, Spend Management Experts. In this role, she serves as a strategy consultant, bringing transparency and understanding to clients' supply chain spend across primary logistics disciplines including transportation, fulfillment, and distribution.Visit www.spendmanagementexperts.com for more information.

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