More Challenges for the Transportation Network: Day 2 of the SCRC Meeting

Speakers are the SCRC meeting yesterday and today continued to speak more on the topic of transportation strategy given increasing challenges in the transportation sector, and the need for an effective transportation management strategy.

George List, a professor of mechanical and construction engineering, emphasized the need for governments to consider the broader impacts of global change.  For example, the widening of the Panama Canal will change the conditions here in North Carolina, as enormous container ships will be circumnavigating the globe. Steamship companies will dedicate vessels that permanently go eastbound and westbound. And in Panama a huge transshipment area will grow where they will will do break bulk, put cargo onto smaller ships and send to North America. These services will no longer occur in US ports, and this will shift the nature of supply chain designs.  As opposed to increasing ports to ship massive containers of bulk items, regions like North Carolina need to think differently, and to consider new possible locations for transport-driven logistics portals statewide.  For example, George mentioned that the Research Triangle is a major provider of vaccines worldwide.  These are little vials with very short half-lives, and to ship them you need a category 3 ILS equipped airport so autopilot technology landings are possible.  This requires investment in the right sophisticated technology.    But for public sector funding decision makers, the idea of spending money on runways is a foreign idea.

Clark Robertson from CSX Railroads also came in to speak on the role that railroads have played in the US economy.  Railroads were critical in helping to develop the United States in the last half of the 1800’s.  Their growth was incentivized by governments to expand networks.  In the last 1880s  the first Interstate Commerce Act rregulated trains.  The rights of way today were built from 1850-1920.  Rail mileage peaked in 1920 and then went into recession.  By 1850 there were more than 9000 miles of track which expanded to 450,000 miles by 1920.  The mass production of vehicles caused this market to drop dramatically, and now the US has about 180,000 miles of railroad.  By 1970s the railroads were on the brink of ruin.  More than 21% of mileage was run by bankrupt railroads.  The railroads had lost most passenger business, and freight business was regulated and operating at a loss.

What changed that was the Staggers Act in 1980.  Prior to this Act, railroads could not enter into confidential contracts with clients.  The Act introduced balanced regulation in the rail industry and allowed railroads  some freedom.  Since the Staggers Act rail volumes have doubled.  Average rail rates have fallen 42%.  Rail productivity have been among the highest, and railroads are financially strong.  Railroads are much safer and spending on infrastructure continues to be strong. Clark did mention that rail capacity continues to be a challenge with the shale oil boom, and this is simply a function of the rapid rise in demand and the inability of the railroads to add capacity to meet this.

Adam Ruff from Excel Logistics spoke about some of the challenges of transportation, and mentioned that the indicators continue to show constrained markets.  He noted that “We are seeing good economic growth and YOY increases in tonnage, and passenger vehicle production is hitting a high water mark, as is industrial production.  There is increasing pricing power, and on average a 2-4% increase in freight demand – which is outpacing the supply of truck capacity due to limited drivers.  There is a chronic lack of drivers, and it is an unattractive profession for most people.   He notes that this is similar to the 2006-2007 market where capacity was becoming constrained.  This is impacting how you think about managing the network, and in procurement.

In the regulatory environment, there are a number of regulations that are on the books.  These include hours of service limitations for drivers (11 hours), and Compliance, Safety and Accountability (CSA).  Other that will impact productivity include fuel economy (Café standards are increasing for mid-heavy weight trucks), emissions of particulate and Co2, and others regarding comprehensive drug and alcohol databases, and equipment with speed limiters and stability control systems.  These are all designed to provide greater safety and environmental improvements, but there is a cumulative drag on operational productivity and running the network.  Drivers are negatively impacted in terms of productivity.

Some estimates cite that the equivalent of 400,000-800,000 drivers will be taken out of the market in the next 10 years!   This is perhaps a high estimate, but it is nevertheless alarming.  The first impact on hours of service has already been felt.  Some solutions include allowing Canadian truckers to operate in the US, and in the future perhaps using other foreign drivers as well.

In terms of the challenges to freight infrastructure, Adam noted that  Excel has to design in a lot of “slack” due to the congestion in major urban centers.  Fuel tax hasn’t been increased since 1993, and funding for the Highway Trust fund is truly “hand to mouth”.  Investments in ports and rails and waterways are competing with other political priorities.  There is inadequate funding and lack of consensus on investment priorities in general in the US.  As an example, Adam Ruff mentioned the big border crossing across the Detroit River.  The Canadian government is going to pay for a new bridge, but the US government cannot find the funding to fund the customs plaza.

On the inbound side customers started to by-pass or disintermediate middlemen and going directly to the point of need.  Given challenges with capacity, companies are re-thinking their transportation strategies – perhaps going to smaller fleets that are better suited to the business.  Some are also looking at dedicated fleets, and ensuring that they are using their full capacity and do operational tradeoffs to fill every empty mile on fleets that are dedicated.  Many companies are thinking about the different advantages and options for dedicated capacity investments in a constrained transportation market environment.