The Transportation Headache
Your distribution and logistics plan could make you or break you.
June 23, 2008
Never in this industry has the pain of getting your product to the customer been so great and there seems to be little relief in sight. The transportation and distribution challenge has always been one forced upon growers — a necessary evil of sorts that was just part of the business process. The problem? Cost and capacity. The former is rising and the latter falling, making for an unsure future when planning any transportation budget.
The issues stem from the underlying costs of running a truck or trucking company. If you run your own trucks, you know some of the numbers. If you use a common carrier, then you truly feel the numbers, especially in the spring shipping season when drivers and their brokers seem to be in control and you have to play by their rules.
The obvious question to ask is, "Why has transportation become so costly and difficult?" The answer lies both within and outside the controls of the horticultural market. In the last several years, transportation costs have soared. The easy-to-identify items are rising fuel and insurance costs. If you are unaware of either, you obviously have nothing to do with the transportation function of your company. At press time, a barrel of crude oil costs $65 and forecasts by many are for oil to hit $100 by years end. Don’t bet against it. A standard truck gets 5.5 to 6 miles per gallon. If you use refrigerated trailers, add another 20 or more gallons a day to keep the trailer cool.
The impact of fuel cost increases is minor if a trucker is hauling a trailer of Rolex watches across the country because the value of the watches is so high. Any transportation cost increase is diluted by the high value of the product being shipped. However, hauling 1-gallon plants (low value and seemingly getting lower) makes the fuel impact very evident and quickly finds its way to the bottom line. For example, if you move a plant load 2,000 miles or more, the fuel surcharge impact alone for a refrigerated trailer can be more than $700 for a truckload. Not small change at all.
Another large impact is insurance. Common carriers are faced with huge rate increases and a tight insurance market. Deductibles are high and underwriters are getting very strict with their guidelines. This extra cost has to be passed onto the market and is reflected in the ever increasing "rate per mile" quoted by most carriers. Insurance rates are rising due to numerous factors including clogged roads (thus more accidents), a lack of qualified drivers that meet underwriting guidelines and a general lack of appetite of most insurance companies to write policies for trucking companies.
But it is not just fuel and insurance driving this pain. Other phenomena are also having a large impact on the nursery market. The driver shortage is so severe that we as an industry are seriously talking about importing workers from Third World countries (India, China and South America) to drive trucks. Why? Because, the transportation industry is already understaffed by an estimated 20 percent in most major markets. With the Baby Boomers all retiring and no new drivers coming into the industry, we expect the situation to get much worse. Think about it — why would anyone want to be a long-haul driver when you can make 50 percent more as a construction worker and be home every night?
And, on this point, our wonderful government has not helped in the last two years by paying drivers $1,000 per day for disaster cleanup. This was the going rate for a driver to bring his dump truck and help clean up the Katrina mess. And FEMA paid the drivers’ fuel bills and provided lodging! The cleanup continues and is expected to take several more years.
This is further impacted by the latest Department Of Transportation hours of service rules that dictate how long a driver can be on the road, reducing the number of "available hours" a truck can be on the highway. This effectively reduces the supply of trucks in the market, pushing up prices. The DOT rules have put the most pressure on the larger carriers that have the biggest chance of having their log books audited. They face hefty fines unless they stick to the new rules.
While this may seem like a minor problem, consider that many growers have loads with 5, 10, 15 or 25 deliveries. Under the new DOT rules, these become impossible loads for drivers to take. Drivers simply do not want your business. They want their truck turning its wheels rather than waiting for a big box store to try to find one of its ever-decreasing staff to unload a truck. Even if you get the driver to take your load, you will see "drop fees" for the 5th or greater delivery often being $250 or more from most of the national or regional carriers. They must be compensated for sitting around at a store trying to get unloaded, so they price delivery fees accordingly.
Is there any more bad news? I am afraid so. The fact is most drivers and carriers are not so enamored with the horticultural market. The one-word reason is "seasonality." While there are other reasons, the main reason is the seasonal nature of the nursery business. Drivers like consistency. The other major refrigerated product hauled is food. Food shipping, generally speaking, is consistent. Most growers only need trucks for about four months a year.
Yes, there are many exceptions, but why would a driver or common carrier want to give up consistent clients to haul nursery product and potentially lose a major client that provides year-round freight? This leaves most growers entering the free market of trucking to buy a truck at the best spot rate available along with every other grower in the spring, each bidding up the rate until the most desperate grower gets the truck. Obviously, this is not a recipe for low freight costs or higher grower profits.
The Bright Side
So what can be done? As it happens, a lot. In the coming months, we’ll write a series of regular articles on the important topic of transportation, distribution and logistics. While I cannot promise to solve all of the world’s transportation problems, I can promise to provide you with some solutions that work. Solutions that will add money to your bottom line and other growers have implemented successfully (and, sometimes more importantly, things they tried unsuccessfully).
Transportation spending is one of your largest expenses. All indications are that prices will remain high, with most pundits forecasting higher future costs. However, there are answers, and there are things you can do. Look for Greenhouse Grower’s new series called Transportation, Distribution and Logistics over the coming months and start putting some of that wasted money back in your pocket.
Tim Higham is the CEO and President of Interstate Transport, Inc., the largest dedicated logistics provider to the horticultural market. Learn more at www.interstate-transport.com or call 866-281-1281.