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How Disappearing Freight Capacity Could Lead to ‘Chaotic’ Q4

Businesses might be in for a “chaotic” fourth quarter, according to a Penske Logistics executive.

End-of-year turbulence could emerge if consumer demand picks up in the coming months and fewer trucks are out on the road to deliver freight, Andy Moses, senior vice president, sales and solutions at Penske Logistics, told attendees at last week’s Reuters Supply Chain USA 2023 conference in Chicago.

Since October 2022, 11,000 operating authority agreements have been revoked, according to the U.S. Department of Transportation, suggesting that trucking fleets are voluntarily going out of business.

“That’s pretty extreme from what we’ve historically seen,” Moses said. “This cycle of capacity now leaving the market will fuel expectations of rates starting to firm up here in the next quarter or two. Depending on which prognosticator you believe, whether it’s late 2023 or early 2024, rates will be firming up quite a bit, all of which creates an interesting budgeting year for 2024 for most shippers.”

The increasing carrier costs extend across driver wages, trucking equipment replacement and escalating insurance rates as safety pressures mount in a tighter litigation environment, he said.

On the market side, Moses projects that spot freight rates are bottoming out “around now” in May, before they embark on a “slow, steady climb.”

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Out at sea, the year-over-year spot freight rate results appear to reflect the trough. As of Thursday, the Drewry World Container Index of $1,720 per 40-foot container was 78 percent below the year prior’s $7,657 per container, but just a 1 percent dip from the $1,741 in the week prior. Since March 9, the spot freight rate was down less than 5 percent, when it was $1,806 per container.

As a result of the massive inventory backlog that was the storyline of 2022, retailers and brands have been destocking as quickly as possible to offload excess product and pivot their inbound freight strategy.

Look no further than retail’s brick-and-mortar giants, which have unburdened themselves to kick off the fiscal year. Walmart‘s first-quarter earnings report showed total inventory was down 7 percent to $56.9 billion, including a more than 9 percent decline in the U.S. business, while Target ended the quarter with inventory down 16 percent to $12.6 billion, including 25 percent less in discretionary categories.

Both companies said better supply chain costs helped their gross margins, although Target’s chief financial officer Michael Fiddelke said freight is “still a headwind” for now.

Like mass merchants, off-price retailers are also taking pains to get inventory right, with TJX cutting inventory nearly 8 percent to $6.4 billion and Ross Stores slashing merchandise 16 percent to $2.2 billion.

In an earnings call, TJX chief financial officer John Klinger also indicated that the Marshalls and HomeGoods parent doesn’t expect domestic freight costs to improve even as overall costs across ocean decline

“[Domestic] costs are a little stickier,” Klinger said. “The wage rates that have been implemented particularly in rail and truck, those aren’t going to come back out.”

Citing The Economist, Moses said companies will soon shift from destocking to restocking, which would indicate that freight volume activity is picking up.

Other areas of uncertainty for trucking include the continued movement of goods to East Coast ports as dockworker contract negotiations continue on the West Coast, which affects how far some freight has to travel once it arrives on land.

“Overall, any meaningful disruption is too broad to really plan for that easily,” Moses said.

Shifts are also occurring in overall retail supply chain networks, which truckers will have to account for regionalization as last-mile and middle-mile become more important to the consumer. Moses noted a steady shift away from long-haul trucking as retailers increasingly allocate their inventory regionally.

Amazon is the biggest recent example, with the e-commerce giant reorganizing its distribution network earlier this year into eight regional hubs in an effort to cut costs and leverage predictive analytics to get the right product to the right consumer.

“This [regionalization] protects shippers from some of the shocks associated with spikes and declines and long-haul trucking capacity and availability,” Moses said. “That’s something that we think about when we design solutions for shippers, and figure out what can be practically executed consistently for years ahead.”

While the supply chain crunch of 2021 into 2022 had retail giants like Walmart, The Home Depot, Costco, Target and Ikea charter their own vessels to efficiently import goods into the U.S., Moses said he is seeing a sudden pullback from these investments.

Although he didn’t call out any retailers by name, he warned those that attempted to charter a vessel can’t simply reverse course on the decision. At the same time, he believes that retailers would forge ahead with their charter plans since the “memory of why they did it isn’t so far behind us.”

“When it comes to creating a private fleet, I don’t think that’s something that anyone does for a year, or two or three,” Moses said. “You’ve got some infrastructure you’re creating there, and you’re going to want to sustain that.”

As supply chains gain complexity and the demand for visibility picks up steam, whether it be via land, sea or air, companies will need to ensure they’re effectively managing their networks.

“I think there’s a capability around governance that is not to be underestimated,” Moses said. “If you’re going to outsource some function that you might otherwise resource that staff internally, well, then you’ve got to invest in good governance and how to sustain strong long-term partnerships. It’s amazing what we can accomplish when we work with shippers that that are collaborative, that share information openly, and that are open to new ideas.”