By Mark Montague
National weather forecasters are predicting a busy summer for bad storms, including a more-active-than-normal hurricane season in the Atlantic basin. This news would ordinarily send supply chain managers into continuity-planning mode, but after the wave of violent weather that hit the Midwest in May, many are already there.
Catastrophic natural disasters like hurricanes, flooding, and tornadoes cause obvious and costly disruptions to the supply chain. Other “wild cards”—labor issues, supply-side risks like raw material shortages, the collapse of a bridge on a major interstate—can generate just as much if not more havoc on transportation schedules and budgets.
Last year, in a Business Continuity Institute survey of logistics managers at 530 companies worldwide, 73% of respondents said they experienced at least one supply chain disruption during the previous 12 months, with five disruptions being average. While roughly half cited adverse weather as the direct cause, 35% said the cause of their disruption was indirect, specifically an event that affected outside suppliers like trucking companies.
That’s an important point. If you’re a national retailer with five distribution centers and one is damaged in a storm, you can shift to an alternative DC to serve that region. It’s not so easy to switch contract carriers around, especially if their trucks are locked into a regular operating pattern. Their availability to serve new points may be limited. In that case, spot market capacity may need to be tapped to cover the short fall in service.
Effect on Freight Rates
When disruptions upset normal freight patterns, price changes on the spot market bring supply and demand into balance. Brokers and increasingly shippers use the spot market to find short-term truckload capacity right away. For carriers, the spot market is both a source of backhauls and an opportunity to fill available trailers at a higher-than-normal rate when capacity is tight.
Consider what happened to outbound spot-market van rates from Houston to Oklahoma City following the tornadoes there in late May.
Usually a sleepy backhaul, the rate for truckload van freight spiked to $1.93 per mile ($1.46 for the line haul plus 47 cents for the fuel surcharge), which is 20 cents higher than the average rate for last month. Tornado relief is at least partly responsible, as local stores need to re-stock with everything from DIY home-repair supplies to batteries, water, and groceries. Rates are not likely to drop substantially until July, as June is the typical peak season for that lane.
As the volume of van cargo from Houston to Oklahoma City returns to its seasonal norm, tornado-related freight will transition to flatbed freight, including heavy-duty construction equipment and materials necessary to rebuild.
It’s a Macro World
One of the biggest challenges managers will face as they build a contingency plan is how to account for what’s happening with truckload freight capacity in the rest of the country during and immediately after the event itself. A freight disruption in October, for example, may have a far different impact on their supply chain than one in June or July.
For instance, right now, produce harvests are putting the squeeze on truckload capacity throughout the Sun Belt, especially in California. Harvests are one to two weeks ahead of schedule, and spot market rates still have a lot of headroom beyond the current 30-day average of $3.06 per mile including fuel. Produce is still rolling out of Southern California and Arizona, as well, where outbound rates from Los Angeles rose 18 cents during the last week of May. Harvests (and rates) typically peak in June or July.
The Golden State is the source of as much as 50% of our domestically grown produce, and much of the seasonal capacity is found on the spot market. While most of this freight moves in temperature-controlled “reefer” trailers, some produce can be hauled in vented vans. Plus, carriers with multiple trailer types will hitch up their reefers, removing van capacity from the road temporarily to take advantage of the higher rates for hauling produce.
If you needed to enact a contingency plan right now, it might be harder (and costlier) to find a carrier than it would have been if your supply-chain disruption had occurred during a time when the seasonal freight patterns are different.
This underscores the need to monitor the freight picture in real time, noting capacity and rate shifts with the most current and relevant data possible. It’s one thing to follow a plan or a projected model during a crisis. It’s another to see the actual effects of an event on the lanes you run and then be prepared to take advantage of a dynamic market.
Mark Montague is the industry freight analyst for DAT, which operates the DAT® Network of load boards and RateView analysis tool based on the matching of more than 68 million spot (non-contract) loads and trucks per year. He holds an MBA in Transportation from Indiana University as well as a Bachelor of Science degree in mathematics and has applied his expertise in rates and routing for carriers, 3PLs, and shippers for more than 30 years. He is based in Portland, Ore. For information visit www.dat.com.