News / Tighter US haulage market a serious threat to low inventory strategy

The US tariffs reinforced a trend among cargo owners to keep inventory levels low and replenish quickly – a strategy that relies on readily available and cheap truck capacity, so the rapid rise in haulage rates and tender rejections is forcing a re-evaluation.

The Q1 Distribution and Fulfilment Index, produced by ITS Logistics, describes the period as “a stress test for the velocity thesis”.

Its authors concluded: “The discipline of lean inventory, downstream positioning, and replenishment-over-accumulation survived the quarter, but the assumption underpinning it – abundant and cheap transportation – collapsed in March.”

They noted that the cost of holding and moving inventory had risen sharply, with both warehousing and transport costs up. While warehousing capacity tightened, the main culprit has been the rapid surge in trucking costs.

Truckload capacity continues to tighten as regulatory moves decimate the driver pool, while cost pressure forces struggling operators out of the market, and the resulting rise in rates has been turbo-charged by the impact of exploding fuel costs.

And relief is not in sight. Trucking rates will not retreat before the end of this year, warned Satish Jindel, founder and president of SJ Consulting.

According to ITS, warehousing capacity contracted in the first quarter, with national vacancy rates at 7.51% and rent growth accelerating to 1.3%. This is not likely to ease, as the warehouse construction pipeline is at its tightest in nearly a decade.

Still, this is a minor headwind compared to the trucking situation.

“The cost of moving inventory faster rose in a step-change, and the economic equation between carrying cost and transportation cost narrowed sharply. For most categories, carrying cost still exceeds transportation cost on a marginal unit, particularly given tariff-elevated landed costs. But the gap compressed, and for fuel-intensive long-haul categories, the comparison has inverted,” ITS found.

Ryan Martin, ITS president of distribution and fulfilment, said the first quarter proved that lean inventory strategies could hold under pressure, but warned that their strength hinged on the underlying replenishment infrastructure.

“Firms that entered Q1 with functional downstream space and multi-carrier redundancy preserved service at manageable cost. Those that relied on spot freight to compensate for thin inventory paid the price,” he explained.

“The defining question for Q2 is not whether to restock, but whether logistics networks can absorb the fuel and capacity shock without service degradation – and which operators have the functional space, laboir depth, and carrier diversity to do so,” the ITS report concluded.

Mr Martin reported that some of his customers were increasing inventory levels, and others attempting to keep them low while trying to meet fill rates from their clients. He expects to see more action as the realisation sinks in that the transport cycle has undergone a fundamental shift.

“I think it’s finally starting to resonate with shippers, but it won’t fully, until they have loads sitting and have to pay a premium to get them moving, which is starting to happen,” he said.

“At some point, the JIT environment goes out the window when transportation costs increase, as they are. This is a very typical cycle that has been played out many times over the years,” he said. “Shippers will start to push for slower/cheaper modes of transportation which will increase their inventory levels to offset.”

According to Todd Larsen, ITS SVP of enterprise sales, the market has already passed some milestones that augur shifts in shipper behaviour.

“The first thing to watch is tender rejections holding above 10% to 12%. Once that happens, routing guides start falling apart and contracted capacity gets a lot less dependable. We’re above 13% OTRI right now, and it’s been sustained,” he noted.

“The second is spot rates getting close to, or moving above, contract rates. When carriers can make more money on the spot market, they’ll naturally move toward it. That’s where shippers start seeing cracks in networks they thought were locked-in. We’re already seeing spot running well above contract on a lot of high-volume lanes,” he noted.

“The third is capacity overall. New carrier authorities are down 27% year on year, carrier exits are still climbing, and spot load posts were up around 70% year on year in Q1. Put all of that together and this feels a lot more structural than cyclical. The real shift happens when shippers stop talking about rates and start talking about loads sitting. We’re starting to hear more of that already,” he said.

Mr Jindel said shippers typically tried to negotiate a better discount when faced with increased trucking charges, but this tactic is doomed in the present market.

“The only way to manage that cost and control spend is to be more efficient and smarter, to get better utilisation. If they can’t figure out how to do it, there are people who can help them,” he said.

“Thirty percent of truckload capacity every day is wasted. Think what that does to the cost of trucking.”