U.S. intermodal traffic volumes set a record in 2017, and the consensus going into 2018 is for more gains. The global economy ended last year with its best-synchronized recovery since 2010. In the U.S., ocean imports were expected to rise 7 percent over 2016 levels, according to a December survey by the National Retail Federation (NRF) and consultancy Hackett Associates. Meanwhile, already-solid domestic intermodal demand will likely be goosed if qualified over-the-road drivers remain in short supply and if the trucking industry struggles with transitioning to the federal safety mandate requiring that virtually all trucks built after the year 2000 have electronic logging devices (ELDs) onboard.
The ELD mandate, which took effect Dec. 18, could result in a conversion of highway traffic to rail if businesses believe that over-the-road drivers may not be able to meet delivery targets; the ELD rule is expected to cut driver productivity by 3 to 10 percent as drivers accustomed to fudging paper logs in order to run more miles than allowed by law are now forced by technology to stay within federal hours-of-service (HOS) limits.
But the mandate could be a doubled-edged sword for the intermodal supply chain. That's because dray drivers who haul traffic to and from intermodal ramps are required to comply unless they operate less than 100 "air" miles—roughly equivalent to 115 road miles—per road shift. There is no typical dray distance, as the lengths of haul vary widely depending on the circumstance. There is no available data to determine the percentage of non-compliant dray drivers.
A worsening overall shortage of qualified drivers, exacerbated by the cost and operational pressures of "running electronically," is likely to lead to higher wages for dray drivers and increased costs for a network still heavily dependent on the dray. Any potential problems could be amplified depending on the number of independent draymen who drop out of the business because they were unwilling to adapt to a post-Dec. 18 world. In addition, dray drivers could migrate to the over-the-road side of the business, especially given the large-scale wage increases being offered by big trucking. All of this could result in significant consolidation within the dray segment, leading to higher rates.
"THE BIG WILL GET BIGGER"Should ELDs force dray drivers off the road, "the big will get bigger, the small will be put out of business, and prices for dray as well as long haul will increase, especially in tight local markets," said Patrick J. Ottensmeyer, president and CEO of Kansas City, Mo.-based Kansas City Southern Railway Co. (KCS), one of the seven Class I rail carriers in North America.
C.H. Robinson Worldwide Inc., the Eden Prairie, Minn.-based broker and third-party logistics service provider (3PL) and one of the top five users of U.S. intermodal services, is bracing for what Phil Shook, the company's intermodal director, called a "significant shift in drayage rates" partially caused by a tightening driver market. In an interview in early January, Shook said some drayage firms are mulling a shift to a time-based pricing formula rather than one based on mileage in part because of the ELD mandate.
On Jan. 10, Overland Park, Kan.-based 3PL MIQ Logistics warned in an e-mail that drayage rates have escalated due to stronger demand, a shrinking driver pool, and the effect of delays and long wait times at ports and chassis yards, which make it harder for dray drivers to hit their delivery targets and stay within the HOS limits. Winter storm Grayson, which battered the Eastern Seaboard in early January and either shut down or curtailed operations at multiple ports, also took a toll on dray capacity, the company said.
Because dray is inherently a short-haul move, many drivers, by definition, can operate roundtrips and remain within the mandate's "100 air mile" geographic limit. However, many others routinely put more daily roundtrip miles than that on their rigs. James Hertwig, who retired at the end of 2017 as president and chief executive officer of Jacksonville-based Florida East Coast Railway (FEC), said there were more than a few times when goods scheduled to move via less-than-truckload (LTL) to FEC's rail head in Jacksonville had to instead be trucked there via dray because the LTL trailer lacked sufficient density to make the run at the time required to hit FEC's cutoff.
Larger dray fleets are, for the most part, already equipped with ELDs. However, much of the nation's dray hauling is handled by owner-operators, the segment of the driver community who've so far been the most challenged by ELD compliance requirements.
Then there is the overarching problem of driver undersupply, which affects draymen as it does long-haul truckload types. Shook of C.H. Robinson perhaps best summed up the industry's predicament by saying he was recently told by a large trucker that it had more manpower allocated to recruiting drivers than to soliciting freight.
MARKET UPHEAVALAll of this comes as the railroads and the intermodal community confront a profound change in how product is ordered and distributed. Rising e-commerce demand and the accompanying shift in order fulfillment patterns will require inventory to be dispersed across a large number of DCs located closer to the customers. The railroads are handling their share of e-commerce—the Intermodal Association of North America (IANA) reported a 7.7-percent increase in 2017 in the use of 28-foot trailer "pups," the type of equipment utilized to haul the smaller, lighter-weight goods that are most commonly ordered online.
However, e-commerce's distribution characteristics run counter to the railroads' traditional model of clustering operations in select large-volume terminals, said Larry Gross, a long-time rail consultant. The solution, according to Gross, would be to create a network of secondary terminals near the freight. However, that creates challenges of its own because the vast length of intermodal trains would make it difficult for smaller terminals to serve them. How the supply chain configures the drayage network to respond to these secular changes in distribution will be a story to play out in 2018 and beyond.
The remedy for sustaining timely and reliable dray service in a post-Dec. 18 world lies, as it has with virtually every supply chain management challenge, in more timely and efficient operations. Shook said greater emphasis will be placed on such basic blocking-and-tackling processes as "drop-and-hook," where a full trailer's availability is synchronized with a truck's arrival so a driver can dump an empty trailer, hook up a full one, and be on his or her way.
But the ultimate responsibility lies with the railroads, according to Ottensmeyer of KCS. "Where ELDs could have a direct impact on dray carriers is when train service deteriorates in terms of on-time-performance and predictability," Ottensmeyer said in an e-mail. "A driver waiting will consume hours of service, so if a driver had planned to make two dray runs and the second incoming load is delayed on rail, he or she may run out of hours before completing both runs." The same scenario applies at cargo owners' facilities, where loading dock productivity at a warehouse can impact waiting times for drivers, he added.
Gartner, Inc.