Tag Archives: shipping

Graduate Macroeconomics of Trucking 501

We have posted around 125 blogs and the only thing I have mentioned about trucking is the places we go and occasionally something unusual like a breakdown or weather. One issue that comes up several times a week and is really the basis for how America works is the finances of the trucking industry. Both the mainstream media and politicians have vested interests in deceiving people. This is a small attempt to shed a little light on a very important subject.

Ever since the dawn of large corporations, these corporations want to use logistics to move their product from point A to point B. Logistics goes back to Ancient Greece, Rome and China. In the most basic view, logistics is the flow of control. It began as a military term and emphasizes having the right equipment and manpower at the right place and at the right time. The real control is financial. While logistics includes the people involved, the security along the way, the warehouses where the goods are stored and equipment to move the product, such as a ship, truck, train or airplane, the real issue in the flow of control. The real flow of control is money.

Sears/Kmart, Walmart, Lowes, Target, Home Depot, JC Penney and anyone else with a “big company” mentality use large contracts to ship their products. They demand large shipping companies such as JB Hunt, Schneider, Swift, Werner, etc. These large shipping companies do not bid on individual assignments or “loads.” They fight for huge multimillion-dollar contracts over a period of time, usually between 6 months and 2 years. With a signed contract in hand, they borrow money to buy the trucks, buy new trailers, hire drivers to make the runs, expand or purchase terminals and hire support staff such as planners, dispatchers and mechanics. They make this sound so good. The truth is that new contracts, unless they are for a new plant just opening, undercut someone else already doing the work. Wages are lower for the people actually doing the work. There are also more people to pay and more overhead. The people doing the actual work, that is the drivers and mechanics, are usually paid substantially less.

Not all loads in these jumbo contracts pay the same. Some are easy and pay well. Other loads are very difficult, some are dangerous and some pay very poorly. Companies working on contracts talk about “covering” loads, That means making certain that all loads are delivered, no matter what the conditions or circumstances. This is where the dangerous push to deliver “no matter what” comes from. It isn’t that a $500 load might be an hour late. It’s that the company might loss a $5 million dollar contract.

Often these difficult and dangerous loads are JIT (just-in-time) loads. That is, companies are using the US road system as their warehouse. They finish a subassembly at one plant then load it onto a truck with just enough time to make a delivery in perfect weather to another plant just as it is needed at the second plant. Any problems with weather, breakdowns or construction are not considered and become “the driver’s fault.” This kind of extreme time pressure causes an enormous increase in accidents.

To avoid most of these accidents caused by this time pressure, simply allow the driver to choose the load instead just assigning loads to the driver. This is the system now in place by Landstar.

Not only would the big companies lose control, many intermediate level jobs will no longer be needed. There is no more need for dispatchers or even terminals. Existing noncompany mechanics and drivers will make more money, creating a greater demand for waitresses, video games and whatever else drivers and mechanics want to buy. Individual “bad” loads will have to pay more, increase safety or both. Otherwise they will not be delivered. If there are not enough drivers, then competition for the existing drivers with cause rates to go up. Once rates have gone up enough, more people will want to become drivers.

Once again, the free market, if it is allowed to truly be free, will triumph over central planning. Everyone will win. Everyone, that is, except the central planners.

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What Is “Seasonally Adjusted?”

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Most of us hear the phrase “seasonally adjusted” with a vague idea that we know what those words mean. Since they have different meanings in different contexts, it can be very confusing. While a complete definition of “seasonally adjusted” can be an entire course in a MBA program, a general understanding will make living in America a little easier.

Sometime around the first of January every year most American businesses take inventory. In factories, ordering and shipping new products slows to a crawl. Schools face snow days, use supplies on hand and reduce or stop ordering supplies. Retail establishments try to reduce inventory without ordering new products. Farm work is at the lowest point of the year. Temporary holiday workers are laid off. Nationally, this is the highest unemployment time of the year. Trucking and rail lines ship the lowest volume of the year. This is the busiest season for accountants and for the purchase of winter supplies such as salt, heating oil and snow removal equipment. Many of America’s most productive workers take extended vacations in January and February. Holiday spending reduces ability to buy at the beginning of the next year. In places where travel is difficult, most entertainment and eating establishments have their lowest sales of the year.

As income tax refunds begin to arrive in late February and weather begins to improve in the Southern states, businesses begin to improve. New hires are added and the overall economy begins to improve. Depleted winter stocks are resupplied. If the improvement is good enough, when a new graduating class in May looks for jobs, there will be enough jobs. If there is not enough improvement in the spring then the new graduates will produce a drag on the economy with a boost in unemployment. Late April/early May is usually a small drop from March/early April as businesses attempt to guess what summer will be like.

May/June usually sees the first harvest of early crops, requiring more workers. Those who can, go on vacation, allowing temporary summer workers to go off the unemployment roles. The newly employed usually spend freely, hurting themselves but helping the overall economy. As bills come due, late June sees a slight slowdown economically. August sees back to school spending increase, students drop off unemployment roles as they go back to school and overall demand for goods remains steady.

September is very difficult to predict for seasonal adjustments. Bad weather across the country turns otherwise good indicators into a slightly bad economy. If the economy is very good, like it was in the 90s (Bush 1 and Clinton) early Christmas spending and good harvests can make a huge economic bubble. In a bad economy (Obama), September can be a mini downturn. The major crops are just beginning to be harvested, Christmas spending has not started yet and people are not ordering durable goods.

Beginning in October, crops have to be harvested and businesses begin preparing for Christmas. Even in poor economies, October/November usually sees an increase. Temporary seasonal workers are hired. Winter supplies are stocked. The only real question is how long does this bubble last? In good economies, this increase in demand can last into January with the last few weeks resulting in great rates for shippers, truckers, trains, airfreight, etc. Some companies are so dependent on this surge in sales for a few weeks that this is the only time of the year they are actually profitable.

In poor economies, people do minimal Christmas buying and the annual slowdown actually starts before Christmas.

These fluctuations vary from business to business. For instance, the entire medical profession is virtually immune to these seasonal variations. Others, such as swimming pool manufacturers, see most of their business at a different time of the year, in this case spring/summer.

The important point is that seasonal adjustments are critical to understanding what is really going on, not just accepting the latest political spin. If unemployment numbers are going up or down, does that indicate a serious problem or is that just “seasonal?”

This is a small attempt to help the average American to have a better understanding of the information around him. This will hopefully help you make more informed decisions.

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