C. F. Lynch & Associates

Want to Buy Some Pork Bellies?

By Clifford F. Lynch

DC Velocity, May 2007

Though itís billed as a way to minimize risk, a bold new plan to bring some stability to the transportation market could have precisely the opposite effect. The talk in transportation circles these days is all about a proposal to trade transportation capacity futures to protect pricing and availability. Citing the capacity shortages that have plagued shippers in recent years, advocates of the capacity futures market are promoting the idea as a hedge against risk: Buy it now and use it later when you need it. If you donít need it, sell it to someone who does.

But letís not get lured into the commodity trap. While the idea might sound good, we need to keep in mind that what works for soybeans and pork bellies might not work for transportation.

In its simplest form, a commodity is an item that has value and is produced in large quantities with uniform quality. Whether itís something tangible like oil or intangible like electricity, a commodity is a homogeneous, undifferentiated product. When it is traded, it is solely on the basis of price.

Some would argue that transportation service fits that category. As they see it, transport service is just a way of getting something from point A to point B. It doesnít really matter who provides the service, as long as it gets there.

I submit thatís exactly the kind of thinking that could get shippers in trouble. As those in the business know, thereís much more to transportation than simply hauling something between two points. Itís also about on-time pickup and delivery; itís about planning and satisfying shippersí needs in a mutually satisfactory way. Above all, itís about relationships.

Granted, there actually is a futures market for ocean capacity, but thatís quite different from domestic truck capacity. First of all, there is less variability in the product. In ocean service, standard-sized containers move over standard routes on predetermined schedules. Although there may be some service variability due to weather or unforeseen circumstances at ports, container movements are fairly predictable. This is a far cry, however, from the type of capacity needed to move a shipment of hair dryers to Wal-Mart and deliver it within a two-hour window.

If the experience of the last three years has taught us anything, itís this. In a crunch, the shipper who comes out on top Ė the one who manages to find a carrier when it needs one Ė is not the one who wins a bidding war, but the one with the best relations with the carrier. For evidence, you need look no further than a study conducted last fall by DC Velocity and the Warehousing Education and Research Council (WERC). The studyís results confirmed that during the previous year, those shippers who had fared best were those who had developed collaborative relationships with their carriers. They were the ones who gave carriers timely projections of future shipments, who held regular meetings with their carriers, and who tried to be better customers in general.

It is important to keep in mind that a shipper and a carrier have basically conflicting objectives. True, both want (or should want) their customers serviced well, yet they also want to maximize their own profits. Working through these conflicting objectives to everyoneís satisfaction requires some careful relationship building.

For a number of practitioners, managing a global supply chain has gotten quite complicated. They are encountering new technology, new cultures, new currencies, and in some cases, new modes of transportation. What we donít need is another impersonal technique for managing transportation. Transportation has been, is, and I believe will continue to be a relationship business.

If you still want to trade something, try pork bellies Ė that market looks a little less volatile than the market for feeder cattle.




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