The Latest Supply Chain Trends To Watch As 2019 Approaches

2019 is here and several key transportation and supply chain startup trends have entered the spotlight. Please read our latest article on 2019 supply chain trends that discusses the increased digitization of the supply chain and more.

With more than half of 2018 now in the rearview mirror, we’re taking another look at trends and challenges in the supply chain. What’s changing and what’s the outlook for the near future? It’s been an interesting year so far, to say the least. For this expert roundup, we’re bringing back a few special guests and introducing you to a new panel of subject matter experts.

In this article, you’ll hear from:

• Doug Mueller: Breakthrough President and CEO
• Brooks Bentz: President Emeritus, Breakthrough Supply Chain
• Jeremy Becker: Managing Director, Breakthrough Supply Chain
• Rep. Mike Gallagher (R-Wis.): Congressman for Wisconsin’s 8th District
• Matt Muenster: Senior Manager, Breakthrough Applied Knowledge
• Jenny Vander Zanden: COO, Breakthrough Fuel
• Ethan Elkind: Director, Climate Change and Business Program, UC Berkeley and UCLA

While Doug Mueller helped lead our organization since 2007, he transitioned into the role of CEO at Breakthrough in early 2018. That’s also when he provided some insights into three major trends for shippers to watch: transportation automation, sustainability, and the on-demand economy.

Q: What developments in 2018 have impacted these supply chain trends and how should shippers adapt?

MUELLER: “There has been strong economic growth in 2018, and that exacerbates some transportation challenges, such as high demand and tight supply in relation to trucking capacity, as well as rising energy prices.

Doug Mueller: Breakthrough President and CEO

The transportation energy landscape continues to evolve as new sources and types of energy gain market share. The most notable energy sources currently in use are diesel, natural gas, and some electrification. This evolution is supported and enabled by both technological advancements and regulation.

To accompany economic growth, demand is up, transportation energy inventories are down, and anything that represents a potential geopolitical situation brings a risk of price shock. So, there’s certainly been plenty of volatility in 2018.

Currently, clients are telling us there seems to be an imbalance in the relationship between shippers and carriers. Shippers bear the responsibility of getting their products to market through carriers. Because of high demand and lack of capacity, prices are rising, while quality of service declines, significantly for both in some cases.

Ultimately, the value equation is decreasing, which isn’t sustainable. In a free market economy, such as the United States’, we’ve come to expect more value over time. We expect things will improve and prices will remain reasonable.

I believe it’s likely that the imbalance in transportation will accelerate the pace of change in the industry. As the saying goes, ‘necessity is the mother of invention.’

Yes, automation solutions such as platooning and autonomous trucking will be realized faster. Yes, trends in e-commerce, such as reducing cycle times, are here to stay.

The question shippers should be asking now is, ‘Are we preparing our organization for these changes, or are we waiting for trends to pass?’ If you’re in an organization waiting for things to pass, you’re in danger of being passed by your competitors and other innovators.”

As Mueller explains, when there aren’t enough truck drivers to fill the need to deliver freight, the transition to potential solutions, including autonomous trucking, could happen a lot faster. But, there’s still an immediate need to address the challenge of capacity now.

Breakthrough Supply Chain President Brooks Bentz calls it a “perfect storm of tight capacity, rising prices, and increasingly erratic service.” Both Bentz and his Supply Chain colleague, Jeremy Becker, Supply Chain managing director, say this story is nothing new. They also believe there may be a way to quell what Becker describes as the market swinging like a pendulum between shippers and carriers as each group tries to take advantage of the situation

Q: How concerned should shippers be about ongoing tight capacity? What can be done now, and what should be done in the future to support a stronger supply chain?

Jeremy Becker: Managing Director, Breakthrough Supply Chain

BECKER: “When it’s a constrained market, and there’s not enough capacity, carriers can take advantage. When the market slows down, and there’s reduced need for capacity, shippers take advantage. This back and forth is not healthy for a business relationship.

Often, shippers don’t have the same access to source capacity as 3PL’s or brokers, who have thousands of carrier phone numbers.  One way the Breakthrough team differentiates itself is through the vast network of shipments they process daily through their fuel management system.

Today, we process over 40,000 shipments per day, in near real time, meaning we have a holistic view of the shippers and carriers that create markets.” Breakthrough utilizes both housed data, and external sources, to align real service providers with shippers’ freight.

If you’re not monitoring compliance or adherence to a plan set forth in a sourcing event, it can quickly drift away from the plan in a market such as the one we’re experiencing in 2018. Without a process for monitoring and a way to intervene when needed, you have no hope of staying within budget.

The Breakthrough Supply Chain team not only provides monitoring and compliance reports to shippers, we distill them down to the most important aspects and reveal the potential to change behaviors with the carrier base or in your own operations while highlighting opportunities to expand positive behaviors.”

While capacity is a challenge domestically, international headlines and global concerns impact shippers as well. Rep. Mike Gallagher (R-Wis.) worked for Breakthrough just before his successful run for Congress in 2016. Congressman Gallagher serves on the Transportation and Infrastructure committee and has a Ph.D. in Government – International Relations.

Q: How could the current geopolitical environment impact energy prices, and what is being done in Washington to support transportation concerns?

Rep. Mike Gallagher (R-Wis.): Congressman for Wisconsin’s 8th District

GALLAGHER: “Over the coming months, new geopolitical developments may have significant consequences for the global economy. First, ‘snapback’ sanctions on Iranian shipping, finance, and energy will come into effect at the beginning of November. Because the administration has indicated it intends to impose secondary sanctions on countries that do not eliminate Iranian oil imports by November, I expect the Europeans and others doing business with Iran will largely comply with the sanctions, even if they disagree with the president’s decision to exit the Joint Comprehensive Plan of Action (JCPOA). As a result, global oil prices may rise as Iranian oil exports see a precipitous decline.

Secondly, with tensions rising, it is very possible that the trade wars will continue into the fall. Although the negotiations between the United States and Europe in July were a positive development, it remains to be seen whether they will produce a final agreement. In the meantime, countries—including the US—may take corrective action to subsidize already-impacted industries. This will likely have the perverse effect of prolonging trade disputes, as the constituencies seeing the greatest impacts may be somewhat placated by subsidies. While I hope that Congressional review and action can head off the worst consequences, because the impacts of tariffs can lag significantly behind their imposition, I am worried things may get worse before they get better.

Thirdly and finally, in Congress, we have been working on improving our nation’s infrastructure to support commerce and international trade. One of the most vital steps we have taken is House passage of the Water Resources Development Act, or WRDA. WRDA authorizes critical investments in America’s harbors, ports, and inland waterways in addition to other water infrastructure. This includes regular maintenance and upkeep, as well as the deepening and dredging of our ports so that they can stay competitive with global shipping trends. There is considerable potential for growth in this sector so long as the geopolitical environment cooperates.”

When it comes to global marine fuel management, a major topic of interest for shippers is the 2020 sulfur cap regulation, which the International Maritime Organization (IMO) is changing from 3.5% m/m (mass/mass) to 0.5% m/m. Matt Muenster of our Applied Knowledge Team provides some perspective.

Q: Describe the overall impact of changes to the global sulfur cap on shippers. What should shippers be doing to prepare, and why is visibility so important?

Matt Muenster: Senior Manager, Breakthrough Applied Knowledge

MUENSTER: “At Breakthrough, we have composed four key principles that we believe will govern the future of the transportation industry. One of these principles states that conventional fuels will become cleaner with price implications. The International Maritime Organization’s January 1, 2020, limit to the amount of sulfur that can be used in fuel consumed on high seas movements is an example of such a change.

The IMO’s 2020 sulfur cap will likely result in higher fuel prices across all modes of transportation, including the North American over-the-road and rail industries. We anticipate a broad impact from this change because a clear majority, perhaps 85 to 90 percent, of the maritime shipping industry will use low-sulfur fuels to comply with the IMO’s regulations. The shift of the maritime industry to cleaner conventional fuels will have a sizable impact on the supply-demand fundamentals of the refining industry, too, pushing up prices for low-sulfur products like diesel.

The current fuel surcharge practices of the maritime cargo industry are obsolete, as is evident through multiple emergency bunker surcharges that have been passed by carriers onto shippers during the first half of 2018. If the current fuel surcharge practice was efficient and accurate, there would be no need for additional surcharges. Shippers should prepare for the coming regulatory change and a more diverse portfolio of marine fuels by gaining visibility to their current fuel costs. Breakthrough’s Marine Fuel Management program allows for full visibility into individual freight movements, resulting in shippers’ having the ability to manage fuel costs and make decisions using clear data.

Breakthrough’s Marine Fuel Management program will enable shippers to fairly reimburse their carrier partners and navigate dynamic markets through the IMO’s 2020 sulfur cap, and beyond. The IMO has already begun talks to limit the amount of CO2 emissions from vessels, so the value of shippers’ understanding of their fuel cost, consumption and emissions will continue to grow.”

While changes in fuel used in maritime shipping will impact prices for other modes of transportation, there are additional factors impacting diesel prices as well. As diesel prices rise, some shippers will start looking at alternative fuels to move their goods to market. Ethan Elkind says there’s a specific energy source that will prove useful to shippers of heavy freight.

Q: What types of alternative energy are showing the most promise for the heavy-duty sector, why should they be considered, and how could shippers benefit from them?

Ethan Elkind: Director, Climate Change and Business Program, UC Berkeley and UCLA

ELKIND: “The most promising types of alternative energy for the heavy-duty sector include battery electrics and hydrogen. Batteries are becoming cheaper, more energy dense, and able to recharge on faster timelines. Because battery electric trucks are cheaper to fuel and maintain in the long run compared to diesel trucks, some short-range applications may be cost-effective already, and longer-range trucks will soon be as well.

Shippers should consider them for the economic benefits, as well as the improved driving experience with the fast electric acceleration and quiet ride, which could help attract drivers during a time of labor shortages. Hydrogen fuel cell vehicles are currently expensive, lack fueling infrastructure, and may not bring the same environmental benefits as electricity due to the energy loss from using energy to generate hydrogen, which then has to move vehicles.

But that said, it may have an important role to play in long-distance heavy-duty freight, given the limitations of batteries. Honorable mention goes to biofuels like biodiesel. Depending on the source of the feedstock, some of these fuels can actually be carbon negative. The question marks revolve around cost and availability of the feedstocks, as well as policy commitment.”

Elkind also weighed in on what’s needed to prepare shippers of all types for a market ripe for change in the form of alternative energy options.

Q: What steps can be taken to ensure organizations are poised to successfully usher in change in the alternative energy market?

ELKIND: “The key for shippers is to have confidence that alternative energy-powered vehicles are a smart investment, both economically and in terms of meshing with business operations. Most prominently, they will need to know that the fueling infrastructure is convenient, affordable, and ubiquitous.

Shippers should get involved in conversations about the deployment of infrastructure, such as utility-funded electric vehicle fast-charging sites. They will also need to communicate their business needs to those installing the infrastructure, so that it is optimally located to coincide with areas where vehicles may be ‘resting’ or otherwise stopped for loading or unloading and would be free to fast-charge.

Shippers should also talk to policymakers and alternative energy companies to coordinate and participate in pilot or ‘demonstration’ projects, in order to test innovative alternative energy technologies that have the promise to scale and benefit the wider industry.”

In early 2018, Jenny Vander Zanden projected the continued rising costs of diesel. Here’s what she’s seeing now.

Q: What’s happening with diesel fuel prices and how can shippers manage transportation energy rather than react to market volatility?

Jenny Vander Zanden: COO, Breakthrough Fuel

VANDER ZANDEN: “Diesel fuel prices have increased by over 25 percent from July 2017. This type of fluctuation in diesel has brought a lot of attention to fleets’ transportation fuel spends and questions around solutions to manage the fuel spend effectively, mitigate risk, and plan for the future.

1. Effectively Manage Fuel Spend: Breakthrough has seen an increase in the number of shippers looking for solutions to manage their fuel spend. Fuel Recovery offers shippers a mechanism to reimburse fuel on every lane based on the specific pickup date utilizing a market-specific cost of fuel and taxes. This allows shippers to remove the distortion of index-based pricing that creates distortion. In addition, Breakthrough continues to see increased interest in intermodal conversion to create savings opportunities. On average, intermodal utilization reduces consumption of fuel by 50 percent and provides significant fuel savings – higher fuel costs have increased the economic value of moving products via intermodal.

2. Mitigate Risk: With the significant volatility in the market, many shippers are looking for opportunities to create budget certainty in fuel spend through hedging or fixed fuel contracts. Breakthrough works with our clients to operationalize budget certainty through our Transformational Fuel capabilities or provide inputs on volume to support hedging strategies.

3. Plan for the Future: Many executives at organizations are inquiring about the future of the energy markets. It is the time of the year when many shippers kick off their strategic planning process for the next year, including budgets. Prices will remain at their elevated levels during the second half of 2018, and early 2019, as a consequence of sustained economic growth, temporary supply shocks, and geopolitical risk considerations. The end of 2019 is poised for more significant upward pressure for diesel fuel prices due to upcoming changes to marine fuel grades. For those reasons, Breakthrough works with our clients to provide monthly forecasts and insights on the upcoming influences in the market.”

Who is Helping You Navigate Change?

Change has been one thing you can count on in 2018 and beyond. And, as Doug Mueller says, we can expect changes in transportation to accelerate.

“The future is always unknown and unknowable,” Mueller explains. “There will certainly be economic dips in years to come, which we will work our way out of once again. But, I don’t believe those ups and downs will fundamentally impact whether change occurs. There may be slowdowns and distractions, but progress will continue.”

Breakthrough offers, and continues to build, a suite of services to help shippers adapt to change and stay on top through increased visibility and expert analysis. Find out more when you review our client success stories. Or, contact Breakthrough today to start a conversation about how we can work with your organization.