New infrastructure has also opened the door to new transportation strategies for many Canadian companies. Canadian consumers might expect to reap benefits, such as lower costs and improved service levels. Larger Canadian transport providers, particularly rail companies, may begin to benefit from increased cross-country traffic—a departure from today’s mainly regional services.
E-commerce is redefining supply-chain strategy
As recently as ten years ago, supply-chain managers for brick-and-mortar retailers aimed to keep minimal inventories in stores and warehouses. But they built up those inventories during the autumn months in preparation for the holiday shopping season, creating an annual peak for ports, railroads, and trucking companies. E-commerce has permanently changed the expectations of consumers, however (Exhibit 3). First, they have become accustomed to purchasing from their homes (or on the go), to receiving their items quickly, and to free shipping, so they order more frequently and in smaller batches. Second, returns are accepted much more widely by e-commerce companies than by brick-and-mortar ones. Shoppers buy and return freely—a process that is simple for them, but quite burdensome for logisticians.
In response to these shifts, many retailers are increasing their permanent downstream inventories and changing the way they manage them, moving from megawarehouses to smaller, more flexible facilities closer to consumers. While the e-commerce giants, such as Amazon, are setting this trend, smaller players are investing urgently, too. As a result, the last mile of delivery is becoming even more critical. More distribution centers near densely populated areas cut the average shipping distance.
That’s great for consumers, but it chips away at many of the efficiencies transportation providers have gained over the years. At one big company, truckload miles per truckload trip have declined by 25 percent.12Less-than-truckload players are also seeing a dramatic effect, but to their benefit: LTL has increased by 9 percent annually since 2009,13and the boom does not appear to be letting up. E-commerce and growth in reverse logistics have boosted LTL, which in turn has become increasingly efficient at moving freight out of its networks.
In Canada, online retail sales are growing quickly, from Cn $22.3 billion in 2014 to an expected Cn $39.9 billion in 2019, which would be nearly 10 percent of all retail sales.14A number of obstacles that have held back Canadian e-commerce may be fading away. Infrastructure investment will probably lower the cost of shipping. Meanwhile, big retailers have put in place strong strategies, organizations, and footprints to offer Canada’s online consumers massive scale.15Similarly, Mexico is beginning to catch up in e-commerce, but the big obstacle there is the fact that credit cards are far less common, making it more difficult for consumers to transact. Despite that, online sales are expected to double (to 4 percent of all retail sales) by 2020. Here too, large players are driving the change.16Amazon launched an end-to-end Mexican operation in June 2016 and is already providing access to its offerings in innovative ways—for example, by selling gift cards for cash at stores all over the country.
Until recently, consumers had to accept passively whatever a shipping service company provided unless they wanted to pay significantly more to expedite. But supply chains are entering a disruptive reality powered by e-commerce and reverse logistics, so companies need to be prepared for continual and unpredictable evolution.
Technology levels the playing field
Our research shows that across North America, the trucking market is extremely fragmented. In the United States, the top ten players control just 12 percent of it (Exhibit 4).17In fact, of the more than 275,000 for-hire trucking companies in the country, nearly 90 percent have ten or fewer tractors.18In Canada, fragmentation is similar, and in Mexico, it is far more pronounced: the top ten players control just 14 and 3 percent of their respective markets as measured by power units.19,20The story is similar when measured by revenues.
Recent technological advances will benefit all carriers, especially smaller ones. Better access to market information, for instance, will give small players opportunities to win more freight and to get more insight into the balance between market prices and demand—and earlier in the process, too. As small carriers increase their ability to exploit available knowledge, they will be able to compete for more opportunities than ever before, in both baseline and peak freight. Freight-matching apps and other technologies will improve connections. And established 3PLs now offer a plethora of fully loaded services (covering activities such as exception handling, document management, third-party interactions, and nearby load alerting) on desktop and mobile platforms.21With these new tools, smaller carriers are becoming increasingly able to punch above their weight.
The changing demographics of drivers will also favor smaller carriers. As populations in the United States and Canada age, this part of the workforce shrinks. In Canada, for instance, truck drivers are not only older, on average, than other labor pools (44 as opposed to 40 years) but also aging faster.22Already, drivers are significantly harder to find. The Conference Board of Canada predicts a shortage of 25,000 to 34,000 drivers by 2024, while the Canadian Trucking Alliance puts it closer to 48,000. In the United States, this oft-discussed problem is expected to grow starker as older drivers leave the workforce faster than younger drivers enter it. Projections of the driver shortfall vary from 100,000 to 175,000 by 2024.23
In Mexico, the executives we spoke with had little concern about a shortage of drivers, but a lack of hard data makes it difficult to know for sure whether or not this is a problem. In any case, any shortfalls in driver capacity will primarily affect larger consolidated-shipping companies. Small, independent trucking companies tend to rely on a limited number of longtime employees and have lower turnover rates, on average.24
The North American recession of 2007–09 was hard on surface-transport companies, but today volumes are back, and resilient carriers have become more efficient. Over the past several years, Canada and Mexico have rapidly built supply-chain capabilities for more efficient transport, both domestically and abroad. By embracing e-commerce, US consumers have fundamentally changed the supply chain, pushing inventories further downstream. Other changes are also gathering force, including emerging technologies such as autonomous vehicles, connected devices, alternative fuels, and blockchain, to name a few. As a result of all these changes, transport markets are less predictable than ever, and require more vigilance from executives.