TRUCK CAPACITY SHORT IN MEXICO

Mexico Trade on Laredo Bridge
   Mexico Trade on Laredo Bridge

From The Journal of Commerce

By:  Troy Ryler, managing director of Mexico for Transplace, can be contacted at troy.ryley@transplace.com.

Last year’s peak season in Mexico brought about the worst capacity shortage we’ve experienced in a decade. The imbalance in trade between the U.S. and Mexico left shippers scrambling to find truck and rail capacity as carriers were forced to reposition empty equipment in order to meet the demand.

While shippers were hoping for relief during the offseason, that was not the case. Already in 2015, the normal pools for equipment that accrue in Mexico during the off season have yet to appear, so capacity remains tight. This has not only made for a challenging off season, but is also an indicator of things to come.

The imbalance in northbound and southbound trade has continued to increase in recent years as Mexico has become a preferred country for manufacturing and more and more companies have near-sourced operations from Asia to Mexico. Additionally, more Asian goods are now being shipped into Mexico directly via ocean, which has further disrupted the balance of inbound/outbound capacity.

With the growing number of exports from Mexico to the U.S., the trade imbalance will not go away, and capacity will continue to be in high demand. The capacity shortage is further exacerbated by the U.S. driver shortage, which adds even greater limitations for carriers in being able to move available equipment and insert additional capacity into the market.

This capacity shortage will be further intensified once produce peak season begins in April. The increase in produce shipments will command available capacity and create challenges for shippers, even for those companies moving dry goods, as much of the equipment will be refocused on perishable and time-sensitive agricultural products. This combined with the seasonal slowdown in southbound movements into Mexico will create serious capacity issues.

With capacity in high demand, U.S. carriers will focus a majority of their truck volume and drivers toward fulfilling their U.S. commitments before sending excess capacity to the border. So as the demand of exports in Mexico continue to increase, there will be fewer available trucks and railcars moving southbound to meet that demand.

This year’s peak season capacity shortage is projected to be worse than pre-recession time periods. In key markets such as Monterrey, Guadalajara and the Bajío Region, there will be only one trailer moving south for every 3-4 required northbound. Some shippers think giving carriers an extra two to three days’ notice on their transportation equipment needs will solve the problem, but that’s not the case. While giving advanced notice will help, it does not solve the issue of a lack of capacity for all shippers in the Mexican market.

During last year’s peak season, a number of shippers addressed capacity challenges by transloading goods to the U.S.-Mexico border. Many companies will look to use this strategy again this year, but moving freight to the border on a transload should not be viewed as a fix-all solution. While it does give shippers access to more U.S. carriers that don’t currently enter Mexico, which could lead to a shorter wait time for freight pickup from their plant, it doesn’t eliminate the potential wait time at the border.

Due to the number of touch points throughout the cross-border shipping process, there are a lot of things that can go wrong in a tight capacity market. So even if shippers can get their freight to the border, they still may be forced to wait for a U.S. tractor to be available to go northbound. Shippers need to understand that even with implementing new strategies to adapt to shortage of capacity, service levels will continue to be affected – both in the pickup of freight and due to corresponding issues at the border.

To meet the increased demand, many carriers are sending partially filled or empty trucks to southern border lanes in order pick up freight — forcing them to operate at a loss as they reposition available equipment. Further straining the already volatile market is the expectation from many shippers that the transportation carrier, brokers and logistics companies will absorb these additional costs. While that may have been done in the past, shippers cannot expect them to take on the cost of peak season, especially in today’s carrier-friendly market where companies are knocking at the carrier’s door in order to get capacity.

One way to compensate for the imbalance of trade during these high demand months is through a peak season surcharge (PSS), similar to those implemented by ocean and air carriers. This pricing strategy enables carriers to operate as the market demands, without the risk of incurring significant loses. By paying a PSS, shippers would enable their carrier partners to relocate some empty equipment in order to meet demand. While this won’t create a guaranteed capacity solution, it can help make hard to come by capacity more readily available.

Shippers partnering with a third-party logistics (3PL) provider can take a more collaborative approach to implementing a PSS strategy. A 3PL can help pool together companies willing to pay a PSS in order to command greater freight spend in order to secure more capacity, then diversify the empty miles and repositioning of equipment among those participating companies. This would allow them to enter the spot market and pay premiums on an as-needed basis and not as their only option besides waiting.

As the growing number of exports from Mexico to the U.S. show no signs of slowing down, the challenges that come as a result of the trade imbalance will not go away. Shippers need to understand that many of the old practices during the recession won’t apply this year or in coming years. Simply transloading shipments to the border or diversifying their transportation modes won’t solve the problem the way it has in the past. Shippers need to explore new strategies and work with their carrier partners to create a mutually-beneficial shipper-carrier approach to peak season.

Troy Ryler, managing director of Mexico for Transplace, can be contacted at troy.ryley@transplace.com.

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