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Mar.09, 2015

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COMMENTARY 102 THE JOURNAL OF COMMERCE MARCH 9.2015 Troy Ryley LAST YEAR'S PEAK season in Mexico brought about the worst capac- ity 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 equip- ment to meet the demand. Although shippers hoped for relief during the offseason, it wasn't to be. Two months into 2015, the normal pools for equipment that accrue in Mexico during the offsea- son have yet to appear, so capacity remains tight. This hasn't just made for a challenging offseason, but is also an indicator of things to come. The t r a de i m ba l a nce h a s increased in recent years as Mexico has become a preferred country for manufacturing and more compa- nies have near-sourced operations from Asia to Mexico. More Asian goods also are being shipped into Mexico directly via ocean, which has further disrupted the balance of inbound-outbound capacity. With Mexican exports to the U.S. growing, the trade imbalance won't go away, and capacity will continue to be in high demand. The capacity shortage is exacerbated by the U.S. driver shortage, which adds even greater limitations for carri- ers in being able to move available equipment and insert additional capacity into the market. This capacit y shor tage will i n t e n s i f y w h e n t h e p r o du c e peak season begins in April. The increase in produce shipments will command available capacity and create challenges for shippers, even for those companies moving dr y goods, because perishable and time-sensitive ag ricultural products will sop up much of the equipment. Combined with the seasonal slowdown in southbound movements into Mexico, this will create serious capacity issues. With capacity in high demand, U.S. carriers will focus a majority of their truck volume and drivers on fulfilling their U.S. commitments before sending excess capacity to the border. So, as Mexican export demand increases, fewer trucks and railcars moving southbound will be available to meet that demand. This year's peak-season capac- ity shortage is projected to be worse than pre-recession time periods. In key markets such as Monterrey, Gua- dalajara and the Bajío Region, only one trailer will move south for every three or four 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. Although giving advanced notice will help, it doesn't solve the capacity shortage for all shippers in the Mexican market. During last year's peak season, a number of shippers addressed capacity challenges by transload - ing goods to the U.S.-Mexico border. Many companies will look to use this strateg y again, but moving freight to the border on a trans - load shouldn't be viewed as a fix-all solution. Although it gives 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. Because of the number of touch points throughout the cross-border shipping process, a lot of things can go wrong in a capacity-constrained market. So even if shippers 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 new strategies to adapt to capacity shortages, service levels will continue to be affected — both in the pickup of freight and because of corresponding issues at the border. To meet the increased demand, many carriers are sending partially filled or empty trucks to southern border lanes to pick up freight, forc- ing them to operate at a loss as they reposition available equipment. Further straining the already vola- tile market is the expectation among many shippers that the transporta- tion carrier, brokers and logistics companies will absorb these addi- tional costs. Although that may have been done in the past, shippers can't expect them to take on the cost of peak season, especially in today's carrier-friendly market where com- panies are knocking at the carrier's door to get capacity. One way to compensate for the imbalance of trade during these high-demand months is through a peak-season surcharge, similar to those implemented by ocean and air carriers. This pricing strat- egy 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 to meet demand. Although this won't guarantee a capacity solution, it can help make hard-to-come-by capac- ity more available. Shippers partnering with a third-party logistics provider can take a more collaborative approach to implementing a PSS strategy. A 3PL can help pool together com- panies willing to pay a PSS to command greater freight spend to secure more capacity, then diversify the empty miles and repositioning of equipment among those partici- pating 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. JOC Troy Ryley is managing director of Mexico for Dallas-based third-party logistics provider Transplace. Contact him at CROSS-BORDER BOTTLENECK

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