The supply and demand function of global supply chains impacts shippers, manufacturers and, of course, consumers. However, one of the links most profoundly affected by the ebbs and flows of supply and demand is the trucking supply chain.
When demand for freight services surges, additional strain is placed on the trucking supply chain. If the increase in trucking demand is substantial, it can be weeks or months before the trucking supply catches up.
In the meantime, retailers and distribution centers may be left without adequate inventory. On the flip side of the coin, manufacturers and shippers might have to sit on inventory because there are not enough carriers to deliver their freight.
Trucking supply and demand factors can impact the entire supply chain. In light of this, it is critical to understand the supply and demand function and how this function affects trucking.
What is the supply function?
Before shifting the focus and talking about the trucking economy, let’s first cover the basics of supply and demand function. Starting with supply, the focus will then shift to trucking demand.
The term “supply” refers to the amount of goods or resources that are available. Regarding the trucking industry, the term specifically refers to the number of drivers and/or trucks that are available to haul freight.
Generally speaking, supply increases when prices rise. If suppliers can generate a higher profit, they are going to provide more of the goods or services they offer, such as freight hauling services.
Another factor that impacts the trucking supply is salary. If driver wages increase, more qualified individuals will pursue a career in trucking, thus boosting supply.
What is the demand function?
At the basic level, demand refers to the nexus between the quantity of goods demanded by consumers and the price of said goods. Demand increases lead to price increases.
However, as prices rise, demand will begin to drop. In response, suppliers will decrease prices in order to encourage increased demand for their goods or services.
Trucking demand, much like trucking supply, is incredibly fluid. This fluidity is due to the dynamic array of factors that can impact the demand for trucking services and the supply of drivers as well as trucks.
The demand for trucking services is impacted by the number of shippers that need to forward freight and the volume of the goods they need to move. These shippers are constantly adjusting their order volume in response to changes to the supply and demand function at the consumer level.
What is market equilibrium?
Market equilibrium represents a perfect balance between supply and demand. When the market achieves equilibrium, demand and supply are equal. On a supply and demand function graph, the equilibrium point is the intersection between the supply line and the demand line.
Factors that drive the trucking economy
Numerous factors impact the trucking economy, the most notable of which include seasonal demand, annual procurement cycles and market capacity.
Seasonal demand
Throughout the year, demand for trucking services can fluctuate greatly. Fortunately for carriers and their clients, many of these fluctuations are quite predictable. For instance, produce shipments begin and peak at about the same time each year. The same goes for retail shipments.
Due to this predictability, seasonal demand fluctuations are rarely disruptive. Still, shippers, carriers and other participants in the trucking supply chain must be mindful of these fluctuations.
Annual procurement cycle
Every year, carriers have to increase their rates. These rate increases help carriers maintain adequate profit margins amid rising fuel and maintenance costs.
Many shippers engage in yearly contract negotiations to counteract these rising rates and minimize exposure to the market’s volatility. This series of negotiations is referred to as an annual procurement cycle since multiple shippers are attempting to procure freight services within the same window.
The annual procurement cycle helps truckers estimate demand for the coming year. However, this cycle does not stabilize the fluid trucking supply and demand function.
Market capacity
Market capacity, more commonly known as the market capacity cycle, refers to deflationary and inflationary periods that impact the freight economy.
During inflationary periods, shippers often end up overpaying for freight services because inflation affects the accuracy of their rate forecasts. Conversely, during periods of deflation, shippers can achieve more favorable rates. However, carriers may experience lower profit margins.
How does supply and demand impact freight cost?
Even though the trucking supply chain is in a state of near-constant fluctuation, the basic rules of supply and demand still apply to this industry. When demand outpaces supply, freight costs rise. Shippers compete for freight services and are often willing to pay a higher rate to ensure their deliveries are prioritized.
On the other hand, an excessive supply of trucking services can drive down prices. Carriers are working to attract more clients, which leads them to offer better rates than they would during times of high demand.
Are truckers still in demand?
As the demand for trucking services fluctuates, so does the demand for truck drivers. However, there is always a need for qualified truck drivers. Several factors drive the seemingly insatiable demand for truck drivers, including:
- Retirements
- Economic growth
- High turnover
Of these factors, turnover probably has the biggest impact on the demand for truckers. Every year, thousands of drivers resign from their current positions. This reality creates an opportunity for aspiring new drivers to step into a rewarding profession.
In addition to turnover, economic growth also plays a major role in the steady demand for truck drivers. Although the global economy goes through growth cycles, overall consumption of goods has increased exponentially over the last few decades. This increase has created a need for thousands of new truckers.
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