The Transportation Industry is considered to be cyclical in nature because the revenues and profits of companies operating in this category are directly tied-in with economic booms and recessions. This implies that when the business cycle in a country hits a high, there is tremendous growth in this industry, which also triggers increased employment .
This is primarily because whenever the economy of a country is doing well and Gross Domestic Product rates register an increasing trend, there is increased production of goods by the manufacturing industry as well. The underlying reason for this increase in production volumes is increased demand for goods by the population in general, who have the buying power to purchase these products off the shelf as soon as they become available in stores . Increased factory production automatically necessitates increased transportation requirements as well. This is because companies that are producing more want to make sure that the goods are also delivered to the target audience in a safe and timely manner.
Therefore, countries that have strong and stable economies also have an extremely robust transportation sector. A crucial factor in this case is the price of the fuel that is being sued by the transportation and shipment vehicles, whether it is petrol, diesel or gasoline. When the economic outlook is positive, companies are willing to pay the higher fuel cost, because their higher-than-average profit margins more than cover the additional expenses .
However, on the other hand, in times of economic recession, the transportation industry is one of the most extensively and significantly hit. Economic, business and industry downturns are cyclical in nature and, more often than not, are unavoidable. This is a situation characterized by high inflation, reduced purchasing power of people, and consequently, reduced demand for most products. As a result, companies end up lessening their production volumes as well, otherwise their products will remain on the shelf or become obsolete in their warehouses. When there is reduced production, there is naturally a decreased need for transportation vehicles as well .
Given the nature of the transportation industry, it is neither feasible nor practical for companies to continuously adjust their capacity. This is because getting rid of vehicular transports is not an easy task in the first place. Secondly, even after a company reduces its fleet during the hard times, it will have to re-purchase or rent the additional vehicles around so that when the economy takes a turn for the better, the company will be in a position to transport the bulk of the goods produced. However, there are certain strategies to be implemented that can help the transportation sector manage its capacity issues better .
Whenever there is an economic recession and consumer spending drops, the transportation industry will always be hit. This becomes even more significant for those companies that own the majority of their own carriers. When ownership is in-house, the company itself is required to pay the maintenance costs of the vehicles (a fixed cost), while also paying for the space where these vehicles may be stored while not in use.
Therefore, the rational thing to do is to use third party transportation contractors, instead of owning all transportation vehicles yourself. These vehicle vendors typically have a diverse customer base belonging to different categories, therefore, their revenue model is not as adversely affected when compared to companies operating within one industry. This is because when business slows down overall, the vendors are in a far better position to lease or rent out their assets to other industries since they do not operate within the constraints of a single industry .
Secondly, if a company’s business model mandates having a large fleet on-board at all times, then downsizing is often not an acceptable solution. In this case an emerging trend has been of pooling and sharing resources by an entire category. This implies that if the automotive industry for example, needs to ship X units in the next 3 days, then the required amount of units can be moved from point A to point B with minimal hassle .
References
Barratt, M. (2002). Understanding the meaning of collaboration in the supply chain. Supply Chain Management: An International Journal, 30-42.
Stank, T. P. (2006). A framework for transportation decision making in an integrated supply chain. International Journal of Supply Chain Management, 71-78.
Vidal, C. J. (2007). Strategic production-distribution models: A critical review with emphasis on global supply chain models. European Journal of Operational Research, 1-18.
