Exclusive Inbound Logistics Research: Trucking Perspectives 2009

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Cruising down Interstate I-81 through Virginia's Shenandoah Valley two things are obvious—NASCAR doesn't translate well to radio and the trucking industry is alive and well.

Negotiating hundreds of miles of white line fever, drafting and passing convoys sandwiched tight with 53-foot trailers, 7,000-gallon tankers, and 96-foot turnpike doubles, offers a shotgun perspective of where the motor freight sector is racing. Here's a hint: it's not backward.

Not unlike any weekend race at Martinsville or Richmond, today's trucking market is a test of patience and will, character and resolve. There are flat straight-aways and pitched turns; there are shredded treads littering the track, evidence of unseen blowouts; but there is also the hum and buzz of tractor-trailers zooming past in perfect unison. Watch closely and names such as Schneider, Swift, Groendyke, Western Express, UPS, and Old Dominion slingshot their way along the Interstate with willful abandon.

Inbound Logistics' 2009 Trucking Perspectives takes a similar read of the road. Amid the still-deafening whir and blinding blur of today's motor freight sector, our research weaves in and out of empirical data and anecdotal insight, isolating and framing challenges and opportunities confronting both shippers and carriers, as well as trends that are shaping their respective futures.

Soliciting more than 200 questionnaires from trucking companies and motor freight buyers, IL pits their unique perspectives against each other to expose the real drivers sparking change within the industry. We asked carriers to identify how they are working with customers to neutralize adverse market pressures by expanding service offerings, IT capabilities, and coverage area.

Shippers share their point of view as well, offering insight into factors they value when selecting motor freight partners and how they are working in concert with carriers to move their business forward.

As always, bracing Trucking Perspectives is Inbound Logistics' annual Top 100 Motor Carriers list, a pack of the leading players in the trucking segment. Each year we present a nuts- and-bolts directory of carriers that are innovation pacesetters. From global, asset-based truckload carriers towing on both sides of the Asia-Pacific divide to regional less-than-truckload haulers and bulk-shipping stalwarts that carry more than less, our Top 100 Motor Carriers represent a diverse pool of trucking companies that are pushing the pedal to the metal, while delivering speed and reliability to their customers.

THE PRICE IS RIGHT...

The reverberations of a global recession and a severe depression in supply chain inventory have had a marked impact on the U.S. trucking sector. Conflating fixed sensitivity to volatile fuel prices, consumer uncertainty has forced trucks to idle and carriers to optimize all aspects of their operations. Cost control has become a clear and present concern, and motor freight companies responding to this year's Trucking Perspectives survey indicate as much.

Pricing pressures from customers and competition are carriers' greatest challenge according to 87 percent of survey participants, followed by rising fuel prices (52 percent), rising equipment expenses (47 percent), taxes, fees, and other regulatory costs (46 percent), and increasing insurance liabilities (45 percent). Given demand dearth and capacity softness, driver-related outlay is of least concern, registering with only 27 percent of the survey pool.

Trucking companies have been challenged to optimize fleet use and maximize loads to match shrinking pipeline volumes. Beyond tactical measures addressing their own asset-heavy efficiency improvements, many are embracing logistics services to organically sow and grow shipper partnerships and enhance their value. In light of the economy, some have begun operating "3PLight," mining new opportunities to expand their core freight capabilities and value proposition outside the trucking space.

After cost-related concerns, 32 percent of carriers report technology investment as the next-greatest challenge, indicating they are exploring ways to enhance their value to customers through the lens of communication and visibility solutions.

Dovetailing with customer demand for IT capabilities that deliver greater cost economy and supply chain transparency, more than one-quarter of surveyed truckers (26 percent) are feeling the pull of green mandates from both consumers and government. Regulatory measures to reduce engine and carbon emissions through new equipment, speed, and idling restrictions and bio-fuel requirements are rampant. Trucking companies are answering the call voluntarily and through enforced compliance.

Arguably, the business case for embracing sustainability efforts, rationalizing fuel consumption, and reducing operating expense has grown in importance as a result of, not in spite of, current market conditions.

THE BIG SQUEEZE

Shippers, too, have felt equal pressure to squeeze transportation out of their swelling expense reports and within shrinking budgets, placing an even greater burden on trucking partners. Abundant capacity has truckers cinching resources and stretching sales efforts, giving motor freight buyers the upper hand—for now.

Shipper survey respondents overwhelmingly report that price (92 percent) trumps customer service (49 percent), reliability (47 percent), and coverage (44 percent) when evaluating trucking partners in today's market—bringing to bear carrier sensitivity to competitive rate pressures. Capacity (20 percent) was the least-valued consideration.

That shippers value price over customer service raises a key question: How do carriers who market their services and coverage superiority as a competitive advantage, and try to "sell" a higher price as a result, react to this new reality? Motor freight buyers are more willing now to sacrifice a day or three in transit, at a lower cost, as long as they and their customers know when shipments will arrive. Moreover, less service-sensitive carriers are gaining ground with shippers who can balance more time and fewer bells and whistles with improved economy.

Customer service has slid down the totem pole of expectations because failure is no longer an option—it's a deal breaker. If transportation service providers can't consistently deliver on promise, there's a fleet of suitors waiting in line to take the next order at a cheaper price. Carriers are on a much tighter leash and shippers are cognizant of this leverage.

Nearly half of surveyed motor freight buyers (44 percent) acknowledge switching carriers recently, following last year's trend. Their reasons are mixed, but largely reflect failed expectations: "late pickup and delivery, and no communication," "better carrier fit for service needed," "damaged shipments," and "my contact left for a different company."

Confronted by their own pricing pressures, shippers are more willing and able to reevaluate rates in certain lanes and re-bid accordingly to extract as much value as the current market allows. Even valued shipping customers are feeling the compulsion and seizing the opportunity to negotiate pricing. "The market is such that our long-term collaborative partnerships are under pressure to reduce costs, so we see pricing pressure across the board," reports one carrier.

...UNTIL CAPACITY GETS TIGHT

Freight buyers that have established, long-term arrangements with core carrier partners recognize the intangible value of partnership. As one shipper notes, "sorting out the hype to make accurate and real comparisons is important. I'd rather have a carrier I trust who delivers my freight on time and damage free than save a few dollars per move."

Still, the nature of supply and demand, and buyer impulse to wrangle with transportation suppliers over spot-market pricing, is creating a dangerous precedent that will trigger a harsh reality when capacity hardens.

The numbers speak for themselves. Over the past three years, the average fleet size of companies responding to IL's Trucking Perspectives survey has dropped from 2,946 trucks per carrier in 2007 to 2,574 trucks per carrier this year. With little to fall back on, many trucking companies have jettisoned older trucks and winnowed their asset pools to reduce overhead.

Larger motor freight companies have the latitude to simply idle assets until demand picks up. Smaller LTL carriers don't have this luxury, nor do TL companies that don't have the terminal yard capacity to store equipment.

Eliminating capacity is a double-edged sword that some carriers are ominously straddling. They are looking to uncover quick, short-term business and fill trucks by delivering competitive prices while also cementing existing relationships for the long term. But removing assets also jeopardizes market position and strength.

"We've recently seen carriers shrink their fleets and/or expand their customer base to ride out this economic storm," reports one trucker. "When overall freight volumes rebound, these carriers will find it difficult to honor commitments made to that expanded shipper base and experience extremely tight capacity. Shippers who take a longer-term view will avoid the difficulties that come with having an oversold, overextended carrier on their side."

SHIFTING INTO THE FUTURE

Carriers have been proactive and vocal preaching the gospel of long-term collaboration to stir and awaken their customers to a looming reality: a return to "normalcy" will likely resurrect dormant issues such as driver shortages, Hours-of-Service regulations, capacity scarcity, congestion, and infrastructure neglect. And if that isn't reason enough, both shippers and truckers are waiting with bated breath for the very real possibility of a major market event that could severely tip the capacity/demand scale in the truckers' favor.

Among carriers, 69 percent believe customers are aware of the potential capacity crunch when the economy rebounds, closely paralleling 2008 data. By comparison, only 58 percent of shippers identify this as a concern, a drop of three percent over last year.

This divergence in opinion may simply be attributed to an expectation gap. Shippers are concentrating on the here and now to massage stakeholder interests. Carriers, with little else to hitch their tractors to in the current market, are selling customers on the future.

"We have attempted to make customers aware of the inevitable capacity shrinkage," says one carrier. "Most shippers, however, appear poised to take advantage of current rates as a result of capacity abundance and current production levels."

But as other trucking companies note, corporate blinders may exacerbate this anomaly, particularly when the executive level fails to weigh the importance of transportation and logistics on the bottom line.

"We believe logistics departments' decision-making is overridden by CFOs and CEOs, which will negatively impact their ability to gain capacity when volumes return," says one carrier.

If that's not a sign that logistics and supply chain management are still treading water in executive boardrooms, one carrier observes that some customers still don't understand that supply chain solutions cannot be served though short-term reactions: "Collaborative and consultative relationships are vital cogs in developing comprehensive and sustainable logistics solutions."

The repercussions such oversight might bring to shippers will likely depend on the speed of economic recovery. A slower, more curved rebound will allow carriers to react and acquire necessary capacity to meet demand. A sharper and swifter upturn will only stifle economic expansion and growth.

For the time being, and amid speculation that the recession has turned, the former scenario appears more likely. Motor freight carriers, the leading indicators of fortune and famine, are unanimous that the U.S. economy will remain in a holding pattern for the near term. On the plus side, only five percent of respondents expect conditions to get worse. More sobering, only 32 percent see the economy improving, while 63 percent see more of the same through the end of the year into early 2010.

Figure1. U.S. Truckers By Operating Area

Over the past three years there has been a seismic shift in the areas where motor freight companies are trucking. In 2007, 61 percent of surveyed carriers served the United States exclusively; this year that number drifted to 31 percent.

By contrast, in 2009, 57 percent of motor freight companies report they serve North America, compared to 33 percent in 2007. The growth of NAFTA trade and the rising aspirations of Canada and Mexico as global trade partners, and the maturation of manufacturing, distribution, and consumer markets south of the U.S. border, have helped trigger expansion.

Beyond the North American continent, U.S. truckers are making waves and paving new roads for expansion. In 2009, 12 percent of carriers identified themselves as global, doubling the figure from two years ago. Trucking companies are responding to demand in developing countries to share expertise and resources as well as meet their growing need for capacity. At the same time, carriers recognize the value they bring to customers by offering end-to-end global services.

Figure 2. Trucking Services

Truckload (TL) cartage is most dominant among motor carriers, with 81 percent of survey respondents reporting this capability, compared to 55 percent who provide less-than-truckload (LTL) service—closely paralleling last year's data. Shipper efforts to reduce more expensive LTL miles have made regional markets much more competitive in this segment, while long-haul trucking is increasingly under siege by more affordable rail/intermodal solutions. That said, the number of carriers offering intermodal services remains steady at 44 percent.

One striking change from last year is a six-percent increase in motor freight carriers (67 percent) offering dedicated contract carriage (DCC) services. The cost and responsibility of operating private fleets in a down economy has likely swayed some companies to jettison their assets and rely on for-hire carriers, accounting for this niche growth. From a trucker perspective, DCC business tends to be very profitable. Secondly, the "dedicated" service that carriers provide, and charge dearly for, is often nothing more than their standard offering packaged differently.

Figure 3. Trucker It Capabilities

Truckers satisfy a core need by transporting freight. But many shippers now depend on carrier partners to contribute more than just space.

This year, 82 percent of surveyed carriers indicate they supply customers with email alerts and real-time visibility into shipment movement from origin to destination. Equally important, 61 percent offer online logistics services such as advance ship notices and claims filing, giving shippers actionable information they can convey to supply chain partners and customers; and 57 percent provide online pricing and routing information.

Pinpoint shipment tracking is still taking time to develop. While 44 percent and 23 percent of carriers provide bar code and RFID capabilities respectively, only 32 percent and 19 percent offer item-level visibility for those solutions. Moreover, only 19 percent of surveyed trucking companies offer any-time visibility and communication to their drivers.

Figure 4. What's more important, your relationship with your carrier or with your broker/intermediary?

When capacity is tight, many shippers rely on brokers and 3PLs to align capacity with demand. But following last year's trend, more companies are relying on intermediaries to locate the best pricing in spot markets and lanes, reinforcing a subtle, if important, shift in how motor freight buyers purchase space.

Half of surveyed shippers acknowledge that their relationship with carriers is most important (compared to 53 percent in 2008), while 17 percent report a higher regard for partnerships with brokers/intermediaries, and 33 percent (30 percent in 2008) perceive both relationships as equally important.

Given current economic pressures, shippers see freight brokers and their networks as a practical means for finding the most competitive rates. At the same time, many carriers are relying on intermediaries themselves to fill capacity and ship fuller loads.

For many companies, the freight broker serves as a complement to core carrier partnerships. "I work with carriers directly for expediting shipments, but with brokers for other loads," says one shipper. Another freight buyer reports that it uses third parties to review individual lane quotes and to keep carriers honest. But it also has a say in which trucking companies are used.

One challenge for shippers is differentiating carriers who act as brokers and brokers who masquerade as carriers. Most carriers also have freight forwarding authority and function essentially as brokers, or utilize brokers to their advantage. Customers needing to move freight call the carrier for quotes and service. Sales people, in turn, contact one or more brokers to get a quote, then respond to the customer with a marked-up price and try to close the deal.

Still, for the majority of freight buyers, and reflecting the 50 percent tilt, working with carriers is the preferred means. "I find less control dealing with transport brokers, and more reliability when dealing with carriers directly," reports one shipper.

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