Looking Down the Road
Despite its challenges, the motor freight industry is on a roll, according to exclusive interviews with five trucking big wheels.
At nearly $600 billion, motor carrier services represent roughly half of annual U.S. logistics spending. Even the largest carriers serving the market contribute less than 10 percent of its revenue.
The U.S. logistics market's diverse carriers and service providers face a particular set of challenges. Labor represents a leading expense for carriers, and trends suggest it will only become more expensive. Some carriers experience minimal problems finding adequate personnel resources, while others register annual driver turnover rates of 100 percent or higher.
Asset productivity represents another critical issue for carriers. Interaction with shippers and consignees comes into play, along with regulations and carriers' ability to identify and act on opportunities to improve their operations.
Capital expense also creates challenges due to the high cost of assets the industry employs, and the low margins that often result from overcapacity or aggressive pricing practices among competing companies.
Despite these challenges, motor carrier professionals love what they do, and their tenacity reflects the industry supporting U.S. domestic and international commerce. Here's what five leading trucking executives told Inbound Logistics about the issues driving change for their companies and the industry.
Planning for the Unexpected
With natural disasters and other disruptions occurring with alarming frequency, professionals at every supply chain level are examining their operations' durability. And when your operations center is in the heart of "Tornado Alley," contingency planning is critical.
Con-way Truckload has firsthand experience testing its contingency plan. In May 2011, the Joplin, Mo.-based motor carrier withstood a multiple-vortex tornado—and kept customer freight moving.
Not all companies are that fortunate in this era of extended supply chain networks. A critical link fails or is threatened, and a whole supply chain risks collapse. Increasingly, there is discussion of looking beyond Tier 1 suppliers to the next level in the supply chain, and even beyond. This may become a more common practice, especially for shippers and consignees examining the strength of their transportation providers, says Herb Schmidt, president of Con-way Truckload, and executive vice president of Con-way Inc.
Each year, Con-way Truckload moves 2,600 tractors and 8,000 trailers across its North American network. 2011 has endured more than its fair share of global supply chain disruptions, including volcanic eruptions, earthquakes, floods, tornadoes, and political upheaval. Many companies were disturbed to discover that the second or third tier of their supply chains shared a common source.
Balancing sourcing among a number of Tier 1 suppliers to avoid disruption is nothing new. Many shippers maintain contracts with multiple carriers or brokers so they have coverage if their core carrier experiences a disruption. "Many shippers and consignees may be looking more closely at the contingency plans their carriers, brokers, and third-party logistics providers (3PLs) have in place," Schmidt says.
In May 2011, a tornado flattened much of Joplin. "The core of the tornado struck within one-eighth of a mile of Con-way headquarters," Schmidt recalls. "At the company's administrative and operations center, the winds were in excess of 100 miles per hour, and possibly as high as 150 miles per hour."
Thirty-six trailers on Con-way Truck-load's adjacent lot turned over; some of them were loaded. The tornado flipped a tractor over the maintenance shop, lifted the shop's roof, blew in 12 overhead doors, and destroyed two miles of perimeter fence. Yet while all of that was happening, the carrier didn't lose a single dispatch.
Designed to withstand 300 mph winds, the facility housing the operations center receives part of the credit. The company's information technology department and mainframes reside in a basement built with sub-floors, water pumps, and a back-up generator surrounded by water walls and supported by an uninterruptible power supply.
When the tornado hit, Con-way Truckload was already planning a mirror IT facility that would back up the company's data and provide an operations site if the main building was compromised.
One disadvantage of a distant backup facility is the difficulty of relocating workers when needed. So Con-way Truckload sited its backup facility just five miles due north of its operations center—"because tornadoes don't move north and south," says Schmidt—to allow workers to easily shift if a problem occurs.
The backup facility will alleviate the risks inherent in a centralized operation. Con-way currently does booking and planning at the Joplin headquarters, and pushes the data to satellite facilities. "Although the headquarters is adequately protected, I want a reasonable Plan B that doesn't place a lot of stress on the balance sheet," Schmidt says.
Even with impenetrable operations centers, exposed carrier networks are at risk. In some operations, terminals are located in a number of regions and one or more might be exposed to a disruption at any given time. To the degree carriers are dependent on those operations, a series of problems can add up to serious trouble quickly.
Joplin's centralized operations don't impart much risk to Con-way Truckload's satellite terminals, as long as they can access load information and communicate with drivers and customers. If necessary, operations can be transferred to one of those satellite facilities for 24 to 48 hours.
Another part of Con-way Truckload's broader contingency plan is the ability to work with sister divisions such as Menlo Multimodal. "That division books nearly $1 billion per year in truckload moves, so it has relationships with subcontractors who have capacity," Schmidt notes. "And its data systems are compatible, so we can easily transfer bookings."
Larger shippers ask about Con-way Truckload's contingency plans and backup systems, but those queries are less common from small and mid-sized companies. "Smaller companies don't typically experience significant disruptions," Schmidt notes, "and are less dependent on tight delivery schedules."
Nonetheless, Schmidt expects companies of every size will develop an interest in planning for the unexpected. "Shipper contingency plans reflect responsible stewardship over the business," he adds.
Keys to Weathering Tough Economic Times
Wes Kemp, president and CEO of Fort Smith, Ark.-based ABF Freight System Inc., says the past three years have been the most challenging of his 42 years in the transportation industry. Those dark clouds, however, also presented a silver lining. "When you go through tough times, you make discoveries," Kemp says. "You always come out a little smarter than when you went in."
Faced with a 20- to 25-percent drop in volumes, carriers often scale back to reduce variable costs. Fixed costs, however, then represent a higher percentage of the company's overall costs. To restore balance, carriers must grow volumes. Kemp is proud of the fact that ABF has been able to grow volumes each quarter and improve yield as pricing firmed. "The company has made progress on earnings," he says.
One key to this achievement was implementing a regional network. The less-than-truckload (LTL) carrier now operates a dual system network for long-haul and next-day/second-day service.
Technology played a key role in enabling the change. "We invested in wireless communications one decade ago," Kemp says, noting that those devices revolutionized the carrier's operations.
"Drivers, dockworkers, dispatchers, and others connect via handheld devices, facilitating rapid shipment pickups, paperless dock operations, and optimal load planning," he explains. "Shipments become immediately visible on dispatch systems throughout North America, allowing freight to be properly consolidated and quickly moved to destination."
Optimization software provided another technology-based advantage. In the past, these tools could optimize daily or weekly tonnages between cities. "The next generation, however, can optimize using real-time data, a capability ABF uses for its regional service," Kemp says.
High-tech tools are valuable, "but good old-fashioned working together also benefits ABF," Kemp says. Collaboration among shippers, carriers, and consignees has helped drive improvements along the supply chain, as well as reinforce customer relations.
Communication and collaboration are important from an operational perspective, as well. As the carrier sought to make operations improvements, efforts such as managing driver wait-time required cooperation from shippers. Increased wait-time results in increased costs for the carrier and, consequently, higher costs for shippers and consignees.
Packaging is another area where shippers, carriers, and consignees can develop collaborative solutions. ABF's packaging engineers help shippers reduce packaging, while ensuring shipments will be sufficiently protected in transit.
"Carriers and shippers should take advantage of opportunities to share their expertise with industry organizations and educational institutions," says Kemp. Participating in discussions about industry issues and evolving needs has helped ABF make progress on sustainability issues, for example.
Kemp cites the proposed driver Hours-of-Service changes as another industry concern that could increase costs for both carriers and shippers. If the hour reduction in driving time remains part of the new rules, he says, "it will jeopardize some of ABF's runs."
Delays at a shipper or consignee facility become increasingly problematic under those circumstances, because more wait-time can push the driver service limit and translate into another 24-hour cycle, creating significant shipment delay or requiring costly expedited intervention.
"The LTL market can certainly be unpredictable, but it will be lucrative for carriers who survive the volatility," Kemp notes.
Change by Design; Change by Demand
The volatile transportation market has driven some motor carriers to change. Others have taken the wheel and driven change for themselves. USA-Truck President and CEO Cliff Beckham believes that as the industry reshapes itself, mid-sized carriers enjoy an advantage over larger companies in being able to effect change faster and more effectively.
One area in which USA-Truck, based in Van Buren, Ark., is making improvements is driver retention efforts. The driver shortage provides an advantage for carriers that can attract and keep quality drivers. With a shrinking pool of qualified drivers to draw from, carriers are spending more on recruiting, training, and compensating drivers. As constricted driver supply creates capacity constraints, carriers with quality service will be able to command more for the capacity they can provide.
To increase its appeal to drivers, USA-Truck developed internal initiatives to drive the softer side of managing people and culture. "It takes more than financial compensation to keep drivers happy," says Beckham. "Market forces will drive pay, but people want more than just a paycheck from their jobs. They want to feel they are accomplishing something important."
Larger economic and market factors are helping USA-Truck achieve its driver-friendly goals. The carrier's service focus shift from long-haul carriage to regional lanes is both a market-driven change and a choice.
The market force at work is the change in the amount of U.S. Gross Domestic Product that comes from wholesale and retail trade vs. manufacturing. Those networks are different, so they have different transportation needs. But from a corporate culture perspective, adopting more regional lanes supports the goal of improving driver lifestyle, which helps with recruiting and retention.
A parallel development is increased shipper desire to consolidate LTL shipments into full truckloads, even at the cost of carrying more inventory. This arrangement also allows shippers to reduce costs by using more rail intermodal and all-water transportation. "Increasing our use of rail intermodal for long-haul moves helps provide more regional lanes for drivers and allows us to offer shippers a wider array of service and pricing options," Beckham points out.
"One risk motor carriers encounter with shorter lengths of haul is that drivers spend more time at docks and in metro traffic," notes Beckham. "Hours-of-Service rules changes threaten to constrain carriers' ability to get maximum use of their assets—both the truck and the driver. Once that clock starts ticking, you have 14 hours to use the asset."
Those assets are most productive when they are racking up miles, not minutes, and that poses a pricing challenge. Carriers are tracking their return on assets, and drivers are looking at compensation that has traditionally been based on miles. Economic pressures are driving change that is slow to come for an industry with a long history of doing business under the current pricing model.
"The multitude of competitors in the market becomes a limiting factor in the ability to change legacy pricing models and paradigms quickly," says Beckham. "One thing is certain: driver compensation will increase.
"Carriers can't just eat the cost, so they need to find a way to pass it on," he adds. "Tighter capacity may help, but the long-term challenge will be modifying pricing systems to reflect the changes that are occurring in the industry."
Even with all these market pressures, Beckham notes the importance of creating a positive corporate culture for people who are spending more of their waking hours on the job with their co-workers than at home with their families.
"We want to provide our team members with freedom and discretion in how they go about pursuing results, rather than taking an assembly line approach," he says. "We have tried to develop a culture where people are encouraged to think and pursue results using their strengths, but within a set of defined ethical boundaries."
Market push and management pull have driven changes in USA-Truck's service offerings and network configuration, but those same forces continue to shape its corporate culture.
The driver shortage will be a long-term problem for the industry, notes Beckham. "Economic cycles will continue to rise and fall, and regulation will ebb and flow," he says. But he believes the driver issue will only worsen until the industry is able to attract a new generation of workers.
Efforts such as USA-Truck's corporate culture emphasis can help provide a competitive edge in attracting and retaining drivers.
The Company You Keep
When Bruno Sidler, chief operating officer at CEVA Logistics, describes the 3PL's dependence on its suppliers, he also highlights the position of nearly every shipper. CEVA is a non-asset business and, when it comes to motor carriage, most shippers are also primarily interested in their carriers' assets, or their 3PLs' ability to access those assets. But relationships matter for more than access to capacity. Collaboration delivers results.
CEVA collects and evaluates day-to-day key performance indicators (KPIs) to address supplier service gaps. But, when it comes to relationship management, CEVA looks beyond KPIs. The 3PL's new supplier recognition program provides a model for evaluating shipper/carrier relationships by examining the qualitative factors that help build strong relationships. Under the program, CEVA emphasizes suppliers' basic values and corporate culture, then considers whether suppliers are employing global best practices. The program also weighs suppliers' sustainability programs, and corporate and social responsibility. Finally, it evaluates the steps suppliers take to execute major projects successfully for CEVA and its customers.
While KPIs measure the effectiveness of supplier actions, the qualitative measures Sidler describes look inside the supplier company. All the companies that responded to CEVA's awards program submission request possess an outstanding key account management approach. They also go beyond the normal call of duty to satisfy customers.
"Price and capacity are always factors when evaluating suppliers," acknowledges Sidler, "but there is huge value in working with suppliers that operate as if they are part of your organization, and own the service and the success as much as you do."
With an open and transparent relationship, both parties can seek opportunities to reduce costs. Lufthansa Cargo, one of the companies CEVA's program recognized, has driven a partnership program with key customers. "Lufthansa works with customers to develop new products, align processes, and take costs out rather than just focusing on price," Sidler explains.
The top-ranked motor carrier supplier in the CEVA global network is Mercer Transportation, Louisville, Ky. With global companies on CEVA's list of nearly 50,000 vendors, how did a small motor carrier providing regional, niche services end up on top? "Mercer Transportation is absolutely critical in what CEVA does for its customers," says Sidler. "Their workers are professional, well-trained, and provide outstanding service."
Using KPIs to measure results ensures that suppliers in the network meet their service obligations. They must make deliveries and handle the details correctly. "Whether you employ your own assets or those of an outside supplier, the success or failure of the transaction reflects on your company," Sidler says.
Sidler acknowledges end customers aren't going to buy a story about why a supplier failed. Delivering value is the goal, and that goes beyond the transactional. Sidler clearly values motor carriers who perform well, but he gets excited about suppliers who are almost an extended arm of the company.
The transparency between vendor and customer extends both ways, and CEVA, as the customer, gets to know its carriers' business as much as it expects the carriers to get close to CEVA and its customers. "It is also important to communicate to our customers how we value and treat our suppliers," Sidler notes. "People depend on us, and we have to depend on our vendors."
CEVA is betting that collaboration is the best business model.
Keeping Pace With Industry Change
When it comes to describing how UPS Freight has weathered some of the most volatile markets the industry has seen, President Jack Holmes needs only one word: adaptability. "If we're in tune with our customers' issues and their prospective solutions, we can adjust to meet their needs," he says.
In recent years, higher import volumes have altered lane balances and resulted in new freight patterns. That shift would have been enough to drive structural change in the industry, but additional influencing factors arose.
When revenues stagnated during the economic decline, for example, shippers focused on cost. They changed personnel and business models, and increased 3PL use to hold on to margins when revenues weren't moving. Part of that cost focus resulted in reduced inventory, which translated to a drop in shipment count for the carrier and an even larger drop in shipment weight.
As companies have sought solutions to these issues, supply chain networks have become more regionalized. Between 2008 and 2010, many large shippers made significant changes in their distribution models, closing distribution centers (DCs) in some locations and opening them in others to consolidate shipments and maximize next-day reach. Truckload (TL) services benefited from consolidation's popularity, and LTL carriers took on smaller loads and last-minute just-in-time shipments.
During 2010, more companies began shifting from long-haul LTL to regional TL. "Large shippers have led this regionalized market approach," explains Holmes, "while mid-sized and small shippers often enlisted 3PLs to help reduce costs."
Noticing this freight spend shift to 3PLs, Holmes' team began examining its 3PL relationships. Although UPS Freight predecessor companies Overnite and Motor Cargo had a long history with 3PLs as an extension of their salesforce, "we took a different approach," Holmes says. "We do business with 3PLs we consider good partners."
Holmes defines good partners as those that endeavor to make each other more effective in their business. Companies that didn't fit this "mutual benefit" definition typically were looking to extract margins without adding value; UPS Freight dissolved those relationships. "The focus for the remaining 3PL relationships was adding value not only for UPS Freight, but also for customers," Holmes says.
"Trucking companies in all modes are trying to figure out which 3PLs enhance the carriers' value and which take away," he says.
In addition to redefining their 3PL relationships, many carriers are struggling with personnel issues. Holmes believes UPS Freight, however, will not initially be affected by the impending driver shortage. "Drivers are very aware of the company's financial security," he says, "and turnover should be low."
As for other personnel challenges facing the transportation industry, Holmes predicts that changes to Hours-of-Service rules could hurt companies with regionalized distribution networks. "Under the proposed rules, the next-day reach regional DCs optimized for doesn't reach as far," he says. "Ultimately, that conflict will lead to another assessment of the existing models."
The national unemployment rate will also affect the industry, Holmes notes. "If it remains high and there is a driver shortage, more people could enter the profession," he says. "Even carriers who have traditionally kept driver pay low will be forced to increase compensation to attract drivers. This increase will play a role in driving costs for carriers, which could affect their rates.
"There's risk and benefit to changing something as significant as pricing," Holmes adds. "Some shippers will see a benefit to the change, bringing carriers new business. But others will resist it simply because it's a change."
As with other changes and opportunities, Holmes suggests, the industry and individual companies are left with the questions of when is the right time to make a change, and how to best prepare shippers to adapt. If the shift is handled correctly, so that customers view it as a benefit, the result is a win for both parties.