Ask The Big Wheels
Inbound Logistics asked seven leading trucking executives to tackle some tough questions about the challenging year ahead. Their advice, words of caution, and strategic vision can help you face the challenges of using motor freight in the short term and beyond.
John Simourian II (Lily): It shows what a circus this bailout has become. Politicians are pandering for votes with their televised meetings, and Hoffa for votes with his absurd comments in the press. How about we engage in serious discussion as to how to assist in fixing our economy?
We have auto companies going to Washington to get in line for a handout because they see others in line, not because there's a plan. They just want money to last for a few more months. In hindsight, it seems it was a mistake to allow Lehman Brothers to go under; however, pouring money into companies and taking equity stakes is not what capitalism is about.
What the government should be doing is: 1) getting the credit system to lend money that will free companies to grow again; and 2) training the jobless and putting them to work rebuilding the country's transportation infrastructure.
David Miller (Con-way): I do not believe a government bailout is the right thing to do, at least for the LTL freight trucking industry. The economy will recover and so will the overall transportation industry. Economic business cycles have a purpose—to cause companies to change and adapt in order to survive as the marketplace and customer needs evolve.
Some are faster and better at doing this than others. Companies that do this best will emerge as the winners. Our customers and our industry win when the market is allowed to remove either poor performance or outmoded business practices and find the right balance between capacity, demand, value, and profit.
Steve O'Kane (A. Duie Pyle): The free enterprise system works. Many of our problems today are the result of government intervention encouraging the banks to loan money for homes people could not afford in the first place. As that plan created crisis more than a decade later, the government now feels the need to bail out the banks to keep our financial system from crumbling. Enough already!
Bailing out troubled companies either justifies inefficiency or perpetuates over-capacity. Either way, it puts the United States at a further competitive disadvantage in the global marketplace.
A.Y. Bingham (Bulkmatic): In principle, I am opposed to government intervention. If the government subsidizes a lot of capacity in this downturn, the remaining carriers will face unfair price competition. So whatever is offered—investment tax credits, for example—should be offered to all carriers, not just the struggling ones. On the other hand, if something is not done, shippers will face a very real capacity crunch when the economy turns.
QUESTION: What's your reaction to cap-and-trade emissions legislation being bandied about by some government officials?
Derek Leathers (Werner): I am concerned about what cap-and-trade legislation will do to the price of fuel. We need to be very cautious as climate change legislation may further escalate fuel prices, with a corresponding increase in shipping costs.
David Miller (Con-way): I disagree with the idea of increasing taxes on an industry that already contributes substantially to maintaining and developing public highways, and uses that infrastructure to provide services that underpin the entire economy.
This industry has no choice but to be almost entirely dependent on carbon-based fuels to operate equipment. While some mobile sources of carbon and other greenhouse gases engage in discretionary activities, trucks do not. Trucks don't go sightseeing. They provide, in essence, a mission-critical service.
Cap-and-trade is a de-facto floating tax that will raise fuel prices. Of greatest concern to trucking is that none of the projected revenue from cap-and-trade legislation is currently being considered for investment in critical transportation infrastructure. Therein lies a serious disconnect.
We should settle for nothing less than an evidence-based, value-driven approach to the decision-making required to fix this country's infrastructure and help reduce the industry's environmental footprint.
Keith Lovetro (YRC Regional): A downstream cap-and-trade system for the trucking industry would be problematic. With more than 500,000 motor carriers in the United States, the administrative process would look a lot different than it would for stationary emissions industries.
If we face an upstream cap-and-trade system targeted at the refinery level, the increase in fuel cost and the allocation of revenue generated from issuing the credits become primary concerns. It is imperative that any revenues generated from a cap-and-trade system are allocated back to infrastructure development, especially in reducing our nation's congestion chokepoints. By addressing congestion chokepoints, we can reduce emissions significantly by ensuring a smooth flow of traffic.
Dan Van Alstine (Schneider): While a properly constructed cap-and-trade program would recognize investments we have already made, and perhaps work to our financial benefit, we don't believe it is the correct approach. Europe has attempted a similar program on a far smaller scale and it hasn't worked.
Regardless, a cap-and-trade program would result in government control over the means and methods of production and the creation of a bureaucracy to manage the program. It would invite a tremendous expansion of lobbying and campaign abuses, for as the government expands its control, so does the need and desire of its citizens to compete for government largess. We believe that cap-and-trade legislation puts at risk the robustness of our economy—an economy that must be sustained in order to fund continuing efforts to further clean our air and water.
A.Y. Bingham (Bulkmatic): Every time we make our transportation system more costly, we hurt our ability to compete globally. We are being hammered enough by new engine standards. Penalize the people who are polluting, not the ones who are doing the best they can with existing technology.
QUESTION: The costs of operating equipment in a capacity-flush, fuel-fixated economy have compelled some trucking companies to divest assets and pursue more scaleable non-asset services, such as brokerage and logistics. How will this development recast the trucking sector and what do shippers need to know as they plan ahead?
David Miller (Con-way): Someone has to own the assets that enable transportation service networks to be deployed and operated. It's the glue that connects every part of the supply chain, from supplier to manufacturer to shipper and consignee. This means that warehouses, freight terminals, technology systems, trucks, tractors, trailers, and well-trained and motivated employees have to be part of the equation. The owner of those assets needs an adequate return on the capital employed in order to reinvest in those assets and maintain the performance levels the customer requires. Shippers can choose how they utilize these assets—either directly with the asset owner, or through a third party that enables the shipper to gain additional value. It depends entirely on the shipper's supply chain strategy.
Smart shippers recognize that their strategy has to encompass more than a narrow focus on freight rates and fuel surcharges. They have to consider the fully landed cost of the transportation of their goods and materials—and how a carrier contributes value to that equation. While there may be an internal battle as to whether increasing transportation costs are attributed to fuel surcharges or freight rates, carriers require increased revenue per shipment simply because all costs associated with providing trucking and logistics services have increased.
Regulatory policy changes have increased the cost of rules compliance. All petroleum-based products (shrink-wrap, grease, oil) have increased in cost. Employee wages, benefits, and healthcare have all increased, too. Diversifying services helps a company extend into other complementary, profitable offerings, which again must provide a measurable benefit to the customer.
Steve O'Kane (A. Duie Pyle): There is currently significant motivation for trucking companies to participate in non-asset-based revenue streams. Almost all do, in one way or another. During times of significant over-capacity, the capital required and the liability created are not sufficiently rewarded on the asset-based side of the business. The laws of supply and demand, however, come into play over the complete business cycle. As significant capacity has exited the asset-based side of transportation, and because this sector has created revenue streams in the non-asset-based world, when demand exceeds supply, relationships will be turned upside down.
Those non-asset-based solutions providers who have established reputations as making decisions entirely on "lowest bidder wins the business" will find they have no one bidding in an over-demand environment. The day will come when they find it impossible to satisfy their customers because they have no assets to deploy.
Logistics providers that take a longer-term view of the marketplace and their relationships with asset-based providers will find value in the carrier partnerships they have fostered. While the non-asset-based world is attractive today, there will be a cycle shift and asset-based providers will enjoy a vastly improved return on their investment when demand and supply hit equilibrium.
Keith Lovetro (YRC Regional): The LTL industry will continuously evolve and there will always be those companies that try to provide services using an asset-light or non-asset-based model. The key point to remember is that it takes assets—trucks, terminals, and a variety of other equipment - to move freight. The best thing a shipper can do is build strong relationships with its carriers.
Dan Van Alstine (Schneider): With a number of large carriers having publicly stated their intent to shrink the size of their fleets, the industry is poised to shift. The dearth of non-asset-based providers will make for a crowded market and stiff competition, all while shippers find themselves with fewer options to choose from for their long-haul moves.
But the winners in this scenario will be shippers who choose transportation providers that refused to follow this trend. Those carriers are definitely creating capabilities in asset-light solutions, but they're also continuing to grow and invest in the asset side of their business. That allows the shipper to enjoy the best of both worlds instead of being forced to choose between a direct line of sight to their freight and lower cost.
A.Y. Bingham (Bulkmatic): Shippers will be wise to look ahead, as well as control costs now. They need to be aware that there will be a major capacity crunch when the economy turns, so it might be smart for them to build relationships with carriers who they want to work with in the future.
QUESTION: There's a perception, particularly among mid-sized firms, that some carriers used strong-armed tactics and gouged prices when capacity was at a premium. How can the trucking industry overcome these perceptions?
John Simourian II (Lily): Let nature take its course. If those companies that feel gouged can find other carriers, they should switch to them. If not, negotiate the best deal and move on.
Derek Leathers (Werner): Some shippers absolutely have a right to feel that way if a provider was not living up to the commitments in place and instead utilizing market conditions as a justification to leverage price. Obviously, over the past two years, that situation has reversed itself. A number of shippers now use those same tactics to force carriers into handling shipments at non-sustainable pricing levels because they have no other options available to them. Once shippers and carriers engage in this cycle, it becomes difficult to break.
Both shippers and carriers need to ensure there is agreement regarding commitment levels and the manner in which they agree to conduct business. From a shipper's perspective, it's fairly easy to ascertain how a carrier has conducted business during both robust and lean times. If a carrier has a relatively smooth rate-per-mile chart over time, it has taken a long-term, commitment-based approach. If a rate-per-mile trend vacillates significantly, it is taking a shorter-term, market-based approach.
David Miller (Con-way): Generally, I believe the markets reflect realities—when there is an abundance of carrier capacity, rates are negotiated downward. When capacity is tighter, prudent shippers negotiate longer-term contracts, with rates commensurate to existing capacity, and ensuring the carrier gains a fair profit to support continued investment.
Steve O'Kane (A. Duie Pyle): The supply and demand system works in two directions. When supply is tight, prices tend to rise as capacity is rationed on an economic basis. That knife cuts more sharply in the opposite direction, however. When capacity exceeds demand, in a highly leveraged business such as trucking, prices can spiral down rapidly.
Many firms take a long-term view with their suppliers and try to develop loyalty by not taking advantage of the circumstances when the supply of trucks exceeds demand. When the market shifts, they then require rate increases to be cost-justified and expect restraint from the carrier.
In a period of over-capacity, however, when the carrier has priced at a rate level that is non-sustainable for the long term, it is certain the carrier will look for a significant increase, or "trade up" the quality of its business when the supply and demand dynamic changes. Long-term relationships between shippers and carriers are the best defense against the possibility of extreme rate swings.
Dan Van Alstine (Schneider): Most carriers know how vital it is to stay focused on building long-term relationships with their customers, rather than taking advantage of short-term market conditions. Unfortunately, there were situations in which some carriers acted too aggressively in leveraging the market several years back.
While carriers can't ignore market conditions if they want to remain in business, they can find a way to create a fair and balanced approach when dealing with shippers. The transportation industry can strengthen its reputation by engaging in discussions with shippers that are centered on how the carrier can continue to provide value. This will help both parties create a mutually beneficial relationship that can survive the ups and downs of the market and, at the same time, avoid the current feeling of being either a "winner" or a "loser."
QUESTION: When the economy was strong and capacity was tight, many small and mid-sized companies felt pressured to seek rate relief and service from brokers. Many companies prefer to deal directly with carriers but are fearful of severing established broker relationships. What will the trucking industry do to relieve those concerns relative to a firm's long-term planning capabilities?
David Miller (Con-way): There have always been opportunities for broker relationships—these times are no different. It's an important part of the mix. Dealing directly with asset owners, however, allows the shipper to better understand the challenges and issues that carriers face in providing service value.
Not all trucking companies are created the same, nor do they perform the same. The value a shipper gains from a broker relationship depends on the ability of that shipper to manage its own transportation needs as opposed to relying on a specialist for that capability.
Steve O'Kane (A. Duie Pyle): Trucking companies are in the interesting position of both competing with, and being vendors of, the broker community. Shippers have the option of moving their freight with either entity, and need to determine the value brought to them by their broker relationship.
Obtaining the best possible value from any provider is a difficult and often time-consuming job. Shippers must decide if they have the expertise to handle that task through their own purchasing channels, in which case dealing directly with the carriers makes absolute sense. If not, outsourcing the competitive shopping can be a wise choice—as long as they communicate their desired balance between predictable service and price to their broker of choice, and are able to determine that a third party, who also plans to profit from the transaction, adds sufficient value to the selection process.
Dan Van Alstine (Schneider): It makes sense that customers miss the close contact and direct line of sight to their freight that comes with a carrier/shipper relationship. Yet asset-based carriers also recognize and understand their concern about severing ties with the broker they relied on in tight times.
In fact, this hesitation is part of the reason so many carriers have expanded their service offerings to include brokering. Ultimately, carriers know it's becoming increasingly important to offer broad, low-cost capacity solutions.
Not only does this allow carriers to meet the needs of their customers, but it also gives shippers confidence that we're truly looking out for their best interests. A carrier that offers access to more capacity makes it easier for the shipper to solidify the relationship for the long term. Hopefully, giving shippers those options will help them realize carriers are serious about providing long-term value to them.
A.Y. Bingham (Bulkmatic): Brokers are a part of our industry. They obviously provide a service that is in demand. It is up to each carrier to tailor its service to meet particular customers' needs. To the degree that brokers meet customer needs, they will gain or lose confidence in them. It won't happen quickly; it takes time to earn confidence.
QUESTION: What structural changes do you see in the way over-the-road shippers mix, match, and broadly manage truckload, less-than-truckload, and intermodal transportation?
Derek Leathers (Werner): At the macro level, decisions are much less mode-specific, and more about the most cost-effective manner for ultimate delivery that meets specific service parameters. To facilitate this, shippers are examining their own networks, inventory flow, and available tools to assist in mode optimization decisions. Shippers are either investing and purchasing those tools themselves, or working with companies that possess both the actual modes and optimization tools for strategic and tactical decision-making.
Keith Lovetro (YRC Regional): Shippers are looking more closely at their order fulfillment and freight flow processes so that they're better able to match various modes and services to their transportation needs. These changes require more real-time information and flexible operations from both the shipper and carrier. Examples of these include time-based window deliveries, merge in transit, pool distribution, and multi-stop truckload shipments.
Dan Van Alstine (Schneider): Transportation providers that offer multi-mode options are far better positioned to meet a shipper's broad needs for reliability, cost, and capacity.
For example, a diaper-manufacturing plant that used to ship everything by truck might now choose to send some loads via intermodal service. If there isn't a specific order being fulfilled and the plant merely wants to move the diapers to an off-site warehouse, the intermodal offering is less expensive and will meet the less-demanding speed of delivery requirements. However, if the diaper manufacturer has a specific order destined to arrive at a customer by a pre-determined date, chances are it will select the truckload option, which offers faster service and more direct freight tracking.
Shippers are faced with an ever-changing series of trade-off decisions, and providers can create options helping to balance these trade-offs.
A.Y. Bingham (Bulkmatic): We are seeing more interest in rail-to-truck bulk transloading to reduce costs, as well as a shift in moving some volumes from Class I railroads to short lines.
QUESTION: In what ways are you helping shippers probe deeper in the supply chain to gain greater control over product movement?
John Simourian II (Lily): We are using transportation as a change agent and engineering the supply chain from outbound delivery back into production to help shippers find the most efficient cost per unit delivered.
David Miller (Con-way): Much of the transaction interaction and reporting that used to be done over the phone or on paper now is done via our Web site, which provides speed and convenience to customers. Web-based tools make access to, and usability of, critical shipping information much more timely and accurate so shippers can better manage their transportation spend and supply chain cycles. It's information that can be shared broadly and has value up and down the supply chain.
Keith Lovetro (YRC Regional): We are currently expanding functionality in our global purchase order management application, which allows factories to book shipments with YRC Logistics directly against purchase orders they are fulfilling for our clients. The tool provides visibility into what customers' vendors are planning and can be customized to help enforce client-specific standard operating procedures. The tool moves beyond traditional purchase order management to managing inventory in motion, providing tracking visibility of specific line items, such as SKUs.
Dan Van Alstine (Schneider): With the world becoming a global marketplace, shippers need more and more visibility to—and control over—their freight as it moves from point-of-origin to final destination. Therefore, logistics providers have to put the processes and technologies in place to meet that growing need.
Schneider has been focused on doing that over the past several years. Thanks to strategic acquisitions in the United States and abroad, we can provide door-to-door service for shipping partners, handling product from an international manufacturing plant to the port, across the seas, then through the last mile to the customer. Because of the connections and technology we have access to, shippers know where their goods are every step of that journey.
QUESTION: When planning ahead and designing long-term strategic efforts, how far out do you look? Why? How far out should shippers be looking?
David Miller (Con-way): As a general rule, we look forward 12 and 36 months for capital planning, but this is subject to how well we are able to determine the direction of the economy. That's pretty tough today. The economic downturn's speed, severity, and impact have been dramatic.
The new political landscape will also affect how we plan and invest. We can expect changes in policies and regulations that govern the transportation industry. Different agencies may take a more aggressive role in regulating business and thereby impact any company's service offering.
One thing we can bet on is that there will be continuing fallout in the transportation industry. Current trends in credit availability and financial liquidity will impact some players differently than others, allowing some to survive and others to fail. Shippers have to factor these realities into their planning process as well.
Steve O'Kane (A. Duie Pyle): If you are not projecting out at least a decade as to what your business might look like, only luck can bring you success.
While this exercise can be frustrating—because the farther out you look, the more likely you will be inaccurate—it is valuable to anticipate what the future holds. Developing that long-term view of a "winner's profile" for your industry provides substantial guidance and insight as to what your one-, three- and five-year business plans should be.
In the fast-changing transportation world, we look out 10 years to make facility decisions that can often take a full five years to complete from land search through permitting and construction. We spend more time determining where we want to be in three years, then devote the greatest effort into what we need to accomplish in the next 12 months to stay on track for the three-year plan. Unless you start out with a vision for the future, determining the necessary steps required to be successful in achieving that objective, near-term planning will not have sustaining value.
Keith Lovetro (YRC Regional): Looking out into the future and trying to predict where things are going is a challenging exercise. We've found the best way to understand this is to talk with customers about their plans, needs, and various activities that shape their businesses. Once we understand a customer's perceptions, we use that knowledge to make a three-year plan. Anything beyond three years gets pretty fuzzy and is only good from a directional point of view.
Dan Van Alstine (Schneider): Our three-year planning process feeds into a one-year budgeting process completed annually. In order to make sure we are planning our future with customers in mind, we engage them in these processes. This helps us determine where to expand and invest in technology, equipment, and geography for the coming year. Shippers should engage their carrier partners in planning efforts to ensure all parties are best prepared to contribute to the company's success.
A.Y. Bingham (Bulkmatic): We used to look 10 years down the road, but the rate of change is such that we now only look three years ahead. Most of our shippers are looking further ahead, often at least five years. Sadly, there are some still trapped in the present quarter.
QUESTION: Some previously dire concerns—driver shortages, infrastructure, capacity, urban congestion—have been overtaken by a down economy and soft demand.Is progress being made on any of these fronts? Or will these issues become exacerbated when the economy rebounds?
John Simourian II (Lily): Can't we use this time as a wake-up call to action and help get the economy moving? Reduce joblessness by using a spending plan on our infrastructure? Roadways, bridges, tunnels, and rail beds all still need massive improvement. It will take billions of dollars and thousands of people to rebuild current systems and add infrastructure improvements for the future so we can remain competitive.
Derek Leathers (Werner): Although initiatives are at various stages in these areas, those challenges have been masked by the lack of equilibrium with supply and demand in this sector. We anticipate all of the aforementioned issues to pose challenges to the industry upon an economic rebound. Capacity shortages are anticipated as record numbers of trucks left the road in 2008. Driver demographic trends have not changed, and labor challenges will swing back around when housing and other industries rebound and compete for the same employee base as trucking companies.
David Miller (Con-way): We continue to deal with these issues; the slack economy has not made them go away. In some instances, they've probably gotten worse.
None of the underlying issues causing driver shortages, insufficient infrastructure, capacity constraints, energy concerns, or urban congestion have been effectively addressed. Once the economy does rebound, it will only sharpen the focus on the need to address these issues.
Keith Lovetro (YRC Regional): To ensure that the transportation industry remains vibrant, we need to invest in our roads and bridges and have access to an appropriately skilled workforce. The current economic slowdown has provided a bit of breathing room, but these issues must be addressed in a long-term plan. The currently proposed infrastructure stimulus package will help address some road and bridge issues, but more is needed to create an available workforce that is well-trained and ready to meet the industry's changing needs.
Dan Van Alstine (Schneider): Unfortunately, the short answer is this: Not enough progress has been made in resolving these challenges. As a result, the basic, underlying causes will indeed become exacerbated when the economy picks up steam.
The fundamental demographics of the driver shortage issue haven't changed, so even though the economy is making it relatively easier to hire and retain drivers now, prevailing industry trends will return in full force. As a result, capacity will tighten.
It's also hard to relieve problems as massive as urban congestion and infrastructure when state leaders are continually being forced to balance current budgets by taking funds from longer-term projects and using them for short-term ones.
Though difficult to do, it's absolutely crucial that shippers, carriers, and government agencies focus on resolving these long-term issues even in today's economic environment. Failing to give these problems due attention only compounds the issues. Because all require multi-year solutions, any delay only adds to the damage that will need to be repaired down the line.