One of the anomalies of the current freight transportation system in North America is that while we have standardized on certain lengths of trailers (e.g. 53 foot), containers (e.g. 20/40/53 feet) and rail cars (e.g. 50/60 foot), there are no North American standards for truck, train and ship lengths. The provincial, state and federal governments in Canada and the United States have an inconsistent set of rules and regulations that create a lack of uniformity. This results in inefficiencies and adversely affects the economies of the two countries.

Lobbying efforts have been made periodically to encourage governments to harmonize vehicle lengths and weights. As reported in the August 15th issue of the Wall Street Journal, a group of 19 Western governors in the U.S. are lobbying Congress to allow for more LCV’s (long combination vehicles) on western USA highways. These LCV’s consist of "doubles" (e.g. two trailers pulled by one tractor) and "triples" (e.g. three trailers pulled by one tractor) — that can span up to 120 feet. Currently, most interstates allow trucks no longer than 53 feet.

To make matters more complex, the term Long Combination Vehicles (LCVs) is not used in a consistent manner. In Canada, LCVs are defined in general as truck/trailer combinations consisting of a tractor and two or three semitrailers or trailers where the total length of the vehicle exceeds the normal limit of 25 metres (82 feet). In the United States, LCVs are usually considered to be multi-trailer combinations having any trailer longer than 28 feet, having more than two trailers, or weighing more than the Federal gross weight limit of 80,000 lbs.

There are Rocky Mountain Doubles, Turnpike Doubles and Triple Trailer Combinations. In the spring, there are restrictions on trailer weights in certain Canadian provinces. Some in the Canadian trucking industry would like the opportunity to extend the operation of LCVs into other areas of the country. But all provinces will be affected, even those that currently allow LCVs.

Because LCVs are allowed in less than one half of the U.S. States, north-south traffic to Canada often has to move in single semi-trailers. If longer trucks are allowed on north-south highways, the number of longer trucks in provinces that already allow them would increase.

When the trucking industry first proposed to operate longer trucks, it talked about using divided highways and the best drivers. Over time, however, shippers off the designated corridors lobby for extensions. Experience in the U.S., based on a report published in 2003, suggested that longer trucks eventually wind up off the main Interstates. At that time, Rocky Mountain doubles operated on 51,000 kilometres of non-Interstate highway, Turnpike doubles on 17,000 kilometres, and triples on 12,000 kilometres.

In general, states and provinces can individually set limits on truck size and weight on state and provincially roads, but not for federal highways. The Western Governors' Association says longer trucks would make it easier to haul goods across vast distances in the West, which could benefit the region economically. Doubles and triples typically have to bypass federal roads and stick to state roads, sometimes forcing them to take longer routes to their destination. The governors' group estimates that miles traveled by heavy trucks could be cut by 25% with the use of more combos.

As reported in the Wall Street Journal article, when Kraft Foods Inc. packs trucks with heavy items such as jars of Miracle Whip and fruit juice, 40% of the units must leave the loading dock partly empty to avoid exceeding federal truck weight limits. Kraft says those rules force it and others to make extra trips and spend more on fuel. Now, the Illinois food giant is part of a coalition of 150 companies lobbying Congress to allow trucks that are 20% heavier on U.S. highways. Supporters of the idea say truckers could pay an extra fee to offset road repairs.

The ongoing recession, the need to reduce carbon emissions and limit capital spending, are creating “an arms race” of sorts in the shipping industry. Efforts are under way to “supersize” trucks, trains, and cargo ships as freight haulers seek to move more goods in fewer trips.

Congress this fall may consider changing the law that since 1974 has limited trucks to 80,000 pounds on interstate highways. A bill proposed by Rep. Michael Michaud (D., Maine) would allow states to raise that limit to 97,000 pounds on interstates for trucks that have a sixth axle to compensate for the extra weight. The measure, which has an identical bill in the Senate, may be considered as part of Congress's reauthorization of the multiyear, $286.5 billion surface transportation law whose funding ends Dec. 31. Under the higher weight limits, Kraft could load trucks more fully, reducing trucks used by 6%, saving 6.6 million gallons of fuel and eliminating 73,000 tons of carbon dioxide emissions annually, said Harry Haney, Kraft's associate director of transportation planning. Miller Coors says it could transport 1.31 million barrels of beer weekly on 7,420 trucks, a 25% reduction in rigs. Supporters say Canada, Mexico and countries in Europe adopted higher weight limits without ill effects.

Earlier this year, Union Pacific Corp. tested what witnesses dubbed "the monster train" --- a 3.4 mile train in southern California, — two to three times the length of a typical freight train. The U.P. increased the length of its intermodal trains 15% in the first quarter, and was experimenting with an even longer train. The company said the ultra-long train was a one-time test. But in an April earnings conference call, a company official said Union Pacific believes it can increase its average train length by another 10% to 15% in an effort to reduce fuel use and emissions as well as wear and tear on its tracks. Other railroads, including CSX Corp., and BNSF Railway Co., have also been running longer trains to improve efficiencies, these companies said.

Meanwhile, new cargo vessels as long as three football fields now ply the oceans and are expected to be frequent visitors to Eastern U.S. ports starting in 2014, with the completion of the widening of the Panama Canal, the primary shipping conduit between Asia and the East Coast. They are almost 25% longer and 35% wider than today's ships. In preparation, eastern ports from Savannah, Ga., to Norfolk, Va., are starting to deepen channels.

As always, these initiatives prompt a wave of pushback on multiple fronts. There are concerns about road safety, the damage these rigs will do to highways and bridges, who will bear the costs of the road/rail upgrades and repairs, the cost of fleet upgrades if longer and heavier vehicle specifications are approved and reservations about the potential for blocked rail crossing during emergencies. These are legitimate issues that warrant consideration.

On the other hand, there is a requirement for the governments of North America to craft a coherent and thoughtful blueprint that will help take our economies to a higher level of efficiency and a more cost effective carbon footprint. Back in 2003, in a report prepared by Consulting Economist Joseph F. Schulman, M.A., Ph.D., he recommended “that before permitting any further increase or liberalization in truck weight or size, governments must

• review and determine the full implications for safety and accident costs;
• review and determine the full implications for infrastructure costs and use;
• review and determine the implications for modal competition and alternative freight
options including intermodality;
• review and determine the implications for the environment, including greenhouse gas
emissions;
and – . . .
• review and determine the full costs of the use of the different modes of transport and
develop user pricing that better reflects full costs.

Beyond this, federal, provincial and territorial governments must, under federal leadership, commence initiatives to standardize truck size and weights across Canada.” This should be a NAFTA initiative, fully endorsed by the state, provincial and federal leaders of the three countries and a priority project in each country.

As this study is being completed, it would be desirable to select certain highways and rail corridors (e.g. Trans-Canada Highway, the North American Super Corridor) and standardize on the “supersized” trailer/train lengths and weights. This would allow for the fluid and cost effective movement of goods between the three NAFTA countries on some key high traffic lanes and allow North America to move up to a new plateau in transportation efficiency.

As manufacturers, distributors and retailers move into the fall shipping period, the sands are shifting in the freight industry. Motor carriers have made a number of adjustments to their operations that are now being reflected in their operating results. Looking at the second quarter financial results reported by the publicly traded transport companies, many companies, including financially troubled YRC, reported vastly superior financial performance.

With so much economic uncertainty at the present time, many carriers are not making additions to their fleets. They are only replacing equipment that reaches the end of its service life. Rate increases are being sought, even by carriers in the LTL sector, where there is still significant excess capacity.

Carriers are scrutinizing their accounts and evaluating how they can maximize the yields on their fleets. They are looking at their long time customers that conducted multiple bids, that pushed them aside so they could save a few cents a mile, that promised them freight but did not honour their commitments, and/or that have reduced their rates to levels that are so low, the freight is no longer worth having.

Now is the time for shippers to conduct face to face meeting with their core carriers. Are the core carriers providing the required level of service? Are the rates that have been secured sustainable? Are the current carriers financially solid or on life support? What are the carriers’ plans with respect to capacity growth, capacity utilization and capacity allocation?

On the flip side, where does the shipper rank on the core carriers’ list of customers? Is the account profitable to these carriers? To whom will these carriers supply their equipment if there is a surge in demand (in the market as a whole)? What level of rate increases are the core carriers seeking?

Conducting face to face meetings with senior representatives in your core carriers should provide answers to these questions. They should offer shippers a level of assurance that as the economy improves, and it surely will, these companies will honour their commitments. If clear answers are not provided by certain carriers, there is a message that is being communicated. The message is that it is time to be proactive and move more freight to lower ranked (backup) carriers in the routing guide.

For many companies, this is the time that 2011 budgets are being prepared, including transportation expense budgets. The level of accuracy of these projections can only be improved by conducting senior level, focused, frank and honest discussions with some of your most important business partners. A “do nothing” strategy could lead to nasty surprises as carriers come in with what could be very aggressive rate increases or make their precious capacity available to their more high yielding clients. Some carriers may exit the industry as the banks finally foreclose on these weak performers as the market for used trucking equipment shows some signs of life.

For shippers that do not have solid carriers in place, remember that a company’s supply chain is only as strong as its weakest link. Remember that your job may be on the line if your core carriers let your company down. The choice is yours. Now is the time.

In Memorium: Don Bernardo

This week a friend and colleague, Don Bernardo, passed away at age 58. I met Don a few years ago when he was President of Nulogx. I was immediately struck by his charm, likeability and intelligence. Don was a creative and visionary fellow. He and his team were well on their way to creating the next great Canadian 3PL/4PL, Freight Intelligence. I offer my heartfelt condolences to his family and friends. Don was a wonderful fellow who will be greatly missed by those who had the pleasure of knowing him.

The North American intermodal freight system is being transformed. The class 1 railways are in the process of making significant investments that will reshape and revitalize this important mode of transport.

These changes are designed to achieve a set of important objectives:

• Speed up cross country transit times by bypassing the congested Chicago container sorting facilities for significant blocks of traffic
• Improve the functioning of Chicago’s intermodal operations, one of the most important rail hubs in the world
• Evolve rail networks so they can ultimately handle double stacked containers across their entire systems
• Take market share from truckers by offering shippers a greener option that reduces emissions, reduces highway congestion and cuts shipping costs
• Enhance the ability of the North American intermodal network to move international ocean cargo arriving via east and west coast ports

In previous blogs, we have reported on some of the major rail corridors under development. Here is an update on current developments.

The CSX National Gateway

CSX has plans to open a 185 acre facility in North Baltimore, Ohio in early 2011. This terminal will become the “nerve centre” for stacktrains coming from the west coast so they can bypass Chicago. Their Columbus, Ohio terminal is being expanded to become a major consumer and freight centre. A planned terminal in Pittsburgh will link this heavy manufacturing area with the interstate highways that traverse this area. As CSX raises clearances, the Chambersburg, Pennsylvania terminal will become the eastern terminus for double stack traffic. From there the loads can move by truck to the major centres in eastern Pennsylvania, Baltimore, Washington, D.C. and the New York/New Jersey region. A new terminal in Baltimore, Maryland will process north-south and east-west trains to/from the seaport. The Charlotte, North Carolina facility will be expanded to increase container traffic.

The Norfolk Southern Heartland Corridor

The Heartland Corridor project is a three-year engineering effort to increase intermodal freight capacity by raising vertical clearances in 28 tunnels on a Norfolk Southern rail line between the port of Hampton Roads, Va., and Chicago. To be completed in September, 2010, containerized freight moving in double-stack trains will be able to shave about 200 miles and up to a day’s transit time between the East Coast and the Midwest. Previously double-stack trains had to take longer routes by way of Harrisburg, Pa., or Knoxville, Tenn.

The Heartland Corridor goes across Virginia, through southern West Virginia and north through Columbus, Ohio. For the past three years, work crews have been raising the roofs on tunnels in West Virginia, Virginia and Kentucky, enabling them to handle the 20-foot, 3 -inch-high container trains that have had to go around the mountains, through Pennsylvania and Tennessee, because the tunnels were too small. The tunnels, built around 1905, have stood at 19.5 feet from track to ceiling. They needed to be an average of 1.5 feet taller, including a 9-inch cushion, to accommodate the double-stack trains.

The Norfolk Southern Crescent Corridor

The Crescent Corridor is a railroad corridor expansion program that will run from the Mississippi Delta, up Interstate 81 through Virginia and eventually into New York and will be a major intermodal corridor linking Louisiana and the northeast. NS is planning new terminal facilities for Charlotte, North Carolina, Memphis, Tennessee, Birmingham, Alabama and Greencastle, Pennsylvania. Upgrades are planned for terminals in Harrisburg and Bethlehem, Pennsylvania.

Chicago Region Environmental and Transportation Efficiency Program (CREATE)

CREATE is a first-of-its-kind partnership between U.S. Department of Transportation, the State of Illinois, City of Chicago, Metra, Amtrak, and America’s freight railroads. CREATE will invest $1.5 billion in critically needed capital improvements to increase the efficiency of the region's rail infrastructure by focusing rail traffic on five rail corridors. The work includes:

• 25 new roadway overpasses or underpasses at locations where
auto and pedestrian traffic currently crosses railroad tracks at
grade level
• 6 new rail overpasses or underpasses to separate passenger and
freight train tracks
• Viaduct improvements
• Grade crossing safety enhancements
• Extensive upgrades of tracks, switches and signal systems

It should be noted that this Program has not been fully funded. To see the full list of the rail improvement projects and the current status of each project, visit the CREATE website (http://www.createprogram.org/index.html) for monthly project status updates.

Clearly this group of initiatives will take North American intermodal transportation to a new level.

As reported in this blog and in other sources, the LTL (less than truckload) segment of the freight transportation industry has been one of the hardest hit by the economic downturn. According to an estimate prepared by the SJ Consulting Group, revenue at the top 25 LTL carriers dipped by twenty-five percent in 2009 from $33 billion to $25 billion. Almost all of the U.S. publicly traded LTL carriers lost money on their LTL operations during the latter part of 2009.

The significant decline in revenues and profits has been precipitated by several factors. The terminal infrastructure and geographical footprint required to compete in this sector represent a high fixed cost. As business drops, it is difficult to reduce fixed costs without having a negative impact on service. Aggressive price competition, some of it targeted at YRCW, the large financially troubled LTL carrier reduced margins to unprofitable levels. In addition, the pricing model that has been in use for decades, namely discounting a rate base that is tied to various classes of goods, is cumbersome and rigid.

The high and low ends of the LTL business have both come under attack. The parcel carriers have targeted the low end with their hundredweight programs while the high end (e.g. up to 10,000 pounds) has been attractive to truckload carriers seeking to fill their empty trucks.

The rise of 3PL’s over the past decade has encouraged many shippers to migrate to them for LTL service. These companies can mix and match LTL carriers to come up with a freight program that is often more cost effective than what individual LTL carriers can devise on their own.

SMC3, a rate bureau that dates back to the days of a regulated trucking industry, is sponsoring the study to be conducted by a team of researchers at Auburn University. The research will be performed in two phases. As part of the research, 12-to-15 in-depth interviews will be conducted with shippers, carriers and 3PL’s. Feedback from the initial round of interviews will be used to frame questions for phase 2.

This is not the first time that LTL pricing has been studied. Previous research efforts were undertaken in 1993 and 2002. Nevertheless, despite the fact that trucking deregulation has been around for thirty years, the classification system tariff has been the basis for pricing and discounting through this period and subsequent to the two previous research efforts. During the apex of the recession, discount levels reached as high as 90%.

In some of my previous blogs I have provided overviews of some new LTL pricing tools (e.g. Cube Based Pricing, Density Based Pricing) that have been developed in recent years. They have gained limited traction. “One thing we want to determine is whether there is a stomach out there within the industry to maybe look at a new pricing mechanism or process,” commented Joe Hanna professor of supply chain management at Auburn University .

SMC3 vice president of business development Danny Slaton, who is sponsoring the research, stated that “We have done these studies before and want to understand how things have shifted over a period of time. We are not really looking at a shift in levels of price; we are looking at the mechanics of the business process and how much more has technology changed what is applied to pricing and how pricing is integrated into the overall business process at the enterprise level.”

The results of this research will be closely monitored by the key players in this industry. Any revisions to current processes will need support from shippers, carriers and 3PL’s and will require a change management procedure to make sure they are implemented in a methodical way.

Transportation companies maintain data files on sales, operations, accounting, maintenance and human resources. The data can be captured on paper or in computer systems. It is often scattered throughout companies in data bases that are incompatible, incorrect, outdated or inaccessible.

One large trucking company, U.S. Xpress, decided to see what they could “mine” from the data in their company. The $1.4 billion trucking company recruited Tim Leonard away from Dell where he was responsible for their data warehousing architecture to become their chief technology officer. Tim’s mandate was to see what he could glean from U.S. Express’ data to help improve the company’s profitability.

According to a recent Journal of Commerce report, Tim found a “lot of data in different silos in different areas.” He also found a large amount of data streaming in from the company’s computers. “Just with DriverTech, our in-cab information system, we got over 900 data elements with every pull.” This level of data was coming from over 9000 trucks. On top of that, much of the data was “dirty - - incorrect, inconsistent or incomplete. This prevented the company from producing the types of dashboards and business intelligence reports we wanted . . .”

The U.S. Xpress Solution

The company had “cleaned” its data five years ago but it had not maintained this effort thereby allowing the data to become “dirty” and impossible to use. Leonard launched a data quality initiative using applications from Informatica, a software vendor that provides data integration and management tools. He began with a pilot to identify, collect and clean data associated with truck idling time. Leonard created an idle report that linked truck numbers, driver names, and the fleet manager responsible for each particular truck. The project took six weeks to complete and two weeks to test.

Benefits to U.S. Xpress

Leonard and his team produced a report, backed by solid data that is estimated to save U.S. Xpress $6 million a year across its fleet of 9200 trucks. The payback period on the software investment was three months. Leonard then expanded his data cleansing and mining initiative to include maintenance, operations and customer relations management. One maintenance “data-mart” and six executive dashboards replaced 400 reports.

Small and mid size fleets can also benefit from data cleansing and mining. Mesilla Valley Transportation (MVT) is one of the largest transportation providers in Western Texas and Southern New Mexico, with a fleet of 800 trucks and 3,500 trailers that haul goods across North America. To manage costs, MVT sought to watch every penny and count every mile per gallon, per driver. Yet, employees struggled to understand profitability and performance, manually cobbling together information from siloed data sources using various tools and resources.

“We also had a problem on the financial side of the house,” says Mike Kelley, Director of Information Technology at MVT. “Our transportation management system didn’t provide consolidated reports or historical information for trending analysis. Our complex corporate structure includes multiple companies using multiple accounting systems. Producing a consolidated financial statement was a manual, time-intensive process.”

Dean Rigg, Chief Financial Officer at MVT, wanted tools to measure companywide performance. “Business intelligence is about showing employees our goals and encouraging them to perform. We had no way to say to everyone, ‘Here is where we are today; this is where we want to be tomorrow.’ Instead, the route planners and fleet managers had to pull month-old data from a variety of places. They were making business decisions based on a gut feeling rather than from factual information.”

Key performance indicators (KPIs) were calculated monthly, using complex Microsoft Office Excel worksheets. Management turned to the IT department for custom reports on KPIs such as average miles per truck, per day; rate per mile, per area; long idle/short idle data; business by sales representative; and average accessorial revenue per truck (extra services that are billable, such as including several workers to unload goods, or just-in-time delivery). Soon, 3 of the 11 IT staff members were working full time delivering reports. IT staff members struggled to consolidate data from disparate sources. Also, they used different methodologies for reports, which diluted management’s faith in the data.

“We immediately started looking for a comprehensive business intelligence solution from a single vendor,” says Kelley. “In these tough economic times, we didn’t want to pay for a costly, difficult-to-use solution or try to cobble different tools together. The solution had to be easy to deploy and use so we could start seeing the value sooner rather than later.”

The Mesilla Valley Solution

Mesilla Valley Transportation chose a business intelligence solution from Microsoft. The solution provides MVT with a suite of technologies that gathers data from the company’s systems, creates customized reports and dashboards for analysis and drill-down, and makes reports available to employees through familiar Office system technologies. After deploying an interoperable suite of Microsoft business intelligence technologies, staff members can access, manipulate, and share data using familiar Microsoft Office technologies and dashboards with drill-down capabilities. With reliable business data, MVT is measuring the efficacy of its cost-saving initiatives, motivating employees to perform better, cutting costs, and driving profitability to stay competitive. MVT completed the rollout of its business intelligence solution in December 2009. Today, more than 300 employees in 30 departments use it as an integral part of their work environment.

Benefits to Mesilla Valley Transportation

Mesilla Valley Transportation is using its Microsoft business intelligence solution to gain unparalleled visibility into the business so that it can compete in a tough economy. “We depend on our Microsoft BI solution to maximize performance and productivity,” says Kelley. “It’s empowering our employees to take advantage of current data so we can work together to keep MVT trucks on the road. And the more we are able to deliver reliable business insights to improve performance, the better equipped we are to make the right decisions—decisions that save time and money.” Since deploying its business intelligence solution, MVT has improved information access, increased profitability, and improved employee performance and resource utilization—all without incurring extra work for the IT department. Clearly data cleansing and data mining are tools that trucking companies of all sizes can use to improve their profitability.

Noel Perry, a Partner with FTR Associates, has written a very interesting and thought provoking paper entitled, “The Challenge of Deep Economic Cycles,” In his report, he argues that “the United States has resumed a pattern of high cyclicality. That means bad things for logistics.”

Mr. Perry suggests that most of us tend to operate in a “bipolar” way. As creatures of the present, we interpret a good stretch of economic activity as a constant that will last forever. Our confidence in a continuation of the good times leads us to “end up in an overbuy mode. At some point, usually after a significant overbuy, we realize our error and stop buying. The same focus on the present . . . now causes us to . . . underbuy, again by a significant amount. That is a recession. The economy is bipolar, cycling between euphoria and depression.”

As we become more euphoric, “our neurosis becomes psychosis and the overbuy becomes a ‘bubble.’ At some point the bubble bursts and we get a long-overdue big correction.” Most recently, “the . . . three overbuys of the cycle were consumer credit, home prices and financial risk taking. When those bubbles burst in 2008 the economy collapsed.”

This leads to Mr. Perry’s key thesis that the latest bubble has yet to burst. This bubble will result from the credit problems in Europe and in the United States. “Since I have yet to see the least evidence of the resolve to reduce U.S. governmental borrowing, from either party, I conclude that our creditors will prick our bubble sometime this decade, probably sooner than later. Moreover, the resulting shock to a governmental system . . . will create a wave of . . . taxes and spending policies that will add another level of volatility to the transportation environment.”

Using historical data on previous economic cycles, Mr. Perry demonstrates that recoveries following deep downturns tend to be much shorter (e.g. 10 quarters versus 25 to 28) than the more shallow cycles and the peak to trough is five times worse. “Short recoveries are bad for transportation for a simple reason. The benefits from an upturn take about a year to come in. It takes six months or more for the average manager to realize that there has been a turn; it takes another six months for that manager to take advantage.”

These rapid changes in a short time frame make it difficult to right-size the fleet. “Right-sizing usually falls short of the required amount because the fleets seldom choose to right-size fully and because they can’t right-size fast enough, even if they wanted to. They must complete the job after the rises and falls are complete.” This creates a significant capacity utilization issue. In addition, regulatory changes are expected to take more than 200,000 drivers out of the U.S. workforce. This will create stress for all industry participants. Mr. Perry also argues that “truck pricing has entered a new and radically more volatile phase.” A more volatile environment also creates large swings in trucking company earnings as we have seen the past year.

If we are headed into a more difficult freight environment, what should trucking company leaders be doing? Mr. Perry argues that there are two approaches to developing a cyclical strategy.

“Smoothing The Cycle. Mr. Perry suggests that there are five variants to this option for a carrier:

• Choose a customer segment that is growing, in the hope that the underlying trend will moderate a downturn.
• Choose a customer segment with inherently low cyclicality. The classic example is the reefer segment. Americans always overeat; there is no undereat. . .
• Assemble a diversified portfolio of customer segments that vary in different ways and at different times. Railroads, inherently do this with large portfolio of weather-related commodities (grain, coal) that offset autos and steel that cycle with the economy. . .
• Concentrate on the most stable portion of any customer’s business, usually the base load, dedicated portion. Customers attempt to protect their dedicated operations in a downturn to keep productivity high and cost low. . .
• Attempt to lock in volume during a downturn in exchange for guaranteeing capacity during the next upturn. The catch to this strategy is the tension between market conditions and the smoothed trucker’s earnings. During the downturn those earnings are above industry averages attracting competitive attention. During the upturn the smoothing results in earnings below industry averages, creating pressure for a move. This tension requires very committed manage¬ment and solid relationships with customers.”

The other option is:

“Chasing The Cycle. The alternative is to adopt flexible operations that move with the cycle. One cuts cost aggressively during the downturns . . . then adds capacity rapidly during the upturn—for a price. This approach puts a premium on forecasting and monitoring because the highest returns go to the first adapter. That firm cuts costs before prices collapse in a downturn and scarfs up capacity just before the real capacity crunch.

The deep-cycle economics of the current decade will require managers (and investors) to adopt four new paradigms, heretofore seldom seen in North American logistics. The first is a switch to flexible budgeting and planning, abandoning the comfortable notion that the next year is predictable. This will take a significant increase in market tracking and scenario planning.

The second switch is from short-run profit maximization to full-cycle profit maximization. All of the possible strategies for managing deep cyclicality make the practitioner suboptimal at some point in the cycle. Management (and investors) must fight the urge to abandon the strategy at that point.

The third switch is related; that is the development of full-cycle relationships between shippers and carriers, characterized by much tighter three- to five-year contracts rather than the loose one-year contracts in vogue. Jumping ship has a much higher cost in a deep-cycle economy.

The fourth switch is the change from simple cost minimization to cost minimization with capacity assurance. This will be a major challenge to a shipper base whose value system rejects price premiums and a carrier base shy about extracting capacity premiums.”

In 2009, trucking company executives faced the most serious economic challenge since the Great Depression. Many leaders adopted a survivor mentality. The focus was on maintaining essential business while cutting all discretionary costs. Despite the departure of an estimated 3000 trucking companies, most industry leaders were able to right size their business model, park excess equipment, reduce staff and freeze or cut salaries to remain in business.

This year is shaping up to be very different from the previous one as trucking company executives are facing a new set of challenges. Business levels are improving but at an agonizingly slow pace. The European debt crisis has created a new level of uncertainty as to whether or not the economy will continue its growth pace or slip into a double dip recession.

In the LTL sector there is still excess capacity that is making it difficult to increase rates. In the truckload sector, capacity shortages are being experienced on certain days in specific geographic areas. The intermodal business is running at about full capacity.

The new CSA 2010 initiative will raise the bar on truck fleet operational performance at a time when driver shortages are occurring. In the U.S. potential new cap and trade legislation and new emissions standards could have far reaching effects for the trucking industry. Truckers are buying fleet equipment again but mostly as replacements rather than in anticipation of growth. Consumer confidence has taken a step backwards in recent months.

This evolving economic environment will require modifications to the leadership styles of truck fleet executives. The “bunker mentality” of 2009 must be replaced with a new leadership paradigm.

Improved Skill Sets

According to a new survey conducted by ExecuNet of 3,636 executive recruiters and human resource professionals, big changes are under way. Over one in four companies surveyed plan to expand their executive teams with new hires and 56 percent are planning to “trade up.” They are seeking replacements that are better equipped than the incumbents to meet current expectations and market demands.

Drivers of Business Growth and “Quick Wins”

This year industry executives must be able to drive growth. Business owners are looking for “adaptability,” the ability to change course and take decisive action to make things happen. Executives must be able to secure “quick wins,”. . . . “launch new initiatives and make an immediate positive impact on the organization and its bottom line,” according to Craig Herner, a partner with recruiter Odgers Berndtson in Vancouver.

Motivators

This year leaders must be motivators. As reported in a prior blog, many survivors of staff cuts are suffering from “employee layover syndrome,” an emotional and physical state brought on by over work and stress. These employees are looking to their leaders for good direction, a solid plan, support and team building skills.

Retention of High Potential Staff

In a recent Toronto Globe & Mail article, Rick Lash, Toronto-based national practice director of leadership coaching company, Hay Group, expressed the view that “in a recovery, organizations want managers who can retain their high-potential staff because, as the economy improves, top quality staff are usually the first group to look elsewhere for other opportunities.”

Operational Excellence

Trucking company executives will also need to bolster their operational skills to ensure their drivers pass the CSA 2010 checks. For truckers that have not focused on this area, this initiative will force these companies to improve their fleet management processes. This will take operational excellence and quality improvements skills.

In summary, trucking company leaders will need to drive business growth, upgrade their skill sets to meet changing environmental factors and regulation, improve morale, retain their top performers and upgrade operational performance to achieve success in 2010.

The last five years have seen major swings in the freight pendulum. In the mid 2000’s, carriers called the shots on rates and capacity as business volumes soared. During the latter months of 2008 and throughout 2009, the freight pendulum swung backwards. With the recession and the major contraction in freight, shippers took advantage of being in the driver’s seat by negotiating major decreases in freight rates and dictating to carriers the loads they expected them to carry.

In 2010, we are witnessing a tug of war. Business volumes are increasing. Shippers that have both head haul and backhaul truckload freight moving in the same geographic area are seeking to find carriers that will move one-way loads and round trips. While some shippers are able to cover a significant percentage of their loads, there are certain head haul or backhaul lanes that are a chronic problem for them on a weekly basis.

Certain carriers are telling their clients that they will pick up specific loads of interest to them. When it comes to trying to match head haul and backhaul loads, don’t bother trying. In 2010 truckload carriers are being much more selective and are turning down loads that don’t work for them. These carriers are indicating that they will find their own loads moving in the other direction and balance their lanes themselves.

These comments seem to mirror an interesting discussion that has been taking place on one of the LinkedIn groups, The Truckload, Trucking, Logistics, Supply Chain, 3PL Distribution group. Here is one of the explanations offered in this group.

“We are a small company and do not track the turn downs but we estimate it to be in the range of 20-30 per week. To say it is due to a lack of capacity would be somewhat misleading. Many of the loads that we turn down are due to inadequate rates. We have determined that we will no longer accept freight that does not cover our full costs. We have taken that dreaded "back haul" out of our vocabulary. We certainly could accept more loads but why wear out our trucks, drivers and office personnel for a break even rate. We are also finding that we are receiving calls pleading for trucks at any rate. It is becoming a "can you get it today?" and then what rate do you need to do it. Hopefully we are reaching a point of making a reasonable profit once again.”

Another member of the group added this observation.

“. . . The . . . majority of trucking companies need and want to improve their balance sheets rather than expand. Besides they have plenty of idled trucks that have been sitting on the fence. The real shortage is in "qualified" and I can't stress that word enough. Once CSA 2010 kicks in there will be nobody in those shiny new trucks.”

Clearly carriers are being more discerning on the loads they choose to pick up in 2010 as the volume of business increases. Many are focused on trying to improve their profitability after the ravages on the recession.

This does not mean that shippers should throw up their hands and accept that their core carriers will move loads in only one direction and not the other or accept every rate increase that comes their way. Rather, shippers should be taking a hard look at their inbound and outbound routing guides. While it is fine for carriers to wish to take the higher paying loads that are moving in the lanes where they need more volume, it is entirely appropriate for shippers to expect their core carriers to take the good with the not so good, if the round trip rate is within an acceptable range.

If a shipper has inbound and outbound loads coming from and going to the same geographic areas on a consistent basis, this is the time to have face to face meetings with the carriers that service these areas. Transport companies seeking core carrier status should be focused on building business partnerships with their clients. These relationships should be based on profitability for both parties, service quality, loyalty and reliability. If your so-called business partners are solely focused on their selfish needs and are not willing to be team players, this may be the time to pursue other options.

Some years ago, I had the privilege of running one of Canada’s elite IMC’s and freight brokerage businesses. At that time we offered a fairly full portfolio of ground transportation services including LTL, partial truckload, full truckload, intermodal and carload services.

We were proud of the fact that we offered domestic Canada and cross-border LTL services. We sought out carriers that could offer us wholesale (discounted LTL tariff) pricing that we could use to create retail rates. We cobbled together a North American network of LTL carriers that allowed us to provide our customers with a good quality service. While not true marketing partners (in terms of sharing sales leads and unrouted freight), they were valued operating partners that picked up and delivered the freight that we secured on behalf of our customers.

At that time, LTL revenues were a small part of our business. The LTL revenue we provided to our various partners was not a large percentage of their revenues either. We had difficulty finding LTL carriers that were willing to work with us. Shippers were more inclined to sort their business by mode and work directly with asset based providers, particularly in the LTL arena.

Since that time the world changed. The growth in the capabilities, size and scope of 3PL providers along with shipper needs for suppliers with a complete menu of services have shifted the balance of power. Whereas 3PL’s and freight management companies previously had to do the chasing and courting to recruit LTL service providers, these carriers now recognize that 3PL’s have achieved a significant level of control over the customer interface. No longer viewed as “freight pimps” or parasites, 3PL’s now command more respect by virtue of their IT capabilities, supply chain expertise and the higher pecking order they have achieved with many shippers.

As a result, it was with great interest that I read that one of North America’s largest LTL providers, the troubled YRC Worldwide, is forging closer relationships with third-party logistics providers as it tries to rebuild its business. This is being driven by the realization that brokers or logistics intermediaries account for more than a third of YRC Worldwide's revenue.

The company claims it began a sweeping re-evaluation of its relationships with 3PLs last year as it rolled out a restructuring program affecting every corner of its operations. Eventually, it plans to launch new products and services with 3PL partners and closely integrate its less-than-truckload operations into their supply chain networks. It's a step other motor carriers need to take to stay on the road in a fast-changing market, said Bruce Kennedy, YRC Worldwide's vice president of enterprise strategy.

"In August 2009 we began an initiative to change our culture internally and externally from one of frankly competition (with 3PLs) to collaboration," Kennedy said. Kennedy told trucking and logistics executives at last week’s SMC3 meeting in Florida that previously "an intermediary was considered a threat." The carrier started restructuring its 3PL strategy by identifying all the logistics providers in its customer database -- more than 2,000 companies, Kennedy said. It then classified those 3PLs to reflect their marketplace roles, from supply chain managers to forwarders and brokers to price negotiators and "rate resellers." From that initial 2,000, YRC identified a subset of 200 logistics companies "that were significant in terms of their spend and potential spend with us," Kennedy said. "We took action to align ourselves with those partners we truly want to identify with."

There are a couple of things that stand out to me in the YRC initiative. If the statistic above is correct, YRC does not have control of the direct customer interface with a third of its customers. This leaves a significant block of its business vulnerable to third parties that can shift this freight at its discretion. Second, why did YRC wait so long to launch a marketing program targeted at such a large segment of its business? This suggests that YRC is having difficulty attracting shippers through its own sales program.

LTL carriers have also begun to realize that developing close ties with particular 3PL’s can allow them access to a whole new set of clients. When Con-way Freight expanded its business with Caterpillar Logistics last month, it not only gained greater access to freight from the $32.4 billion Caterpillar but also to more than 65 other companies that contract Cat Logistics to manage their supply chains.

Relying more on 3PLs for freight can be a difficult step for trucking executives who built their freight business on direct relationships with shipper customers. But viewed in the context of the slowly recovering economies of North America, the significant share of business controlled by 3PL’s and the need to find growth in the sector of the transportation industry acknowledged to have the most capacity, this appears to be a sound strategy for LTL carriers to employ.

For the past 21 years CSCMP has issued a report on the state of the logistics industry. This year’s report, prepared by Rosalyn Wilson, has the very apt title, The Great Freight Recession. The report contains some astonishing statistics that place the devastation of the past couple of years in perspective.

To start, the cost of logistics in the United States declined by 18.2 percent, the largest one year drop since the report was first prepared. Taking 2008 and 2009 together, logistics costs have declined by almost $300 billion during the recession. Transportation costs have declined by 20.2 percent since 2008. Trucking and other modes of transport both declined by over 20 percent. Ms. Wilson concludes that this drop was due to two factors - - - “a rapid decline in shipments and the cutthroat rate environment.”

In her report, Ms. Wilson identified some interesting developments in the area of inventories. She noted that compared to 2001, manufacturers were slower to clear out inventories in 2009. One of the main reasons was the long supply chains which resulted in orders being fulfilled and delivered well into the recession. The inventory to sales ratio began to “skyrocket” at the beginning of the recession and is now just returning to more normal levels. While sales are picking up, inventory levels remain moderate due to the lean manufacturing processes put in place by many manufacturers.

Retailers responded by shrinking their product mix and skewing their mix toward more lower cost items. Suppliers were encouraged to hold supplies in their inventories.

Ms. Wilson noted a number of significant trends in transportation. Many shippers abandoned their longstanding relationships with their carriers in favour of spot market pricing or 3PL’s. Average length of hauls and truck-ton miles declined. Increased use of intermodal transportation and more regionalization of DC’s became important. While about 2000 trucking companies left the business, many more reduced the size of their fleets. U.S. freight capacity dropped by 12.5 percent. With heavy truck utilization at 75%, new truck sales dropped dramatically.

The consequences of actions taken (or not taken) by truckers in 2009 will play out in 2010. Those companies that held back on preventative maintenance to reduce costs in 2009 may now face the prospects of not being able to pay for those repairs in 2010. The Federal Safety Administration’s new CSA 2010 (Comprehensive Safety Analysis) program will create challenges for those carriers that receive poor safety scores.

Rail transportation was not immune to the recession. Carload traffic dropped by 16.1 percent in 2009 while intermodal traffic declined by 14.1 percent. This was the worst year on record since the Association of American Railroads began tracking rail data in 1988. By mid 2009, an astonishing 500,000 railcars, or 32 percent of rail capacity, was placed into storage. As Ms. Wilson points out in her report, “the big difference between the loss of capacity in the trucking sector and the loss in the rail sector is the rail equipment has been merely sidelined and is readily available to return to service when demand rises.”

The good news is that 2009 is now in the rear view mirror. Business is picking up, albeit at a slower pace than most of us would like to see.