It is hard to believe that a year has gone by since I sat in on a presentation on Social Media in Transportation at the 2011 SMC3 Winter Conference. This past week David Tuttle, VP, Digital Strategy at TMP Worldwide (who spoke last year) was back again and joined by Bobby Harris, President and CEO of BlueGrace Logistics. In the short space of 12 months it is clear that social media have exploded in popularity.

Here are a few statistics to reinforce this message. There are 800 million global profiles on Facebook, Twitter has 175 million users and LinkedIn has 150 million profiles. Facebook reaches 85% of logistics professionals on the internet – over 2.8 million people; Twitter reaches over 22% of logistics professionals on the internet; LinkedIn Reaches 19% of logistics professionals on the Internet.

Beyond the impressive user numbers, there appear to be two breakthroughs this year. The first is in functionality. Companies and individuals are now starting to figure out how to embed the capabilities of social media in their businesses.

David highlighted the “follow me” feature on LinkedIn. It allows people to stay up-to-date on employment opportunities and organizational changes at companies of interest. Your “career page” beside your “company page” is a powerful tool to “inform active and passive candidates” of opportunities. It can be used to “see who is following your company and send automatic updates.” Twitter can be custom branded and used both as a tool to communicate with your followers and to follow them as well.

David also noted that a Facebook page for your business, with photos that tie in to the website or other business activities, can play a key role. Targeted ads can be placed on the right side of the Facebook page and can be tailored to the specific demographics and interests of your customers. Each company pays for these ads on a CPC basis. He also spoke about the importance of scheduling your communication over a period of time to maintain the attention of your fans and followers. Take advantage of opportunities to connect directly with your fans.

The second breakthrough has to do with the relationship between social media and company culture. In his presentation, Bobby Harris called social media the “DNA of the BlueGrace culture.” One of the important points he made in his presentation is “Don’t do Social, Be Social.” He stressed the point that it is not just about creating a profile on Linkedin or Facebook; it is about making social media an integral part of your business.

At BlueGrace Logistics, employees are encouraged to use social media internally. As Bobby said, “people buy from people.” As a result, the company is very focused on the demographics of their clients. Their social media use (e.g. supporting local causes in the community, UFC sponsorship) is aligned with the demographics and interests of their client base. Bobby Harris is able to speak directly to his 100 plus employees with his regular YouTube videos. The BlueGrace strategy is not just focused on improving employee morale; it is designed to improve the company’s bottom line. By being an active social media participant, this increases the company’s brand awareness, humanizes the company’s image, provides superior customer service and produces tighter links with partners and customers.

One of the pathways to success is to establish a social media point person in each company and to actively measure results. Both gentlemen offered some unique insights on a communication tool that is growing in importance on a daily basis.

As I reach my 30th anniversary in the freight transportation industry, I continue to be struck by the lack of innovation in this business. While we have had some changes over the past three decades (e.g. transition from 48 to 53 foot trailers and containers, scheduled train service, the rise of international freight transportation, speed limiters, GPS tracking devices, more energy efficient engines and transportation management software systems, the industry has not changed much when compared to others. If one looks at the retail industry and the advent of shopping over the internet, or the music industry and the advent if iTunes and iPods or the book and magazine publication industries and the advent of tablet computers, the transportation industry lags behind in innovation.

One can argue that changes in the transportation industry are constrained by existing road and rail infrastructure, government regulations and by the huge cost of changing transportation equipment standards. The fact is that with hybrid and battery powered engines in their infancy, we still have diesel powered tractors and locomotives pulling trailers and rail cars as we have had for decades. As a result, when a shipper or carrier tries to “break out of the box” and come up with something significantly different, we all should take a close look to see if this could be an opportunity to improve the competitiveness of North American supply chains.

Four five decades, wood pallets have been the industry standard for moving packaged freight. Swedish retailer Ikea is replacing its wooden plates, not with plastic but with paper pallets. Ikea uses 10 million pallets a year to ship its goods to its 287 stores in 26 countries. In January, Ikea will make the switch to paper with an expected savings of ten percent in transportation costs.

The new corrugated cardboard design can support shipment weights of 1,650 pounds or 750 kilograms. At two inches high, the paper pallets are one-third the height of wooden ones and at 5.5 pounds each, ninety percent lighter. The pallets will be recycled after each use.
The company will have to spend $124 million U.S. on paper and new forklifts. Ikea expects to cut its transportation costs by $193 million U.S. a year. This initiative is already being met with skepticism by those who believe that paper pallets may not meet the requirements for durability and may be adversely affected by weather.

Jeanette Skjelmose, Ikea’s sustainability chief of its supply chain unit has heard these comments and is not concerned. She points to very heavy shipments sitting on paper pallets in a store in Sweden and to the fact that she does not expect the pallets to be left sitting outside of an Ikea store for any length of time. It will be interesting to see the results of Ikea’s experiment in a year or two to determine if this innovation in transportation has the potential to change a fundamental element of freight transportation that has endured for fifty years.

For the past decade, the Canada-U.S. model of economic integration has been deteriorating - - a victim of a border chocked with traffic, an overreaction to the 9/11 attacks, steep fees and erratic regulation. FAST trade has become thick trade. Canada – U.S. trade peaked in 2000 and has stagnated since. Between 2001 and 2010, Canada’s dominant share of U.S. imports has fallen precipitously across a range of products - - from furniture and electrical equipment to printing, paper and plastics.

Market share worth billions of dollars now belongs to China. This reduction in efficiency came during a period of expanding global trade as China in 2009 eclipsed Canada as the leading exporter to the United States.

The new deal that was announced in December 2011 by President Obama and Prime Minister Harper addresses America’s concern with security and Canada’s need to facilitate trade. Rather than publish a comprehensive document as was done with the North American Free Trade Agreement, this new deal basically consists of a press release and a set of good intentions. It has been called the North American Border Security and Trade “Trust Us” Deal. Since the United States is in the midst of an election year and since some of these initiatives will require congressional approval and funding, time will tell as to how many of these good intentions become reality.

The good news is that there seems to be a consensus that a number of these action plans will take effect over the next few years. These are some of the specific programs that will have a direct and positive effect on trade and transportation.

Harmonize and Improve “Trusted Trader” Programs

The idea is to let companies fill in one application to participate in a variety of “trusted trader” programs which allow regular exporters to get their goods across the border more quickly. As an example, there is expected to be mutual recognition and hopefully harmonization of the two main “trusted trader” risk assessment programs, the U.S. Customs-Trade Partnership Against Terrorism (C-TPAT) and the Canada Border services Agency’s Partners in Protection (PIP). The intent in the future is if a company applies for participation in either program and is approved, this will permit participation in both programs. A pilot project is planned.

Improve Pre-Clearance and Expedite Border Crossings

The intent is to expedite border crossings with commercial traffic by providing more dedicated lanes and technology and measuring and posting wait times ahead of border crossings. Carriers that are not FAST approved will have to wait in line at a designated area away from the border so as to not interfere with the smooth flow of goods moving with approved carriers. There are also pilots planned for Montreal and Prince Rupert, B.C. to clear cargo once at these first points of entry.

Create Common Regulation and Streamline movement of Food Products across the border

Another issue that has created inefficiencies in production and trade has been the varying food regulations in the two countries. For example, Canadian companies are permitted to produce 19 ounce cans of certain canned fruits and vegetables while they are not allowed to manufacture 16 ounce cans, the preferred size for U.S. consumers in Canada. The two countries have set up a council to address the so-called “tyranny of differences” and to make sure regulations and standards don’t block the movement of goods and services across the border. Much of the emphasis will be on food and agricultural products. Another pilot will test whether it makes sense to cut back on the inspection of agricultural and food products that have a good record of compliance.

“This - - - (Trade and Security) - - - announcement is not about a common border; it is about an integrated economy and our shared vision for good jobs, increased investment and a higher standard of living,” said CME president and CEO Jayson Meyers. “Canada and the United States do more than just trade with one another. We build things together; We innovate together. And now we must work together to create a collective future that puts manufacturers and citizens alike in the fast lane to prosperity.”

The agreement did not address such issues as the lack of standardization of truck weights and Cabotage. Nevertheless, the new pact or more correctly, this series of agreements will take much work to implement effectively and convert into bottom line results for shippers and truckers but they have great potential to improve cross-border trade between Canada and the United States.

We enter 2012 with a lot of unknowns. Will the European debt crisis be resolved effectively and expeditiously or will it lead to another recession? Will the American economy that is showing some signs of improvement, be able to strengthen during a U.S. election year that will likely produce more political gridlock? Will the expected surge of foreclosed homes further depress the U.S. housing market and the economy or will the buyers of these homes create a resurgence in home renovation? Will North American consumers drive a solid increase in the purchase of goods and services at the expense of higher debt per capita or will this be a year to pay down debt and hunker down for what is expected to be a long and slow economic recovery? Will business leaders feel confident enough to take some of the trillions of dollars that have been parked and invest in plant, equipment and new hires or will they keep their hands in their pockets and drive the unemployment rate higher? I wish I knew the answers to these questions since they will have a material effect on freight transportation.

With these issues as a backdrop, here are some suggested strategies to lead your freight transportation organization in 2012.

1. Expect the Unexpected and take an “Emergent” Strategy Approach

In such a volatile climate, a “proceed with caution” approach would make good sense in 2012. This would include everything from fleet purchases to new hires.
Unless a clearer picture begins to appear from the shadows of 2011, it would be wise to take an “Emergent” strategy approach first suggested by Professor of Business Strategy Henry Mintzberg at McGill University in Montreal. Instead of the more commonly used deliberate approach, the emergent approach is the view that strategy emerges over time as intentions collide with, and accommodate, a changing reality. It is a more grass roots, front-line oriented approach where solving real business problems lead to new strategies. Executives should look for new business opportunities among their front-line troops and middle managers. They should test a number of these opportunities using an approach known as Jugaad.

2. Encourage Frugal Innovation or Jugaad

Jugaad is a Hindi word that, in short, refers to making do with what one has to solve one’s problems. In a business context this means bringing innovative products to market despite limited resources – if not thanks to limited resources, since it is financial constraints that drive it in the first place. Frugal innovation results in great value — no-frills, good quality, and functional products that are also affordable. The idea is to plant a number of seeds, scale up those experiments or pilots that work. Then, when they have proven themselves, ramp them up and spread the key, few winning innovations across the organization. This connects middle managers who are close to the customers with access to the senior executives who control the purse strings. Using an “Emergent” strategy approach and Jugaad, allocate capital and resources to the ones that work.

3. Create Capacity, Hire Drivers to fully Capitalize on the Winning Pilots

If the expectation is slow growth in the years ahead, one must be careful to add capacity to those opportunities that produce profitable growth. Using the successful pilots as a guide, add to your fleet and driver pool to scale up the revenues and profits from these successful business opportunities.

4. Create a Driver Friendly Culture to expand your business

Driver turnover rates are increasing again. As a variety of demographic, economic and regulatory (e.g. CSA) forces play out, driver retention must be a key element of any trucking company’s business strategy. In order to capitalize on your company’s successful new transportation service initiatives in 2012, there will be a requirement to recruit, compensate, train, manage and retain a quality driver team.

5. Maintain Yield Management Strategies and Pricing Discipline

With tight capacity, many trucking companies became far more focused on their costs, their competitive strengths and their margins to improve profitability. This pricing discipline should be maintained in 2012 as companies seek to grow their revenues from their successful pilots.

6. Ramp up your Dedicated Trucking Business Strategy

The challenging economy should continue to drive manufacturers that do not have the critical mass or skills to run a private fleet, to outsource this function to the professionals. A dedicated trucking operation is a way for shippers to lock in capacity and reduce freight costs while for carriers it provides a steady revenue stream and guaranteed capital recovery over multiple years, a true win-win proposition.

7. Migrate from being a Transportation Company to a Supply Chain Solutions Provider

One of the major trends over the past 10 to 15 years has been the emergence of logistics service providers. These companies have been able to become the “go to” suppliers for a range of supply chain services including warehousing and transportation. Shippers have become increasingly comfortable outsourcing their logistics requirements to these middlemen.

In addition, established trucking companies of all sizes have been extending their services portfolios into new areas (e.g. global, intermodal, truckload etc.). Trucking companies, even small niche players, need to take a careful look at their customers’ requirements and calibrate their value propositions and service portfolios to them. This involves far more than creating a “logistics” division to broker loads that they cannot move on their assets. It implies redesigning their companies to provide a range of services, some of which may not be available today. This expansion should be closely linked with their “Emergent” business strategies.

8. Kraft an Intermodal Strategy

Intermodal transportation has historically been a small slice of the total freight pie. That is changing. The rails have made big investments in service, reliability and in their networks. The effective intermodal length of haul is moving from over 1500 miles a few years ago to as little as 650 miles. Even for niche players in the transportation arena, it is time to take notice of what is going on in the railroad industry and develop a strategy to take advantage of these changes.

This year is predicted to be one with slow economic growth and potential surprises. An “Emergent” strategy coupled with a Jugaad approach may be an effective way to create and expand successful new service pilots into consistent revenue streams.

As we enter the New Year, it is time to reflect on the events of the past year and try to anticipate some of the drivers of the economy in the months ahead. In this blog, I will take a look at some of the key economic trends in 2012. In the following blog, I will share some thoughts on the major drivers of freight transportation in the coming 12 months.

Here are some of the economic forces shaping the economies of North America in 2012.

1. North America will avoid Recession

The United States and Canada will probably avoid a recession. The good news is that domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire—albeit cautiously. The consensus among economists is that over the next year growth in the United States and Canada will average between 1.5% and 2.0%.

2. Fundamental Changes are taking place in the Housing Market

The housing markets in Canada and the United States are vastly different. In the United States, the market seems to be reaching an inflection point. One in five homeowners owes more on their mortgage than the value of their homes. Some people continue to pay their mortgages while others have abandoned their homes. For many Americans, the dream of owning a home has turned into a financial nightmare. This is causing some former and current landholders to move to rental properties.

High unemployment is driving multi-generational families to merge and live in the same home. Some builders are constructing homes with two master bedrooms to meet this requirement. The high foreclosure rate and the low demand for these homes are creating a shift from stock speculators to home buying speculators. As reported on 60 Minutes, some neighborhoods in certain cities (e.g. Detroit) are being demolished to reduce crime (e.g. vandalism) and the inventory of homes. In Canada the hot housing market for the past decade is expected to cool over the next couple of years. This is a message we have heard before so time will tell if this will actually come to pass.

3. Debt and Expense Reduction

There isn’t a news broadcast that doesn’t talk about the debt crisis in Europe, the United States or among the citizens of Canada and the United States. Low interest rates have fueled the escalation in debt in North America that for the average person is about 150% of their annual income. There is lots of talk among politicians and private citizens about debt reduction and cutting programs. While governments and citizens must pay down their debts to avoid financial ruin, this is proving to be very tough. The debt crisis is so serious in Europe that if unresolved, it could plunge the world into a major financial crisis. All indications are that the Eurozone will suffer through a recession in 2012—a mild one if the region’s sovereign-debt problems are resolved, or a deep one if they are not. Certainly if the Euro is devalued, this will make it tougher to sell North American made goods in this market of 500 million people. As a result, if this crisis remains unresolved, it will inevitably lead to hard times for all of the world’s citizens. As one expert sees it, we are likely to see a focus on putting food on the table as opposed to presents under the Christmas tree.

4. A Focus on Exports

Both President Obama and Prime Minister Harper have spoken about the need to increase exports as a means of increasing GDP and bolstering tax revenues. This is causing both governments to take action to facilitate trade. Early in December the two leaders outlined a series of tasks that are being undertaken between the two countries to improve security and facilitate the movement of goods and services between the two countries. Prime Minister Harper is in the process of negotiating a free trade agreement with Europe. Canada and the U.S. are working on efforts to increase trade with countries in the Pacific.

5. Chronic Unemployment and Underemployment

The drop in the unemployment rate in the United States to 8.6% made front page news (as Canada’s unemployment rate increased). The big debate in the U.S. Congress is over how long to extend unemployment benefits. Unlike previous recessions, the jobs are not coming back this time. There are many people who have been out of work for 6 to 12 months or more and their opportunities to be reintegrated into the workforce diminish by the day. There are many individuals who have had to accept lesser positions at lower salaries to earn an income. There is a large requirement to retrain displaced employees so they can find meaningful employment and incomes to support their families. Continuing improvements in technology are making existing workers more productive, lessening the need to hire. Hiring is not likely to keep pace with economic growth. There is no quick fix and there is not much likelihood the unemployment number will come down significantly until several months beyond the next U.S. election.

6. Inflation will ease; wage increases will remain modest

Prices have gone up this year for food, electronics and freight transportation, to name a few. Energy prices have gone up and down and would likely spike again if there was to be any increase in demand. With such a huge supply of homes and more being foreclosed every day, housing prices should remain at depressed levels at least for 2012. Interest rates will likely remain low to spur economic growth. With world growth softening and commodity prices off their peaks, inflation in every region of the world will likely decline in 2012. Without a spike in oil or food prices—triggered by a geopolitical events or bad weather—the inflation picture in 2012 will be quite benign. But wages are not keeping pace. Trying to pay higher prices for goods and services and pay down debt while wages are stagnating is not a recipe for a healthy recovery.

7. More Civil Unrest

Time Magazine named 2011 the Year of the Protestor. We are seeing civil unrest on our television screens in many parts of the world - - - the Arab Spring, Russia, Occupy Wall Street, European unrest. These movements, facilitated by the social media, have been unsuccessful to date at producing new democratic states and governments but have been a major force for upheaval. They have not produced any more middle class jobs or changes to the tax code. Despite the bloodshed in Egypt and Syria, these movements show little sign of abating. The raison d’etre for these movements grows stronger by the day.

8. Technology reaches the masses

The hot technology of our era - - - iPads and iPhones are being reduced in costs (not by Apple) by other vendors of similar products. Android smartphones and Kindle “Fire” tablets are becoming accessible to the masses. As we have seen in so many other areas of technology (e.g. laptop computers, colour printers, digital cameras), the cost of these devices is coming down. The technology coupled with social media and online shopping is creating the next wave in digital communication. The IPO of Facebook in 2012 will be one of the closest watched economic events in the New Year.

The New Year will likely be another tumultuous one as we head towards a U.S. election, hopefully a resolution of the European debt crisis and modest economic growth.

Freight Transportation Adjusts to a Resetting World Economy

The year 2011 was another momentous one that was shaped by events on all continents of the world. Uprisings in the Middle East and the overthrow of Hosni Mubarak and Muammar Gadhafi, the European debt crisis, the Occupy Wall Street Movement, the assassination of Osama Bin Laden, the earthquake and tsunami in Japan, the wedding of Prince William to Kate Middleton, and the premature passing of Steve Jobs were just a few of the signature events of another action-packed year.

Closer to home, the three countries in North America all faced significant challenges. The powerful drug cartels in Mexico are threatening its very existence as a democracy as the country gears up for elections in 2012. The untimely death of Jack Layton, the very popular leader of the New Democratic party and the demise of Michael Ignatieff and the Liberal Party have given Steven Harper a majority government and a free hand at steering the Canadian economy over the next four years. The U.S. situation is exactly the opposite as Democrats and Republicans cannot reach agreement on almost anything and as a result the country is in gridlock on most economic initiatives to spark its economy.

Against a background of 8.6 percent unemployment in the U.S., millions more underemployed, one in four homes is worth less than the value of the mortgage, tight credit, anxiety over job security and a possible relapse into another recession, the economy is resetting. Americans are saving more. As various generations of families live together to better withstand the current economic uncertainties, home builders are erecting homes with two master bedrooms to address the social consequences of these challenging times. Smartphones, tablets and the internet are reshaping so many of our day to day activities. The economies of North America and around the world are being reset by this confluence of forces and by the rise of China and other developing nations around the world.

In 2011, freight transportation in North America was impacted by many of the above listed events and by a slow moving recovery from the Great Recession of the late 2008-2009. During that period, between 15 and 20 percent of fleet capacity was taken out of service either through the departure of carriers from the industry or the parking of equipment by many companies. The dynamic of tight freight capacity and a slowly increasing shipment demand made for some interesting capacity challenges this year. Here is my list, not in order of importance, of the major transportation related activities in 2011.

The Freight Economy Disconnects from the General Economy

The news media do a great job of reporting on a broad range of economic issues, both domestically and internationally. But there is an economy that is not properly scrutinized and reported on and that is the freight economy. The big news this year was that this economy held up better than the general economy. Despite the high unemployment numbers and other negative data, consumers showed surprising confidence and spent money. For many carriers business volumes held up better than expected. Consumers have defied the experts and have been spending their way out of the recession. Carrier bankruptcies are down from the dark period a few years ago.

Peak Season shifts from October to August

Another element of the freight economy that has been playing out the past five years is that August is replacing October as the peak shipping month. This phenomenon was confirmed in recent data presented by the Intermodal Association of North America. There seem to be a number of elements that are causing this shift. With capacity tight, smart shippers are moving their freight earlier to beat the crunch and to be in a better position to take advantage of lower cost modes of transport. Unlike the U.S. housing market where there is glut of homes on the market and more foreclosures every day, a good segment of the freight capacity has come back. The early peak shipping season reflects the requirement for shippers to be proactive to protect the integrity of their supply chain.

Diesel fuel sneaks back up to $100 a barrel/The Keystone Pipeline Project is deferred

Diesel fuel has quietly found its way back up to $100 a barrel. The U.S. consumes 15 million barrels of oil each day and imports 10 to 11 million barrels per day. Industry forecasts predict oil consumption will continue at these levels for the next two to three decades, so a secure supply of crude oil is critical to U.S. energy security. With fuel at $4.00 a gallon (U.S.) of $1.20 a liter (Canada), fuel surcharges are on the rise again.

One of the disappointments of 2011 was the postponement of the Keystone Pipeline, a pipeline system designed to transport synthetic crude oil and diluted bitumen from the Athabasca Oil Sands in northeastern Alberta, Canada to multiple destinations in the United States. At its peak the pipeline could deliver 590,000 barrels of oil per day. In November, 2011, President Obama postponed the decision until 2013. Keystone XL is shovel-ready. TransCanada is poised to put 13,000 Americans to work to construct the pipeline - pipefitters, welders, mechanics, electricians, heavy equipment operators, among other jobs - in addition to 7,000 manufacturing jobs that would be created across the U.S. Additionally, local businesses along the pipeline route will benefit from the 118,000 spin-off jobs Keystone XL will create through increased business for local goods and service providers. The postponement, a calculated political move, is a most unfortunate development for the economies of the United States and Canada.

YRC Survives to fight another day

After losing billions of dollars the past few years, YRC made news again in 2011 as it restructured its balance sheet with a $500 million capital infusion, right sized its terminal network and changed its leadership team. The company brought back James Welsh, a former YRC executive, as CEO of the YRC group to see if this LTL veteran can restore consistent profitability. YRC now has enough liquidity to survive in 2012 but it must deliver consistent service and profits to remain in the LTL business.

In fairness, other major LTL players made changes as well. As an example, FedEx Freight purged 100 terminals, consolidated its Watkins acquisition into FedEx Freight and changed leaders. The LTL industry reduced capacity in 2011 to bring it more in line with demand.

Domestic Container Traffic Drives Intermodal Growth

Spurred by a nine percent year / year gain on the U.S. domestic container front, intermodal volumes for the third quarter of this year resulted in annual gains for the seventh straight quarter, according to third quarter Market Trends report published by the Intermodal Association of North America (IANA). “Part of what is driving this is the aggressive approach towards intermodal by motor carriers to moving freight on the rails. Service has improved as has the reliability, service integrity, and transit times, which are all within supply chain managers’ plans,” commented Tom Malloy, IANA Vice President, Policy and Communications.

While we have not seen data to support this, some people are asserting that some of the gains in domestic traffic are on shorter lengths of haul (e.g. less than 550 - 600 miles) where intermodal is now better able to compete with truck on rates and service. The multi-billion investments by CSX and Norfolk Southern in double-stack corridors are in the process of restructuring rail traffic along the east coast of the United States. CSX’s National Gateway, designed to capture more east-west container traffic and NS’s Crescent Corridor, designed to strengthen its network in the northeast and southeast, are key investments in the growth of intermodal transportation.

Pricing discipline the key in a tight capacity market

In 2011 surface transportation carriers held together to increase freight rates. Tight capacity and stronger than expected demand for freight services created an environment conducive to rate increases. In recent years many carriers have acquired the necessary tools to calculate their operating costs. Better tools coupled with tight capacity and better discipline have helped carriers secure increases in contract rates and GRIs. As an example, truckload rates are up 8.5 percent year-to-date as of the end of November 2011.

Carriers expand into new markets

For many years, logistics service providers have been building their businesses by assembling and managing an array of transportation and warehousing services. During this same period, global trade, free trade agreements, the ascent of the big three, China, Brazil and India, have significantly changed the supply chains of many North American companies. To respond to changing shipping patterns, both on a domestic and global basis, many North American carriers and LSPs have been upgrading their portfolio of services. George Abernathy, executive vice president and COO of Transplace expressed it this way. “We are looking at verticals where we already don’t have a broad footprint.” As examples, DHL purchased a mid-west less than truckload carrier and Averitt Express, a major regional LTL provider launched an intermodal service.

Cyber Monday drives growth in E Commerce and home delivery business

ChannelAdvisor, a global e-commerce software provider that helps retailers sell more across online channels, announced that its customers experienced a tremendous Cyber Five, the five-day shopping push beginning Thanksgiving Day that culminated in a record-breaking Cyber Monday. Amazon was a clear winner with more than 50 percent growth year over year - well over twice the growth rate of overall e-commerce. As big box retailers competed to see who could open first on Thanksgiving, online retailers, including Amazon, pushed up their promotions as well. This resulted in steady growth throughout all of November as opposed to the more concentrated numbers we’ve experienced the past few years during the Cyber Five.”

The rapid growth in sales of smartphones and tablets is also playing a part in online shopping. Along with the growth in E Commerce is the growth in home deliveries, an important trend in freight transportation that took another leap forward in 2011.

Dedicated Trucking shifts into full gear

As shippers faced the reality of capacity shortages, regulatory changes and the rising costs of fleet upgrades, fuel and driver wages in 2011, they looked for ways to preserve cash and reduce risks. One such option is dedicated contract carriage. In 2011 this option became attractive as a means of locking up capacity, without making the capital investment, at savings of 10 to 15 percent. For shippers that reduced staff during the recession, this allowed them to outsource the management of its fleet operations to companies that have this as a core competence.

A potential NAFTA – Part 2 is unveiled at year end

U.S. President Obama and Canadian Prime Minister Harper met in early December to unveil a set of agreements for freight and passenger traffic between the two countries. From a freight transportation perspective, the two leaders discussed a set of pilots to expedite the border clearance processes, to move towards a more common set of standards and regulations for dealing with the movement of goods and services, with particular emphasis on food, agriculture and health-care products and to adopt a variety of “trusted trader” programs. The countries agreed that by December 2012 they would seek to implement joint cargo inspection and clearance of goods that arrive by land, rail and sea. The security-focused plan calls for harmonization of the U.S. Customs-Trade Partnership Against Terrorism and Canada’s Partners in Protection program by December 2013. Both programs call for voluntary participation by importers to secure their supply chains, but PIP includes import-compliance provisions that are not part of C-TPAT. With an election looming in the United States in 2012, time will tell if these much needed initiatives will be the stepping stone to a NAFTA part 2 program or will dissipate over time.

What a year! Next year should be even more interesting. Happy holidays!

Last week we received some unexpected good news in the United States as the unemployment rate fell to 8.6%. In Canada the news wasn’t as good as the unemployment rate increased to 7.4 percent. Without counting those people who have given up looking for work or who are underemployed (e.g. performing a job below their level of expertise and education at a wage inferior to what they should be earning), there are about 14 million people unemployed in North America (e.g. 13.3 million in the United States and 1.3 million in Canada).

FTR Associates estimated that there was a shortage of 200,000 drivers in the United States in the first quarter of 2011. How does one explain the fact that out of a pool of 13.3 million unemployed people (plus millions more if you include those who are underemployed), we cannot find 100,000 to 200,000 individuals to fill these jobs?

Here are some thoughts on this apparent anomaly. There were 3.2 million commercial drivers in the United States in 2008, including 1.8 million heavy haul or tractor-trailer drivers, according to the U.S. Labor Department. By May 2010, the number of big rig drivers had dropped 18.4 percent to about 1.5 million. In other words, there are 300,000 drivers that left the labour force that should be available to fill the available jobs. Why is it so hard to convince them to come back to work?

One of the most frequently mentioned reasons is compensation. In the United States, experienced truck drivers can make $50,000 a year at some truckload carriers. According to a BLS survey, the average wage was $39,450 in 2010 while the median wage was $37,770. The survey indicated that 75% earn less than $47,000 per annum.

The trucking industry has a long term practice of paying its drivers by the mile. While there is certain fairness to this approach since it correlates directly with the amount of miles driven and hours worked, it also injects a level of uncertainty into the driver’s weekly pay package. Inconsistent load availability translates into inconsistent pay.

Pay raises are difficult to implement since they cannot be easily correlated with increases in freight rates. In fact, there has been tremendous downward pressure on freight rates as the recession took hold and shippers sought a means of reducing supply chain costs. According to the American Transportation Research Institute, U.S. driver pay fell by 7.4 % in 2009.
Then there is the lifestyle issue. For long haul drivers, being away from home for days or weeks at a time is another deterrent. While there can be a certain glamour in being on the open road and visiting different regions of North America, spending so much time away from home can lead to a range of potential lifestyle issues (e.g. marital difficulties, unhealthy living etc.).

There are a host of other issues that contribute to the problem. At the heart of it is the fact that being a truck driver is not a recognized profession. The current driver compensation packages make drivers a commodity who can sell their services to the highest bidder.
Hours of Service regulations may or may not improve driver safety but restrict work hours. The new CSA provisions improve the quality of those drivers who meet the standards but make it tough on those who work for trucking companies that do not support them with a high quality fleet management program.

The driver shortage problem is coming to a head. Fleet costs are rising as more demanding emissions standards are imposed by governments. The CSA program will push poor quality drivers out of the business. An increasing number of shippers are challenging carrier rate increases (that are intended to cover these rising costs). A driver shortage problem that will exacerbate the capacity shortage is not a sustainable situation, particularly as we try to pull ourselves out of recession.

So what has to change? It will take a combined effort from shippers, carriers and governments to help avert a capacity shortage situation that will disrupt the Canadian and U.S. economies.

From a shipper perspective, there is a need to have “carrier friendly” freight. This can be achieved by removing inefficient and non-productive processes. This includes making improvements in freight packaging, loading, paperwork, vendor and customer network management. Many shippers need to get their “house in order” to keep their freight costs in line. As unpleasant as this may sound, freight rates have to go up (although the level of increase can be muted by Best in Class transportation practices).

From a carrier perspective, there is a need to run a sound operation, to properly recruit and train drivers and to offer them a job and a career within the organization. It is time to look at other pay options including guaranteed pay and incentive based pay for drivers who achieve certain metrics and CSA scores. There is a need to manage and communicate with drivers effectively including dispatcher training so drivers are treated with respect and dignity. We need to create a class of professional drivers who meet specific metrics on an ongoing basis and are properly recognized and compensated for their excellence.

For governments, they need to think through every law and policy they pass that has an impact on driver safety, performance and lifestyle. In North America we need a team of professional drivers that are intelligent, hard-working, thoughtful and motivated employees that serve as a differentiator as we compete with the other leading world economies.

Last Thursday night, I had the distinct pleasure of participating in a Shipper-Carrier Roundtable along with a number of old friends and colleagues. The event was organized by CITT, sponsored by Shaw Tracking and moderated by Lou Smyrlis, editorial director of Business Information Group, publishers of Canadian Transportation & Logistics and MotorTruck Fleet Executive.

As I was driving home, I tried to reflect on some of the most important messages I heard from my fellow panelists that night. There were two that stood out.

First there was a comment from Doug Munro, president of Maritime-Ontario Freightways, about the importance of delivering good service. While this may seem so obvious that it is not worth mentioning, it was the passion with which Doug delivered this message that stood out for me. Doug made reference to the airline industry and noted that there is no acceptable norm other than 100% arrival of its planes. Nothing less can be tolerated. While it is fine for a surface transportation freight carrier to report a 98 or 99% on time service ratio, these statistics acknowledge that the company is failing 1 or 2 times out of every hundred deliveries.

Doug mentioned that one of the keys to his company’s success is to provide excellent service. He highlighted that Maritime-Ontario Freightways is able to gain market share either through the service failures of his competitors or poorly executed acquisitions. He emphasized how he and his management team which he highlighted was the best he ever had, were all focused on instilling this message in their employees.

This message repeats itself in almost every shipper project that my company gets involved in. During a carrier procurement exercise, shippers focus as much on service as they do on price. A carrier that submits competitive pricing, but has not been able deliver consistent service will often find itself replaced during a freight RFP process.

A second major theme that emanated from the discussion was the concept of delivering solutions, not just transportation service. This idea was mentioned by both Heather Felbel, vice president, logistics of Indigo Books & Music, and J.J. Maislin, president of Maisliner, a Quebec-based freight carrier. Shippers are looking for transportation organizations that are problem solvers and can pull together a combination of resources to meet each cluster of customer needs. Shippers are looking for solutions providers that can provide a range of services and modes, that can offer storage when requested, and that can make available value-added information services as needed.

J.J. highlighted how his asset based company has tried to acquire or build organically a unique combination of international and domestic freight transportation services. Being a solutions provider is at the heart of his company’s business strategy.

This message was repeated when Lou Smyrlis asked the question about the rise of logistics service providers and whether this trend will continue. It was my view that 3PLs have done a good job, in some cases, of assembling a group of carriers and/or warehouses and/or value-added services. In many cases they have replaced carriers as the direct interface with the shipper. Certainly as many carriers look down their list of customers, they will find many more logistics providers and freight brokers than they did a decade ago.

Delivering consistent, quality service and being a solutions provider are two of the keys to success for service providers to the freight transportation industry.

On several occasions I have commented in this blog about a looming truck capacity shortage. A soft North American economy coupled with political uncertainty and concerns about Europe and China, are discouraging carriers from making investments in their fleets. Truckers are seeking to maximize the utilization of their existing assets and improve yields, particularly with rising equipment costs, increasingly burdensome government regulations, and a shrinking pool of qualified drivers. However, the on demand truckload model creates uncertainty as truckers wait for shippers to book a load and/or to balance a lane.

Shippers are becoming increasingly concerned about finding the capacity they need to move their freight. They are also concerned that tight capacity will lead to rising freight costs. Capacity shortages in various North American markets this year have caused shippers to seek out options to current transportation processes.

A “Mutually Beneficial Antidote” to Securing Capacity and Rate Stability

One solution to these problems is dedicated contract carriage—the practice whereby, as the name implies, a trucker dedicates equipment and drivers to serving an individual shipper, allowing that customer to lock in rates and capacity with that carrier for a multi-year period. John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., calls dedicated trucking the "mutually beneficial antidote" for carriers that want to get paid for capacity and shippers that want to know it's available.

"Both shippers and carriers are increasingly realizing that dedicated trucking may be just the solution that meets both their needs," Larkin wrote in early October. He stated that shippers who own and operate private fleets could "see 10-percent savings right off the bat" from switching to dedicated service. That's because specialized operators can usually manage fuel, insurance, maintenance, equipment utilization, and driver schedules more efficiently than a shipper that operates its own trucks can, Larkin notes. What's more, companies that outsource their fleet needs can free up their balance sheet capacity and reinvest more of their cash into their core business, which is generally not transportation, Larkin says.

It should also be noted that many private fleets lease their equipment from companies like Ryder Truck Leasing and Penske Truck Leasing, which charge premiums for using their vehicles. Those premiums may go away when a shipper converts from a private fleet to dedicated carriage. A company that shifts from private fleet ownership to a dedicated operation can shave its costs by up to 15 percent, while securing dependable capacity for constant, or "baseload," volumes while using third parties like asset-based on-demand trucking services or freight brokers to handle unexpected surges in demand.

Some Shippers Have Seen “The Light”

Michael Cole, senior director of transportation for food and confectionary titan Kraft Foods, recently stated that Kraft this year will have 400 rigs at its disposal for dedicated carriage, up from 220 in 2010. About 30 percent of Kraft's total 2011 rig count will be privately held or dedicated, up from 22 percent in 2010, according to Cole. Since converting part of its fleet to dedicated, Kraft has seen an eight-percentage-point improvement in its on-time delivery metrics from its distribution centers to retailer warehouses, Cole adds.

The Criteria for a Successful Dedicated Trucking Operation

Dedicated trucking is not for everyone. For shippers with sporadic or erratic freight flows, with significant seasonality requirements, it may not work as well. Ideally this option works best for companies that move commodities (e.g. food, consolidated loads of LTL freight to stores or warehouses) that have consistent flows throughout the year, where forecasts can be made with reasonable accuracy, where there is the possibility to create round trips and continuous moves, and that can commit to specific volumes and sign multi-year agreements.

For shippers that meet these criteria, the dedicated option can provide capacity at a reasonable rate. For carriers, they can purchase and allocate their assets in the knowledge that they have a predictable, profitable revenue stream over a 3 to 5 year time horizon. Watch for dedicated trucking to become more popular during this period of tight capacity and rising freight rates.

The traditional and social media remind us on almost a daily basis that we are seeing the first manifestations of a looming capacity problem. There are already capacity shortfalls in certain geographic areas using specific modes of transport. With 15 to 20 percent of truck capacity removed during the recession and reduced driver availability, this may set the stage for challenging times for shippers in the years ahead as they seek to find reliable means of moving their freight.

The good news is that there is much a logistics professional can do proactively to make sure they protect the integrity of their company’s supply chain. Here are some suggestions.

1. Think Strategically about your Supply Chain, not just Tactically about Transportation

Whether it is sourcing raw materials or shipping to customers, many organizations have options. There may be alternative sources of supply, either domestically or in other countries. There may be a variety of methods in bringing goods to market. This may include shipping to a warehouse or direct to customer, varying order cycle times, changing manufacturing parameters, shipping more volume on slower freight days, increasing safety stock levels, switching modes and a host of other variables. This can also include relocating a warehouse to a more carrier friendly location where head haul or back haul traffic is easier to find.

In other words, it is not just about finding more carriers to handle your current volumes under the existing supply chain paradigms. Securing capacity may require a number of strategic changes to the design of current supply chains.

2. Take a more Strategic and Enlightened Approach to Rate Negotiations

After driving their freight costs down during the recession, many shippers are under the delusion that low freight rates are just one more freight bid away. While freight bids have a valuable place in strategic sourcing, they represent only one tool in the cost containment arsenal. Carriers with good service and limited equipment have come out of the recession with a greater focus on yield management. While there may be some renegade carriers that are willing to break ranks and offer low rates, the overuse of freight bids results in the law of diminishing returns.

Success in rate negotiations must come from clever leveraging of one’s freight, flexibility and shipper salesmanship. Shippers must now present their freight in a way that makes it more desirable for their carriers. They should provide them with quality freight forecasts and schedule loads on dates and times that help their carriers improve their profitability. The freight should be operationally as clean to handle as possible (e.g. the paperwork is ready on time, the freight is packaged in such a way as to make it easy to load and unload with minimal weighting time, carriers have set pick-up or delivery appointments so there is no excessive waiting time). Shippers can also make their freight more attractive by providing their carriers with return trips or continuous, wherever possible.

3. Be Open to Alternate Modes of Transport

If truckload capacity is tight on a certain corridor, would a switch to LTL make sense? Can the LTL be consolidated so as to enjoy LTL capacity while taking advantage of partial truckload rates? In the reverse, is it possible to combine LTL freight with freight from affiliated companies or even competitors? Has your company ever considered switching some of its freight to intermodal service, particularly on longer lengths of haul when there is a buffer on delivery requirements? Would a dedicated fleet operation provide consistent capacity at a reduced rate?

In summary, changing times require new ways of thinking. In particular, a more strategic approach to supply chain management rather than a tactical approach to Transportation may be the key to unlocking more freight capacity for your company.