As the new millennium enters its seventh year, this should be a time of careful reflection by shippers. For the first three years of this decade, shippers had the upper hand in freight rate negotiations. With modest economic growth and ample transportation capacity, shippers were able to maintain good control over freight rates.

In 2003 the tables turned. Driver shortages, capacity constraints and fuel cost increases tipped the scales in favor of carriers. The decline in the value of the American dollar created a shift in the direction of freight flows, with U.S. imports becoming more affordable while southbound export traffic declined. For most of the past three years, shippers have had to endure double digit rate increases, particularly in the truckload sector.

In 2006, the economy reversed direction again, capacity increased and rate increases became more reasonable. Looking ahead to 2007, what strategy should shippers employ in negotiating with carriers? While no one has a crystal ball, there seems to be consensus around the following scenario.
The leading economists are predicting a soft economy during the first six months of the year followed by an upsurge in demand and a tightening in freight capacity during the last six months of 2007. For those shippers that have endured the roller coaster effects of the past six years, what is the appropriate strategy to secure capacity at the best price for your company? Here are some options to consider?

1. Negotiate a modest Rate Increase for 2007
Under this strategy, your company can secure capacity for 2007 at a reasonable rate. This provides cost certainty and capacity for 2007. Should the economy deteriorate in 2008, your company is in a position to negotiate another small rate increase or a rate freeze in 2008. On the other hand, if the economy picks up steam, fuel costs escalate and driver and capacity shortages return, you may face significant rate increases in 2008 or even before.

2. Take a Hard Line with Carriers and seek a Freeze or Rollback on Rates
For shippers with significant volumes, this is a time to secure a freeze or rollback. Some carriers added excess capacity in 2006 in order save money on the cost of the new 2007 engines and / or to better position themselves for the expected ongoing surge in demand. These carriers will be faced with the option of filling these trucks with volume at whatever price the market will bear or removing equipment from their fleet. Since there is already evidence of rate erosion in the market, this may be a time to leverage your volumes to mitigate or offset some of the rate increases that have been accepted in recent years.
The advantage of this strategy is that you can help your company by reducing freight costs, thereby improving your company’s profit margins. The downside to this strategy is that if the economy tightens, your carriers may allocate their equipment to those shippers with more attractive yields. This may jeopardize your company’s available capacity and as a by-product, adversely affect customer service.

3. Conduct a Freight Bid to Leverage Volumes and Sign a Multi-Year rate Agreement
Under this scenario, you can place your company’s freight for bid to a select group of existing and new carriers. You can then negotiate with those short listed carriers that can supply the service and capacity at the best price. To secure this capacity over a longer term, you can negotiate a multi year agreement with modest increases and SLA’s (service level agreements).
This scenario offers your company an opportunity to reduce freight costs and hold these reduced costs, with modest increases, over several (e.g. 3) years. The downside to this approach is if the economy softens, your company has locked into a multi year agreement with rate increases in subsequent years.

The writer would argue that option 3 offers most shippers with significant volumes the best opportunity for cost certainty, capacity and good service. By establishing a multi-year relationship with your core carriers, this fosters a stronger, more collaborative bond. Carriers that know they have a three year commitment on volumes and rates are more likely to work more diligently on behalf of your company. This scenario is most likely to create a win / win scenario and is in the best interests of both parties.

Dan Goodwill
President
Dan Goodwill & Associates Inc.
www.dantranscon.com

“Collaboration” was probably the most frequently heard buzzword during the “Transportation” tracks at the 2006 CSCMP Annual Meeting in San Antonio late last year. Collaboration in a transportation context can take many forms. You can have shipper – carrier collaboration when a company shares its shipping forecast with its core carriers to ensure it has adequate capacity or when a manufacturer and its core carriers work together to modify operating practices that result in excessive waiting time. A shipper can collaborate with other shippers in similar or different industries, or even competitors, to share truck capacity or to create round trips and continuous moves.

Collaboration in a business context is similar to collaboration in a personal context. To make a marriage work, there needs to be trust, good communication, patience and flexibility. What value should a shipper place on collaboration in the face of the significant increase in freight rates over the past few years? How can a shipper maintain its loyalty to its core carriers when it has an opportunity to secure lower freight rates from other carriers?

Similarly, what should a carrier do when it has an opportunity to provide its most valuable resource, its trucks and drivers, to another shipper that provides a higher yielding freight rate? How many carriers come to a shipper and say, we have an opportunity to achieve a higher yield by reducing our allocation of trucks to your company and making them available to another higher yielding client?

Is it reasonable to expect a carrier to share its specific operating ratio for each client with that client? In most cases, the answer is NO. This may work with unprofitable customers but every carrier knows that it is opening a “can of worms” if it reveals how much money it is making from its profitable accounts. Since shippers are seeking rate stability, a competitive cost structure and capacity and since carriers are seeking the maximum yield for its transportation services, does this make trust, open communication and information sharing, the key elements of collaboration, a myth rather than reality?

The writer would argue the opposite. Shippers need to share as much data as possible with their carriers concerning their freight characteristics, volumes, lanes, delivery requirements and their freight rates. Sharing this information with your existing and prospective core carriers is crucial since there is no point trying to establish a collaborative relationship with companies with whom your freight characteristics are not a fit. Similarly, it is essential that carriers share their strengths in terms of head haul and back haul requirements, capacity, service levels etc. so there is a happy marriage with their customers and minimal disappointments down the road. As situations change (e.g. new customers are added, the carrier’s head haul and back haul requirements become different), it is important to share this information with each other to sustain the relationship. Data from a recent study suggests that shippers that do work in a collaborative rather than adversarial role with their carriers tend to spend less on freight as a percent of revenue. Collaboration is a challenge but it is in the best interests of both shippers and carriers.

Dan Goodwill
President
Dan Goodwill & Associates Inc.
www.dantranscon.com

The recent spike in fuel costs has yet again triggered another debate on the subject of fuel surcharges. A few weeks ago in Canada, the shutdown of an oil refinery resulted in shortages of gasoline at some gas stations and a jump in gas prices. The expectation by some was that when the refinery resumed full production, the cost of gasoline would come down. In fact, the opposite has happened.
On the National News in Canada last night, some motorists were interviewed after filling their gas tanks. It was interesting to observe their level of resignation and helplessness as they responded to the interviewer's questions.
The high cost of diesel fuel represents a major issue for transportation providers and shippers with no end in sight. Fuel surcharges have become the norm over the past decade. In a recent study on Transportation Buying Trends conducted by Canadian Transportation & Logistics magazine, 99% of LTL shippers and 100% of truckload shippers are paying fuel surchrages. This compares with less than 30% of shippers paying border detention charges and border security surcharges. In other words, fuel surcharges are now accepted by virtually all shippers. They are, in fact, the most widely accepted form of transportation surcharge throughout North America.
Is there anything that a shipper can do to manage and mitigate these charges? The answer is that every shipper must look at this issue from a strategic and tactical perspective.
Fuel surcharges are now a major component of freight costs. To mitigate these costs, a shipper must look carefully at its customers and its supply chain. To best serve its customers, does the company have its manufacturing facilities and DC's in the optimum locations vis-a-vis its vendors and customers. Rather than shipping costly LTL replenishment orders on a daily basis from a central DC or DC's, would the company be better off shipping truckloads of freight to DC's that are located closer to its customers. Would the increase or decrease in the level of service have a material impact on customer satisfaction and revenue growth? How would logistics costs, of which transportation costs are a large component, be affected. Would the decrease in freight costs be offset by an increase in warehousing costs? How would the company's prices be affected? Would customers pay a premium for superior service? Most importantly, what impact would a change in the company's distribution model have on its bottom line. This type of soul-searching analysis will likely take place on a more frequent basis as the cost of fuel continues its upward trend.
On a more tactical level, what can a shipper do to measure, manage and mitigate its fuel surcharges and freight costs? Here are a few suggestions.

1. You can only Manage what you Measure
One of our bloggers this past week suggested that we roll in the costs of fuel into the freight cost and look at fuel as an integral part of the total freight cost. Some of my clients do this. My preference is to keep fuel costs separate from the line haul cost. The fact is that there are a variety of other cost elements in freight transporattion including additonal deliveries, lumper fees, construction site deliveries and the like. In my view, it is important to maintain visibility of all your cost elements and manage them individually. If not, they become part of your cost base and never come out. You can only manage what you see and what you measure.

2. Do your Due Diligence
Many carriers post their fuel surcharges in their websites. They will certainly supply them to you as part of their rate proposals. Just like not all freight rates are the same, fuel surcharges can vary from carrier to carrier. Do you due diligence.

3. Benchmark your Fuel Surcharge Costs against other Shippers
For a fee, you can benchmark your fuel surchange costs against other shippers in the same or similar industries. By obtaining several readings, you can see where your company sits as compared to the range of fuel surcharges on the market.

4. Fuel Surcharges can be Negotiated
Carriers will negotiate their fuel surcharge. Don't forget that there is a cost recovery and profit generation component to the carrier's fuel surcharge. If you are armed with information on what fuel surcharges are available, you can negotiate a good deal for your company.

5. Fuel Surcharges can be Capped
Some carriers will agree to a cap on fuel surcharges. In other words, if the cost of fuel reaches a certain level and beyond, the carrier will cap the fuel surcharge. This will give you some additional cost certainty.

In summary, fuel surcharges are here to stay and are accepted by almost all shippers. There is still much each shipper can do to mitigate these costs by taking a strategic approach to your supply chain and from a tactical point of view, focusing on those activities that you can measure, manage and control.

As many of you know, the National Motor Freight Classification has been the foundation of the LTL pricing structure for domestic U.S. and Canada - U.S. LTL shipments for many years. Here is a proposal to create a density/cube based LTL tariff that has been developed by Hank Mullen of Mullen Associates and Peter Moore of Capgemini. Please take a few minutes to read the proposal and offer your comments.

Sun Setting On The National Motor Freight Classification

Will technology enable the replacement of the National Motor Freight Classification with a transparent density and cube-based system? Some folks have begun to ask some tough questions.

History

Since the 1940s, motor carriers have been permitted to collectively determine rates and practices that apply to the transportation they provide. Under the Reed-Bulwinkle Act (Reed-Bulwinkle), now codified (as to motor carriers) at 49 U.S.C. 13703, motor carriers acting collectively could be immunized from the antitrust laws by submitting the agreements governing their collective activities to the Interstate Commerce Commission (ICC) and now to the Surface Transportation Board for approval.
Most collectively set rates are for Less Than Truckload (LTL) movements established in conjunction with the National Classification Committee (NCC) classification procedures. Classification, which involves the grouping of commodities with similar transportation characteristics into categories, or “classes”, does not involve the actual setting of rates but is a part of the motor carrier ratemaking process. Every commodity that can be shipped by truck is placed into a class with other commodities that have similar transportation characteristics. Each class is assigned a number, which increases as transportability becomes more difficult. In order to reach a final price, carriers using the classification procedures typically apply a rate to the class that the commodity falls. Under the current regulatory framework, a carrier on its own may determine the rate applied to the class, or a motor carrier rate bureau may set it collectively. For example, if a commodity was rated class 85 and the individually or collectively set rate for particular shipments of commodities rated class 85 were $6.00 per hundredweight, then the carrier would charge its customer $600.00 for transporting a 10,000 pound shipment.
In 1956 the ICC approved the creation of the NCC to be the predominant classification body for the motor carrier industry. In 1980, the NCC established an agreement to promote competition. The agreement was called the Motor Carrier Act of 1980 (the 1980 Act), which substantially reduced federal motor carrier regulations. While the ICC was still in existence, it investigated the activities of the NCC to determine whether they conformed to the aims of new legislation. The ICC found that continuing the NCC’s antitrust exemption was consistent with the new, pro-competitive National Transportation Policy, but only if the classification process were modified so that it focused on only four factors related solely to transportability: density, stowability, liability, and dificulty of handling.
1) Density (weight per cubic foot)
2) Stowability (including excessive weight and excessive length)
3) Ease or difficulty of handing (including special care or attention necessary to handle the goods)
4) Liability (including price per pound, susceptibility to theft, liability to damage, perishability, propensity to damage other commodities with which it is transported and propensity for spontaneous combustion or explosion)
There are 18 freight classes that start at class 50 (lowest cost per hundred pound) and go to class 500, (highest cost per hundred pounds).
The Commission (ICC) stated that density is “the most important transportation characteristic in the line haul.”
Most carriers can have different base (published) transportation rates for each year. In some cases customers have requested to utilize base rates that go back as far as 1992; less a negotiated discount that can reach over 85%! Carriers find themselves in a complex system, which is expensive to administer and supports attorneys, auditors, freight settlement houses and consultants attempting to reduce errors.
It is necessary for the shipper to understand all of the above information. Additionally, shippers must have an understanding of the Carrier Rules Tariff, the Bill of Lading terms and conditions and fuel charges. There are only a handful of specialists who understand the nuances of the National Motor Freight Classification (NMFC). The average shipper is not capable of negotiating as well as the carrier who has years of experience in the rules, classes and exceptions. A whole industry of professionals has grown up to support the shipper including consultants, auditors, and attorneys. All extract a portion of the value of the transport system.
Borrowed in 1936 from the railroads Uniform Freight Classification (UFC) of creating a “simplified” table of classes, the NMFC has outlived its classification process for which a rate can be assigned. International modes of ocean and airfreight have long utilized a cube/weight calculation designed to serve the needs of craft with limited capacities. Due to modern warehouse and transport management systems, the cube and weight tables exist and the origin, destination, service requirements and value known. Carriers currently have the ability to use a cube/density-based scale to quote a rate. A tariff that reflects cube and density will provide valuable planning information for terminal cross-docks and long haul load equipment selection for the carrier. Further, computers can store other shipper choices in service levels such as release value for insurance and delivery date windows to take advantage of cost saving efficiencies in day of week variations. Add to this the ability for systems to communicate with each other in load tendering, tracking, invoicing and settlement and you have the ingredients for a transportation transaction without the need for paper, auditors and the NMFC.

A Collaborative Solution

The Visibility Group is a consortium of companies, with a shared vision of a cube-based LTL transport system, which has begun to encourage and cajole the industry forward.
Mullen Associates: Provides consultation to and coordination of interested parties.
Capgemini: Provides process and technical integration services for carriers and shippers.
Georgia Southern University: Provides research and best practices to support change.

Benefits To Shippers And Carriers

Changing a system currently based upon ambiguous classifications to a more exact system of cube and density benefits the shipper by providing an understandable rate structure that, with some innovation in packaging (e.g. nesting) can allow for self-control in cost reductions. Cube based pricing is a system currently used internationally and should now be used domestically to allow for uniformity in systems, data and metrics.
In addition to be being beneficial for shippers, cube and density benefits carriers with a system that allows for accurate cube and density information at time of tender to enable operational planning and improved utilization of equipment. For the immediate future, it will allow for a change in the classification/FAK LTL rating system, which has become permeated with massive discounts, complex exceptions and paperwork.
The bad news is for the multi-billion dollar legal, post-audit and audit firms who obtain revenue from the artificially complex NMFC-based system of rating LTL in the United States. The new system, when adopted, will allow for pre-rated paperless autopay transactions between the shipper and the carrier. This process will utilize standard calculations and meaningful rate discount programs that support greater efficiency in load optimization, labor and fuel usage.

Hank Mullen of Mullen Associates and The Visibility Group have over thirty seven years of experience in the trucking industry including an in depth understanding of Freight Classifications and ICC (Interstate Commerce Commission), NMFTA (National Motor Freight Traffic Association), NCC (National Classification Committee), NMFC (National Motor Freight Classification), DOT (Department of Transportation) and STB (Surface Transportation Board) Regulations, and Rate Bureau actions. He has substantial expertise within the LTL, TL, and Package industry providing Benchmarking, Rate Comparison Analysis, Invoice Auditing and Tariff and Accessorial Charge evaluations.

Peter Moore is a Vice President in the global Supply Chain practice of Capgemini. Mr. Moore leads the Logistics & Fulfillment as well as the RFID practices in North America. Mr. Moore has over 30 years of experience in manufacturing, third party logistics services and consulting. With deep operational knowledge in all aspects of Supply Chain, Peter has provided strategic and tactical leadership and consulting to general manufacturing, eCommerce, agricultural, consumer, and retail, pharmaceutical and chemical firms both in North America and in Europe.

This appears to be the best of times and the worst of times. With interest rates and unemployment low and with the stock market reaching record levels on almost a daily basis, one would think that this would be an excellent time for the transportation industry. This is not the message I am receiving as I speak with various folks in the industry.
Jim O’Neil, incoming chairman of the Truckload Carriers Association recently stated that “I think we are in a freight recession.” With U.S. economic growth slowing on the back of the housing sector slowdown and the woes of the automotive sector in Detroit, the U.S. trucking sector has seen weak freight volumes over the past six months. Another interesting element of the slowdown was the apparent lack of the traditional fall peak shipping season for some truckers. According to Mark Rourke, President of the truckload division of Schneider National, “it was the softest surge period I have seen in my 19 years in the business.”

What is a Freight Recession?

A recession is defined to be a period of two quarters of negative GDP growth. In the absence of a textbook definition of a freight recession, it can be defined as a period of two quarters of negative growth in freight volumes. The drop in demand for all trucking was clear when the American Trucking Associations’ advanced seasonally Truck Tonnage Index plunged 3.6% in November after falling 1.9% in October. “November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said Bob Costello, ATA chief economist. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear.” This trend appears to be continuing in 2007. It would appear that the conditions exist to support calling the current situation a freight recession. Economic and carrier financial results appear to confirm this statement.
Recent earnings reports from some of the major players such as YRC Transportation, Covenant Transport and CSX suggest that the financial results from trucking and rail companies are deteriorating as business volumes declined in late 2006 and on into 2007. Transportation companies are on the front line in the North American economy, among the first to benefit in an upturn, but also among the first to feel the pain of slowing economic growth.

How did we get there?

There appear to be several reasons. Trucking firms did a lot of equipment "pre-buying" in the second half of 2006 to beat the EPA regulations that went into effect in 2007 governing truck engines and fuel. The result has been a rapid increase in trucking capacity that met with an unexpected decline in demand for trucking late 2006. The upswing in interest rates has had a significant impact on the housing market in the United States. The decline in new home purchases has resulted in reduced demand for lumber products, appliances and other related products. Rick O'Dell, President of Saia stated that he has researched some theories on why the peak season did not materialize in 2006, including one that says “retailers are changing their inventory strategies to emphasize post-holiday sales, which spreads the peak season out more. And that's not a bad thing, because less dramatic spikes make it easier for carriers to plan capacity.” The lower peak demand may have been the result of better planning and advanced supply chain technology. These are all theories that need to be proven with some hard data.

How should Shippers and Carriers Respond?

It should be understood that a number of economic indicators suggest that we are at or near bottom and that an upturn is in sight in such areas as housing starts and retail sales. Some economists are predicting an upswing in freight volumes the latter part of this year or early next year. In a recent RBC Dominion financial report, Transportation stocks were selected as an area for an improvement in stock prices.

Strategies for Shippers

• Take advantage of the market today. Trucking firms are more eager for business now than they have been in a long time. Now is the time to conduct a freight bid to lock in savings over the next few years.
• Use the current market environment to build stronger relationships with carriers. Don't just focus on improved pricing—think about expanding services and collaboration with carriers.
• Meet with your carriers and understand how they mange their costs so you can determine how you can achieve an improvement in your costs.

Strategies for Carriers

• Maintain pricing discipline
• Maintain and improve services levels to retain and expand customer base.
• Expand service coverage (As an example, ABF Freight in January expanded its regional transportation network to include the Central and Southern U.S. and bring next-day and second-day service to two-thirds of the company’s North American service centers. The reason? ABF feels the regional market is currently stronger than the long haul LTL market. Sunbury Transport has expanded its geographic coverage in the United States.)
• Establish partnerships with new carriers to penetrate new markets (and generate new revenues) without making the capital investments.

It is likely that we will see further industry consolidation in the months ahead as carriers seek to spread more revenue over their base of fixed costs and as the weaker players leave the industry.