The Surface Transportation Board's May 7 Ruling

The STB made two decisions. First, it rescinded antitrust immunity for rate bureaus. Second, it removed the immunity for freight classification, under which committees composed of carriers set standard measurement criteria for specific commodities. These changes, when they take effect, will have a profound effect on North American shippers and carriers.

The Surface Transportation Board has proposed revoking the authority of motor carriers to engage in collective rate making and freight classification. This is a decision that could alter how many motor carriers in the United States and Canada set freight rates. The National Motor Freight Classification (NMFC Class Rate with discounts) system has been in use for decades and has been a key tool used in developing LTL tariffs. This comprehensive system has been based on assigning a class to 18 sets of commodities based on density, stowability, ease of handling and liability). LTL pricing is then associated with each class of freight.

New LTL Pricing Methodologies Must Be Established

There are several issues associated with this decision. First, there will still be a requirement to establish one or more systems of classifiying LTL shipments so as to create an orderly and logical way to perform LTL pricing. The NMFC did provide a national standard for classifying LTL freight. Many shippers have come to rely on this system. As noted in one of our earlier blogs, other costing methodologies have been proposed. Pallet based pricing and commodity rate pricing, each of which is based on a similar set of cost components have been around for some time. Making a change to such a long established and well accepted process could result in some upheaval for carriers and shippers until some competing and reasonably universally accepted LTL pricing systems come into widespread use.

Which New or Existing Business or Organization Will Create and Manage these Costing Models?

While carriers will not be allowed to work together to perform any type of collective rate-making activity, there will still be a need for some business organizations to create and maintain LTL pricing methods. There are organizations today such as SMC3, the former Southern Motor Rate Bureau, that would be a natural intermediary to create and manage a new pricing system. Their Czar Lite tariff could be one potentially acceptable LTL pricing model. However, SMC3 would have to change its business model. Rather than engaging in collective rate making, the organization would have to focus more on pricing design, tariff publication and ancilliary LTL pricing services. There are other companies that either specialize in transportation costing methodologies or that perform a carrier/shipper liaison role (NASSTRAC) that might wish to fill the void. Of course, the U.S. Department of Justice would have to sign off on any new processes that are put in place.

Expect a Delay

The STB's proposed deadline for compliance with the new law was September 4, 2007. The National Motor Freight Traffic Association, a carrier group that sets weight and density standards through the National Classification Committee for thousands of shipments, petitioned the STB on May 18 for a 14 month extension. Their suggested date would be Nov. 4, 2008. There is no doubt that additional time is needed to devise new rate making processes and to determine the appropriate compliance procedures.
While some large shipper groups have praised the STB's decision, other groups have argued that there is no other universal standard and have expressed concerns as to how shippers would be able to manage their LTL freight. It is reasonable to expect a delay in the implementation date but it is likely that this ruling, possibly in an amended form, will have a profound impact on LTL pricing. Shippers and carriers should monitor developments in this area very carefully since this will be a major change. At the same time, LTL costing experts and entrepreneurs should use this as an opportunity to develop and "test the waters" for new LTL costing methodologies.

In January 1994, the North American Free Trade Agreement was signed by Canada, the United States and Mexico. The agreement was intended to to encourage the free flow of goods between the three signatories to the agreement. One of the trouble spots was the provisions in the agreement that would allow the trucks of each country to travel freely upon the highways of each other's countries. NAFTA called for Mexican trucks to have unrestricted access to highways in border states - Texas, California, New Mexico and Arizona by 1995 and full access to all U.S. highways by January 2000.
Thirteen and half years after the agreement was signed, these provisions have still not been fully implemented. Currently, cross-border trucking is limited to Mexican drayage companies that must operate within a 20 mile radius of the U.S. / Mexico border and must transfer freight to U.S. domiciled carriers.

Pilot Project Announced by the DOT

In February of 2007, the U.S. Department of Transportation announced a pilot project that would allow 1,000 trucks from 100 Mexican trucking companies the ability to deliver and pick up freight to and from customers in the U.S., provided they submit to on-site inspections in Mexico by U.S. safety officials. After the one-year test program, the DOT could then open the border to all Mexican trucks. As of April 26, Federal Motor Carrier Safety Administration spokeswoman Melissa DeLaney said the agency had completed audits of 31 carriers, 27 of which had passed.

Lawsuit Filed by Teamsters Union and Owner-Operators Association

On April 23, 2007 a federal lawsuit was filed in the U.S. District Court for the Northern District of California in San Francisco by a coalition including Public Citizen, the Teamsters union and the Owner-Operators Independent Drivers Association, aimed at stopping the Bush Administration's plan to open the U.S. border to Mexican trucks. The lawsuit contends that the Department of Transportation's border pilot program violated established federal guidelines. They argued that the DOT was obligated to publish a detailed description of the pilot program and provide an opportunity for public comment.

The Three Major Issues - Safety, Economics and Politics

Safety

The opponents of the pilot program contend that concerns about verification of drivers' records, drug and alcohol testing, hours of service, cabotage, inspections and insurance are "just a few issues that have yet to be addressed by the Bush Administration." Public Citizen argued that the DOT tried to launch the pilot program without the proper safety and security oversight necessary for monitoring foreign trucks. In addition, they stated that the program should start on both sides of the border at the same time.
While some of the arguments presented are based on valid concerns, other are questionnable. David Melendez, a 12 years truck driving veteran stated "they (Mexican drivers) cannot read the signs and they don't even really know how to drive a rig out there. I've seen them with those trucks breaking down, they cut in front of you, they don't even use a signal." Another source stated that "all Mexican truckers are overworked, way underpaid, and rely on illicit drugs to stay awake in order to drive Herculean distances."
These views are not shared by all. The American Trucking Associations generally supports the crossborder program. The ATA has requested that the playing field should be level on both sides of the border before the program is launched.
"I think it's much to do about not very much," said Brigham McCown, a principal at the law firm Winstead PV and a former general counsel to the Federal Motor Carrier Safety Administration. "Even if you open the borders, the drayage trade is going to continue to constiutute a majority of the U.S. - Mexican trade for the next 10 to 20 years."

Economics

The economic arguements are simple. Since Mexican drivers earn lower wages than their American counterparts, opening the border to Mexican truckers should reduce the costs of crossborder shipping, thereby being of benefit to American shippers. On the flip side, the teamsters see a loss of jobs to Mexican drivers. Framing the debate over safety concerns may help delay the launch of the pilot and protect their members' jobs. Another argument that has been expressed is that if these safety concerns are legitimate, opening the border to Mexican drivers may increase insurance costs and as a byproduct, the cost of shipping.

Politics

Since the pilot project was initiated by a Bush Adminstration team appointee, this gives the Democratically controlled Congress an opportunity to embarass the Republican President. Congress took steps to block the Mexican truck program by including more restrictive language, including a provision that would guarantee U.S. carriers equal access to Mexican highways, in a bill passed to fund military operations in Iraq and Afghanistan. However, President Bush said he opposes those provisions, as well as other parts of the bill, and would veto the legislation.

The Saga Continues

As outlined above, this is an interesting brew of safety, economic and political issues. Stay tuned for the next phase of this interesting saga that has been playing out for the past thirteen years.

Wal-Mart has gone through some challenges in recent years as evidenced by its languishing stock price and less than steller profit performance. One result of these difficulties has been a slowdown in planned new store openings. As always, the company continues to seek ways to enhance its image and share price.

Wal-Mart's announces new "Green" Packaging Rating System

To this end, Wal-Mart has launched a new a "green" rating system for the packaging used by all of its product suppliers that will eventually determine who can sell to the world's largest retailer. The creation of the packaging rating system is a significant part of the retailer's strategy to become more environmentally-friendly and meet the demands of its customers. The company's "substainable scorecard" system is designed to pressure up to 60,000 of its suppliers worldwide to lower the amount of packaging they use by five per cent by 2013, use more renewable materials and slash energy use. "This is equal to taking 213,000 trucks off the road annually, and saving 323,800 tons of coal and 66.7 million gallons of diesel fuel from being burned," the retailer claimed earlier this year inoutlining the programme.

Wal-Mart Vendors to be Ranked on their Product Packaging

Those that make efforts to change their packaging and products towards meeting Wal-Mart's goals will be ranked at the top of the list among their competitors, making them the preferred supplier. Those that do not, will face regulation to the lower ends of the ranking and the possible possible loss of their business with Wal-Mart. Suppliers will move up or down the rankings in their product category depending on any changes they make, or that their competitors make ahead of them.

In most consumer manufacturing companies, packaging consumes about 10% of the supply chain dollar while warehousing represents 25% and freight 65%. Many shippers tend to focus on the two big ticket items and pay less attention to packaging. Inadequate packaging can also result in higher than necessary shipping costs and damages.

Initial Test results

Wal-Mart has already made changes to some of its packaging that has resulted in less waste, lower shipping costs and less shelf space. It often cites the $3 million (U.S.) it saved by shrinking the cardboard box holding one line of private label toys. The one inch reduction in height and width, and the elimination of plastic wrapping reduced cardboard use by 3450 tons and plastic by 600 tons.

Change in Strategy

Matt Kistler, Wal-Mart's vice president of package and product innovations, said the move toward sustainable packaging marks a significant change by the retailer away from choosing suppliers solely on price. Wal-Mart is selling the program to the suppliers, who will have no option but to comply, by citing cost savings. The giant retailer said it will save $3.4 billion a year in costs if five per cent of packaging is cut out of the system.

Packaging Scorecard

A separate scorecard ranking system for packagers was also unveiled this week. Packagers will input their data and move up or down the ranking in a similar manner to the rating system for Wal-Mart's suppliers. The online system will then direct suppliers toward the top rated packagers who can help them meet Wal-Mart's targets. Suppliers can take a peak at the beta version of the online scorecard system for their products at www.scorecardlibrary.com. Packagers can test out the system built for them at www.marketgate.com/packaging.

Two Shades of Green

Clearly Wal-Mart's strategy will put the retailer at the forefront of the "green" movement and position them as a leader in the area of selling ecologically friendly packaged products. At same time, their are billions of dollars in potential cost savings available.

A Model for Industry

A few years ago, when Wal-Mart launced their RFID strategy, it was met with concern by many industry observers as not being worth the effort. It is hard to find fault with this initiative and with the various sets of benefits it offers, Wal-Mart has taken a major step in becoming the new jolly "Green Giant."

This initiative should produce an array of benefits. It should encourage all manufacturers to revisit their product packaging to see if their products can be produced in a more environmentally friendly manner and to determine if additional savings can be achieved. Wal-Mart's program should be monitored closely to learn from their successes and failures. It should prod many companies to establish metrics and tracking mechanisms to measure the results of their initiatives. On a personal note, I would encourage manufacturers to speak with their carriers that can be an excellent source of suggestions on how to improve their packaging. It is likely that the Wal-Mart model will be emulated by many companies in a variety of industries.