With the downturn in freight volumes and the increased leverage that this affords shippers, many companies are conducting freight bids to seek lower rates. Some are encountering a nasty surprise. The rates proposed by their carriers are higher than their current rates. Why is this happening? What can your company do to prevent a freight RFP backfire?

If you Get Greedy, watch out for a Nasty Surpirse

In what is perceived to be a “foolproof” environment to reduce freight costs, some freight costs are actually going up. Here is why this is occurring. For the past few years, some shippers have been pressuring their carriers into lower rates. In some cases their rates are below market levels. Some shippers get “greedy” figuring that they can go back to the well one more time with a freight bid to take their rates down another notch.
The carrier then receives the freight bid, puts the commodities, shipping volumes and lanes through their costing model and finds out that they can no longer afford to handle this freight at the current rates. This results in their Pricing Department issuing a new quote with higher rates than the shipper is presently paying. The dismayed shipper then pays the penalty for a freight bid backfire as his rates go up.

Protect your Company by Benchmarking Your Freight Rates

To prevent this from happening to your company, this is what you can do. Before conducting your freight bid, perform a benchmarking study. This can be done in a couple of ways. Informally this can be undertaken by meeting with several new and existing carriers and talking to them about your proposed plan. Listen carefully to the feedback that you receive. Find out from them if they can do anything more on price. Is there anything you can do (e.g. leverage your inbound and outbound freight, reduce your number of core carriers) that can make your existing freight program of greater interest to them.
On a more formal basis, conduct a freight rate benchmarking exercise. Utilize a freight rate benchmarking service to see how your freight rates stack up against other companies with similar volumes on the same lanes. If you find out that you have very competitive pricing, lay low. If there is an opportunity to reduce costs, prepare a high quality bid package and go to the market. This will allow your carriers to provide detailed and accurate pricing. By taking these steps your company can avoid having a freight bid backfire.

As another very eventful year in transportation draws to a close, it is time to reflect on the major events that shaped our industry . Here are some of the landmark events that made this a milestone year in freight transportation.

1. The “Freight Recession” of 2007

The current “freight recession” has become the transportation news story of the year in North America. The credit crunch and the downturn in the U.S. housing market took their toll as all sectors of the freight market, - - LTL, truckload, intermodal - - experienced the ravages of the downturn in freight volumes. The U.S. dollar dipped against many currencies of the world. At one point this year, the Canadian currency had increased in value against the U.S. dollar by 25% before returning to par. The impact that this change has had on manufacturers and freight companies has been massive. Imports suddenly became so much more affordable. Exports suddenly became so much more costly. The very definition of what is headhaul and backhaul freight has been transformed. Trucking companies sought to redeploy their assets in domestic Canadian markets which in prior years had been overlooked. Many transportation companies on both sides of the border employed a number of strategies including parking trucks, cutting costs and aggressive pricing in an effort to weather the storm. At the same time, shippers took advantage of the swing in the balance of leverage to secure rate rollbacks and fuel surcharge reductions.

2. The Rise in the Cost of Fuel

While the freight recession has overshadowed many other news stories, the rapid rise in the cost of diesel fuel to the $90 - $100 range has also been a major event. Perhaps one of the most surprising things about this change is how much consumers, carriers and shippers have come to accept the impact on freight costs. However, with fuel surcharges now are becoming 30% of the cost of freight, this long simmering topic has yet again come to the surface.

3. Sustainability

Spurred on by “An Inconvenient Truth,” the “Green is Good” movement became a hot topic for many shippers and transport companies in 2007. Everywhere you turned, this topic came up for discussion as companies focused on carbon reduction programs and other energy conservation measures. The "Fleetsmart" and “Smartway” programs became popular and awards were handed out to shippers and carriers that embraced good conservation techniques. As often as we all heard the word “sustainability” in 2007, you will be hearing it even more in the years to come. This movement has “legs”.

4. The Opening of the Port of Prince Rupert

Prince Rupert was not a previously well known location in Canada until someone realized that it is the closest North American port to Asia. With the ports of Long Angeles and Long Beach, California and the port of Vancouver, B.C. suffering congestion problems, this made a Prince Rupert a very desirable location to establish a major new port. With a well conceived business plan and five strong business partners and with direct rail links to the Midwest USA, the newly opened port of Prince Rupert has a very bright future.

5. The Disappearing Fall Shipping Season

The Back to School and Christmas shipping seasons still represent the backbone of the surge in freight transportation in the third and fourth quarters of the year. However, for the past two years, something has spoiled the party. The explanations vary from the miniaturization of technology (e.g. the shift from stereos to iPods), the housing and credit crunch in the United States, the congestion at southwest U.S. ports to better planning by logistics managers across North America. Whatever the reason, the fall shipping season “is not what it used to be” and may never be the same again.

6. Globalization

While this movement has been under way for years, 2007 was a landmark year for many carriers and shippers. Major transportation companies ranging from YRC to Werner to Schneider made strategic acquisitions and formed strategic alliances in China. Daily announcements were the norm. Delegations to China and customer / supplier meetings became a major part of the rapidly developing global world.

7. The STB Ruling

On May 7, the Surface Transportation Board made two landmark 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, as they take effect, will have a profound effect on North American shippers and carriers, particularly in the area of LTL freight pricing.

8. New LTL Pricing Methodologies Being Established

As a direct result of the STB decision, there will still be a requirement to establish one or more systems of classifying 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. 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 structures. New density and cube-based pricing tariffs are being developed by a number of organizations. You can expect to see one or more of these methodologies gain acceptance in 2008. 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.

9. Mexico trucks allowed entry into United States

A five member NAFTA trade tribunal ordered the United States to end its long-time ban on cross-border cargo haulers or pay Mexico damages that could reach billions of dollars. The ruling was the first major U.S. defeat under the little-known arbitration process of the North American Free Trade Agreement. The decision caps a three-year process under which Mexico challenged then- President Bill Clinton's decision to suspend the clause of NAFTA that allowed free passage for each nation's trucks. The issue is central to NAFTA because 82 percent of the $240 billion annual volume of U.S. trade with Mexico moves by land. Previously, the 4 million Mexican trucks that cross into the United States were allowed only within a zone ranging 3 to 20 miles north of the heavily congested border, where they transfer their loads to American trucks.

10. Let’s talk about Infrastructure

This incredibly important subject is finally starting to receive some discussion (and a little action). To get a sense of the future if no action is taken, take drive along Montreal’s major highways at rush hour. Key industry leaders such as the CEO of FedEx Freight are now bringing this issue to the surface. We have a long way to go to avoid a looming economic disaster. In 2007, this subject at least began to receive the attention it preserves.

While lists of this nature always leave out certain other important events, honorable mentions must go to such topics as the capacity glut (yes glut, not shortage in 2007), the increasing interest in risk and security management and the interest of private equity in Transportation (at least at the beginning of 2007). No doubt, 2007 was quite a year.

I would like to thank all of you who read and respond to this blog on an ongoing basis. I have received e mails and telephone calls from all over North America. I very much appreciate the words of encouragement and your feedback on some of the ideas that have been expressed.

As I look ahead to 2008, I would like to ask you to continue to provide me with your feedback. Please don’t be shy to respond directly to the blog and share your thoughts with the readers around the world. Also, please feel free to suggest topics for discussion. They would be most welcome. With your help, I am sure we can make this blog a leading source of information and ideas on the freight transportation industry. You can help make this happen.

I wish all of you and your families a happy holiday season and a New Year filled with peace and happiness.

Dan

This is one of my favourite times of the year. In addition to some wonderful moments with family and friends, it is a time to read and reflect on the past year and think about the “big picture.” The life of a freight transportation consultant is a busy one. Other than some vacation time, there are few opportunities to look at the world we live in and take stock of where it is going. The past few weeks have afforded me this opportunity.
I have finally made a dent in the pile of business and transportation publications that pore into my office on a weekly basis. I also had the chance to read Richard Tedlow’s biography of Andy Grove, a very interesting book. Here are some of my take-aways.
The year 2008 is going to be a very tough year, possibly the toughest we have seen in decades. An increasing number of economists and financial analysts are predicting a recession, or if not, a very bumpy year. This is based on a number of factors:

o The US housing slump
o The US sub prime mortgage mess
o Declining consumer confidence
o The high cost of fuel
o The expectation that we have not hit bottom in terms of foreclosures, personal bankruptcies and job losses

Here in Canada, Prime Minister Harper and Finance Minister Flaherty have already started to downplay expectations for 2008. While the Canadian economy has been outperforming the US economy the past year and the Canadian dollar has soared in value against its US counterpart, the close linkage between the economies will serve to diminish Canadian growth.
The forecasts on how long the economy will limp along ranges from the first third of this year, the most optimistic scenario to the first quarter of 2010, the most pessimistic scenario. The experts point to the following set of forces that may help dampen the effects of the economic downturn and facilitate a rebound. They include:

o The current and expected future interest rate cuts by the US Federal Reserve Board
o The projected increase in demand for US goods as a result of the decline in value of the $US
o A financial stimulus package from the Bush government, during this election year, to help Mr. McCain or Mr. Huckabee’s chances of being elected
o A consumer driven push to spend their way through and beyond this period of economic slowdown.

So what will it be? Will the forces of decline result in a Recession or will the forces of economic stimulus result in Resilience? If my crystal ball had the answer, I would probably be writing this blog from the beaches in Turks and Caicos rather than snowy Toronto, Canada. My guess is that we will see a downturn this year and that as the year progresses, we will pull out of it, probably without a recession. The strong, diversified and resilient economies of the US and Canada will help us rebound from these tough times and facilitate a turnaround of which we will see signs in the latter part of this year. In the next blog, we will discuss some strategies for transportation companies to weather the storm of 2008. Have a happy, healthy and resilient New Year!