As a shipper, have you ever wondered if you are paying too much for freight? As a carrier, have you ever wondered how your rates on specific lanes compare to market rates? Effective, April 2, 2008, a web-based freight rate benchmarking service will now be available on a subscription basis.

Trans-Lucent Markets Inc. (http://www.trans-lucent.com), a Guelph, Ontario based provider of Transportation Expense Management (TEMS) systems is the first company in North America to offer this service on annual subscription basis. The new service will be marketed under the name of AccuFreight Index (AFI) and will allow users to access the Trans-Lucent rate data base in real time. The data base will contain freight rates by lane for domestic Canada and cross-border (Canada – U.S.) shipments.

Trans-Lucent currently provides a variety of transportation expense management tools. Their data base of carriers, rates and lanes will be augmented as new shippers, carriers and 3PL’s sign up for the service and enter their data in the data base. Initially the data base will have its greatest value to truckload shippers. Over time, as new subscribers come on board, the data base will contain a full spectrum of rail, intermodal, LTL, small parcel and expedited freight rates for many lanes throughout North America.

Freight Rate Benchmarking services have been available to shippers in the past for specific blocks of traffic. A shipper could pay a provider to perform a study to determine how their freight rates compare to market rates at a particular point in time. The shipper could then focus on those lanes where their rates are higher than market rates and either renegotiate with their current carriers and/or go to market to source other carriers. The value of AFI is that a shipper can now obtain this information on an ongoing basis in real time. Once you subscribe, the shipper or carrier receives a password that allows you to obtain this data on any lane at any time of the day or night.

Users of the system will be able to query specific lanes and look at mode options (e.g. truck versus intermodal). They will be able to look at the freight rate, fuel surcharge and other cost elements (e.g. accessorial charges) in the data base. This will allow all parties to be much better informed than they were in the past and allow for better transportation management decisions.

Carriers will also derive benefit from the system. As the name implies, it will allow carriers to benchmark their rates on specific lanes against their competitors. It will highlight areas where the quality of their head haul or backhaul freight may be suspect or where their costing model may be questionable. It may also help identify areas where certain carriers are targeting specific lanes or customers.

Of course, a shipper or carrier using the service must look at the freight rate data in the context of the other variables that effect the procurement of freight services. Not all carriers are created equal. Some carriers provide better service than others. Their service may be worth more for the added value and reliability. In fact, one of the features of AFI will allow shippers to rank carriers on service as well as price.

In addition, shippers with higher volumes will often, but not always, receive preferential rates as compared to shippers that move freight more sporadically on particular lanes. With those caveats, AFI should be a valuable service to shippers, carriers and 3PL’s.

“We feel that this type of system is something that the transportation industry in Canada has been demanding for some time,” says Shelina Lalani, President of Trans-Lucent Markets. “We plan to begin with truck-load rates, and have already made a massive amount of less-then-truckload data available for our next phase-in. We are especially proud of the ease and speed with which a member can, from their desktop, sign in, describe a type of shipment, and receive valuable data on current market freight rates for that shipment – it all happens intuitively and results are returned literally within seconds.”

The debate over whether or not to outsource a company’s private fleet operations to a third party has been going on for decades. The arguments in favour of outsourcing are fairly well known. In fact, they are so compelling that they make you wonder why any manufacturer or distributor in North America runs a private fleet.

The arguments are usually based on the following rationale.

• Companies should stick to their core competence and allow the professional truckers to run this non-core operation.
• Many manufacturers and distributors cannot run balanced operations. Due to inherent inefficiencies, they should outsource these functions to companies that can manage them much more efficiently.
• Companies that have small to medium sized fleets cannot achieve the economies of scale in terms of leasing costs, maintenance costs and fuel costs to run an efficient operation.
• Many private fleet operators lack professional trucking management expertise and effective information management systems to run an effective operation.
• The skyrocketing costs of fleet insurance make running a private fleet cost prohibitive.
• It is more difficult for private fleet operators to provide their drivers with the quality of training that one would find in a top tier trucking company.
• A highly qualified 3PL or full service trucker can provide a host of “value added” services in addition to trucking thereby making the outsourcing value proposition that much more appealing.

The fact is that there are still many private fleets operating in North America. Private fleets represent forty-five percent of the $700 billion motor carrier market, the largest segment of the industry.

Let’s look at the rationale for maintaining a private fleet. They typically follow this line of thinking.

• For many companies, their private fleet fills a niche in their portfolio of transportation services that include dedicated contract carriage and for hire trucking.
• A private fleet allows a company to provide its most important customers with a higher level of service than one can expect from a third party provider.
• It allows the company to control its inbound flow of raw materials and the outbound flow of finished products on its own assets.
• The company’s private fleet ensures that there is capacity available for its key customers.
• Savvy private fleet operators are moving “blended” operations that include their company’s products and products from sister companies and even competitors.
• Private fleet operations can be tailored to the precise delivery windows of its customers, a service that some LTL carriers are less able to provide.
• These operators are more flexible than for hire trucking companies and are in a better position to handle returns and redirected shipments.

It is clear from these two sets of statements that there is a good rationale for both positions. The ultimate decision has to be based on a combination of economic and service requirements. If a company can provide a superior value proposition and achieve differentiation, at a competitive cost, by maintaining a private fleet, it should do so. If it cannot and is challenged in terms of empty miles, inefficiencies, lack of professional management and higher than necessary costs, the outsourcing option is one that should be considered.

With U.S. and Canadian troops serving in Iraq and Afghanistan, there is much talk these days about war. There is also a war going on in North America. It is a war of a different nature and it is being fought in the boardrooms of trucking companies and in the shipping offices of Traffic Managers. It is a war for LTL and small parcel market share.

The reasons for the war are obvious. According to Howard Schultz, CEO of Starbucks, “mall traffic in America is down between 9% and 10%”. According to a recent Business Week report (The Spending Mirage – April 21), “the decline is pretty much across the board: inflation-adjusted purchases of food, clothing, furniture, and motor vehicles are all down”. The so-called freight recession is being driven by an economic recession. Consumer spending is down. In addition, many consumers are carrying so much debt that they cannot spend any more. This is further impeding spending as economic uncertainty and increasing job losses are influencing even wealthy consumers to become more cautious.

The deepening U.S. recession is causing the big three small parcel carriers, UPS, FedEx and DHL to play “cargo cutthroat”, offering deeper discounts and reducing their once “sacred” accessorial charges to take market share from one another. As a result of postal reform, the U.S. Postal Service is launching its own array of competitively priced service offerings in May. This will raise the competitive bar another notch. To grow their market share in a declining market, price has been the weapon. Rather than hold the line on rates to increase yields, the small parcel carriers are using price as a weapon to gain market share.

The LTL carriers are also “duking it out” among themselves and in competition with the small parcel players. Carriers such as Averitt Express and Pitt Ohio are employing sprinter vans in their operations to more effectively handle small LTL shipments and individual parcels in the range of 100 to 150 pounds. Some larger LTL carriers have formed the “Reliance Network”. As reported in a prior blog, the six carriers in this network are seeking to gain market share by providing their customers with service to each of their partners’ regional service areas.

Con-way is achieving market share gains by providing “faster cycle turnaround times” thereby allowing their customers to maintain lower inventory levels. They are seeing revenue growth in the “high single to low double-digits”. They are also obtaining rate increases of “roughly 2 percent” on their contract customers. Estes has expanded its coverage to become a 50 state carrier.

While some LTL carriers (e.g. Con-way Freight, Old Dominion Freight Line, and Saia) are reporting year/year gains in tonnage, others (ABF Freight System, FedEx Freight, UPS Freight, Vitran and YRC Worldwide) are reporting declines. While most carriers are talking about market share gains, the fact is that the overall freight pie is shrinking. Clearly some LTL carriers, large and small, are feeling the pain.

This is making it tough for executives in trucking companies not able to gain market share. As an example, the Yellow Transportation division of YRC replaced its President for the third time in fifteen months. It also replaced its VP of Sales and Marketing. In a memo to employees, Mike Smid, North American Transportation President and CEO of YRC, who is taking over the reins of its ailing Yellow Transportation division, indicated that employees have a mandate to retain customers at any cost. Translated into trucking terms, this will mean rate reductions whenever necessary to retain customers. Market share losses will not be tolerated.

To improve the financial performance of its regional operations, YRC recently reduced its service coverage in some of its regional LTL operations where it lacked sufficient density to operate profitably. This will likely benefit the carriers that have better traffic densities in these markets and are able to better utilize this freight in their networks.

Clearly it’s a war out there as LTL and small parcel sales people take their rate sheets into Traffic Managers’ offices to retain or secure business. It will take a lot more than rate cutting and cost reductions to win the war. It will take a well thought out strategies, superior service, superior leadership and competitive differentiation. There will be winners and losers. These are challenging times in the trucking industry.

Steve Russell, Chairman and CEO of the Celadon Group, an Indianapolis based truckload carrier, gave the keynote address at this week’s Truck World conference and trade show in Toronto. During his speech he highlighted the impact of the current economic downturn on his company’s financial results.

In his address, he touched on the number of class 8 trucks on the road in America and outlined the number of trucks manufactured each year. He indicated that in order for truckers to re-capitalize their fleets each year, there are typically 250,000 trucks manufactured to replace one fifth of the 1.25 million trucks on the road.

Steve noted that at the current rate of production, there will likely be only 120,000 trucks produced this year. He also mentioned that foreign countries (e.g. Russia) are buying a large numbers (40,000) of two and three year old vehicles. The overall capacity in the market is experiencing a decrease as some companies suffering through the freight recession close their doors. In fact, he indicated that trucking company bankruptcies are up significantly from previous years.

Currently this is not a problem for shippers as a host of economic issues have had a negative impact on demand. The lower supply of trucking capacity is in line with the drop in demand.

However, Steve noted that some major shippers are taking steps to protect their companies’ operations as the economy begins to turn and as truck capacity shrinks. Wal-Mart has signed a two year commitment with the carriers that participated in their freight bid; Target Stores has locked in their capacity for three years.

There appear to be many shippers that do not see the capacity storm brewing in 2009. I continue to hear stories of shippers that have put their freight out for bid as many as three times in one year in order to take advantage of the soft freight market. Clearly the danger in doing this is that the carriers that continue to reduce rates are the “bottom feeders”. A number of these companies may not be around when the economies of the United States and Canada begin their inevitable upswing. In addition, as the freight markets firm up, some of the carriers may look at acquiring more lucrative freight to improve their bottom lines.

Shippers should give some careful thought to the actions taken by Wal-Mart and Target Stores. There is definitely going to be a period of upheaval as the dust settles on the current freight recession and demand for truck capacity exceeds supply. The supply will go to those shippers that are paying compensatory rates, have treated their carriers with integrity and respect and have contractual commitments in place. Relying exclusively on the spot market for capacity may result in significant rate shocks over the coming years. For transportation managers seeking to add value to their companies, this is the time to take a longer term view and secure the capacity needed to move their companies’ freight in the years ahead.
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Jeff Rubin, a respected CIBC World Markets economist has predicted that crude oil will hit $150 (U.S.) a barrel by 2010 and $200 a barrel by 2012. This would translate into $7 dollars a gallon in the United States or $2.25 (Canadian) a litre, twice current levels. His arguments are that world oil production has stagnated at 85 million barrels a day over the past two years. Even with the possible reduction in demand in the western world, the growing demand in China, Russia, India and the Middle East will more than offset these declines over the next five years.

The opposing view offered by Dina Cover, a commodity economist at Toronto-Dominion Bank is that the growth in the supply of crude oil will outpace demand over the next two years bringing oil prices down to $85 (U.S.) a barrel next year before a rebound in growth sends them back into triple digits. While I am not an expert in this area, history would seem to support Mr. Rubin’s forecast. There has been little evidence in recent years that shows a major upswing in production. When you look at the possible success of the $2500 Tata Nano car and the potential market there is in China and India for a gas burning vehicle at this price point, it makes you think that there will likely be a significant increase in fuel consumption in future years. The middle classes in these countries are anxious to enjoy a higher standard of living and switch from bicycle and motorbike to a passenger car.

What does this all mean for shippers? Even if Mr. Rubin’s predictions are unduly pessimistic, they suggest that fuel surcharges are likely to increase significantly in future years and possibly approach the cost of freight. While shippers cannot directly reduce the costs of fuel, their freight transportation programs can certainly have an impact on fuel consumption and on their freight costs. Here is a list of things that shippers should be looking at as we move toward fuel at $150 and $200 a barrel.

1. Improve your Shipment Packaging

Companies that ship consumer goods whether dry, temperature controlled or frozen will have to revisit their packaging. There are companies that provide consulting services in this specific space and can save shippers millions of dollars in freight costs through either reductions in the use of corrugated paper or reductions in cubic space occupied, the key variable in freight costs. There are still many shippers that have not fully grasped the potential cost savings that can be achieved in this area.

2. Reassess your Modal Choices

Shipping LTL and small parcel freight via air, expedited road or even regular over the road service is going to be an increasingly costly proposition. Shippers are going to have to take a harder look at production schedules, customer locations and their network design. The cost/service trade-offs of shipping full loads via intermodal or over the road to local distribution facilities will need to be re-evaluated.

3. Optimize the Size of your Shipments

There are an array of high quality Transportation Management (TMS) Systems that are available on a purchase or pay as you go basis. The algorithms in these programs can take vast amounts of data and optimize shipment loadings to various locations to reduce freightcosts. For those companies that have not taken a hard look at TMS systems, now is the time. It may be the resource you need to keep your company in business.

4. Benchmark your Fuel Surcharges

Not all fuel surcharges are created equal. As a shipper, you owe it to yourself to benchmark your fuel surcharge template against those of other shippers and carriers. This data is available from companies that specialize in the freight rate benchmarking space. Also, keep in mind that even if your company is using an industry standard (e.g. FCA) fuel surcharge template, shippers discount these tariffs at various levels. Many shippers are operating under the misunderstanding that they are paying industry levels when in fact their companies are paying higher than the norm.

5. Negotiate your Fuel Surcharges

Fuel surcharges are negotiable. While recovery of fuel costs is a requirement of every trucker, there is a cost recovery and profit component built into fuel surcharges. You owe it to your company to be paying market rates and no more. Otherwise you are not doing your job and adversely affecting the financial position of your company.

Clearly the management of fuel costs and fuel surcharges is now an important component of every Transportation Manager’s job in North America. Adopting the five Best Practices outlined above can help your company differentiate itself from its competitors and survive in the era of high fuel costs that is now upon us.