Logistics spending climbed for the fifth straight year to a record high of $1.4 trillion, a 7 percent increase over 2006, according to the Council of Supply Chain Management’s annual state of logistics report. Of course, these statistics do not reflect the rapid increase in fuel costs in 2008. Total logistics costs have increased by 52.3 percent since 2002.

Transportation costs across all modes grew by almost 6 percent in 2007 and rose 47.1 percent from 2002 to 2007. During the same period, the U.S. economy grew less than 20 percent since the last recession ended that year.

The rapid escalation in logistics costs is causing shippers to place more emphasis on transportation spend according to Todd Thompson, senior vice president of Exel Transportation Services. “Transportation spending is getting more visibility at the CFO level.”

To gain greater visibility into their freight spend and to manage it more effectively, record numbers of shippers are acquiring TMS (transportation management software systems) as are 3PL’s that are asked by shippers to provide leadership and control in this area. The Transportation Management Systems (TMS) market surpassed the $1 billion mark for the first time in 2006, and the market is poised to exceed $1.5 billion by 2011, according to Adrian Gonzalez, Director of ARC Advisory Councils Logistics Executive Council and author of the study, Transportation Management Systems Worldwide Outlook. Similar growth projections have been made by the Aberdeen Group.

TMS systems allow shippers to optimize shipment loadings and to create more cost effective routes. They also provide shippers with very valuable data to track the utilization of carriers that are not in the company’s routing guide, to identify usage of higher cost (expedited shipping) transportation modes and to see accessorial costs that are often the result of poor business practices (e.g. unscheduled appointments, excessive waiting time).

Shippers are also switching to less expensive modes of transport. According to UPS, shippers are choosing slower – and cheaper—ground transportation over air cargo. Rail, the most efficient means of transport after barges did the best in a bad freight environment. While their yields improved (e.g. 2.99 cents a ton compared to 2.84 a ton), rail carloadings were off 2.5 percent in 2007 and volumes fell 1.9 percent.

In some cases, shippers are regionalizing their warehouse and distribution networks to cut mileages traveled and reduce freight spend. In the current high-cost environment, shippers are willing to trade increased inventory carrying costs for reliability according to John P. Darling, president of Venango Freight Express.

As part of their trade-off analysis, shippers are looking at customer order cycles, transit times by mode, freight rates and fuel surcharges. By changing production schedules and order times, shippers can take advantage of the lower freight and fuel surcharge costs when shipping rail.

The freight environment in 2008 can still be characterized as a shipper’s market. Freight bids combined with aggressive rate negotiations, service level agreements, capacity commitments and longer term contracts can all help buffer shippers from the rapid growth in transportation costs. Entering the bid results into a quality TMS system can ensure visibility, maintain compliance with the routing guide and allow shippers to optimize their shipping activities.

For many shippers, their freight carriers are the lifeline of their businesses. To their vendors and customers they represent the highly visible service arm of their companies. Their drivers and trucks make the pickups and deliveries that help differentiate their companies from their competitors.

The carrier selection process is somewhat haphazard for many companies. Transport companies are selected or replaced over a period of years based on a combination of factors such as sales solicitation, service, pricing and referrals from other shippers. Some carriers have service or claims issues that are not resolved satisfactorily and need to be changed. Some carriers seek excessive rate increases and are replaced with carriers that are less costly. New carriers come on the scene and through a combination of service and price, gain a foothold in the business. In other cases, a formal freight bid is conducted every two years and new carriers are phased in while other established carriers remain. In other words, carrier selection is often done on a “piece meal” or as required basis.

This is a result of the fact that there is no overriding strategy driving carrier selection. The process is more tactical and situational. The result for many shippers is that they are left with a patchwork quilt of local, regional and national LTL and truckload carriers that do an adequate job but may not be “best in class” in terms of service and cost. These companies have an uneven portfolio of carriers that contains the good, the bad and the ugly.

A strategic approach to carrier management has three key components:

1. A clear understanding of what is most important to your company

A shipper must first make a thoughtful assessment of those key attributes that are most important to your company. This will include price but also equipment availability, flexibility, on time service, after hours pickups and / or deliveries, specialized equipment, and possibly multi-modal operations. It is based on a carful evaluation of the required number of core carriers to service the business. Too few core carriers create a situation of overdependence and vulnerability. Too many carriers can result in inadequate pricing leverage, excessive time interfacing with carrier sales personnel and customer service personnel and inconsistent performance.

The issue of asset and non- asset based companies should come into play. Non-asset based freight management companies are good for niche markets where it is hard to find capacity or to handle the entire transportation function on an outsourced basis. Since the shipper is in effect paying two markups, one to the carrier and one to the broker, excessive use of non-asset based companies can result in higher than necessary costs. The needs assessment should look at modes, transit times, rate levels and determining an optimum mix of transportation companies.

2. An assessment of the Carriers that provide the Services needed by the Shipper

This involves having a clear understanding of the price competitiveness and performance of your current carriers and of the best carriers that serve your core markets. In every sector of the transportation business there are industry leaders and weak performers. As management teams change over time, the rankings also change over time. As a result, it is essential that you meet with representatives of these carriers to understand their backhaul and head haul requirements, their customer service capabilities, the size and composition of their fleet, the location where their drivers are domiciled, new markets served and a host of other variables. It is only by gaining this market intelligence that you are able to leverage your volumes with the carriers that have the biggest need for your freight. In many cases, you will find that you can obtain very competitive pricing from the market leaders if you can offer them significant volumes in the lanes that are attractive to them.

3. Develop and Implement a Strategic Carrier Plan

Based on your needs assessment and the market intelligence that you gain, you are able to craft a migration strategy to replace mediocre and less than top performing carriers with best in class companies. You can embark on a journey to arrive at the number of core carriers that is right for your company.

To make sure you achieve the desired performance, you need to test these best in class companies to verify that you are upgrading the quality of service you receive while maintaining or reducing costs. You need to track (scorecard) performance and compare it to what you are receiving from your current carriers. At the same time you should be rightsizing your portfolio of asset and non-asset based carriers.

As the year comes to an end, conduct an honest appraisal of your carrier management strategy in terms of quality of service, freight spend and other key variables and identify areas of opportunity. Over the next year, continue to migrate your company to the highest quality carriers at the most competitive rates. By strategically managing your freight carriers, you can play your part in upgrading the effectiveness of your company’s supply chain and on a personal level, add value to your organization.

With the soaring cost of fuel, freight transportation costs are increasing at an alarming rate. Shippers are searching for ways to mitigate the high cost of freight. A freight bid is an excellent tool to achieve cost reductions in shipping costs. Over the years I have seen many shippers secure significant cost reductions through the successful execution of a freight bid. However, as I speak with shippers, I find that in some cases their experience with freight FRQ’s has been disappointing. Here are a few questions to ask yourself to ensure your company derives the maximum benefit from a freight bid.

When was the last time your company conducted a formal freight bid?

For companies that have not conducted a freight transportation RFQ in a number of years, the odds of success are high. The more frequently you conduct a bid, the lower the percentage of savings that can be obtained.

What are your expectations from the bid?

In some cases, shippers are disappointed in the results because of unrealistic expectations. It is beneficial to benchmark your freight costs against those offered by other carriers. This will provide you with a more realistic cost savings projection. Benchmark data can be obtained from a benchmarking service or by requesting sample rates from specific carriers.

How many modes and carriers are in the bid?

Over a period of years shippers form relationships with a group of core carriers and they become accustomed to using specific modes of transport. When conducting a freight bid, it is a great time to reassess the cost / benefit proposition of alternate modes and to give some new carriers a look. While rail freight line haul costs may be higher than truck on a per ton basis, their fuel surcharges may be lower, thereby reducing the total cost of shipping rail. New carriers may need your freight to fill certain backhaul lanes. They may be able to offer better pricing on specific lanes than your incumbent carriers. By limiting the number of modes and carriers in a bid, you may be limiting your potential cost savings.

Is your company leveraging its inbound and outbound freight?

Are you able to create round trips and continuous moves? Are you leveraging your inbound and outbound freight to capture the maximum cost savings possible?

How many rounds of bidding will take place?

Through multiple rounds of bidding, you are able to gain a better understanding of the needs of your carriers and are in a better position to leverage your freight. As you learn more about your carriers’ capacities and lane requirements, you are better able to achieve additional cost savings.

How much capacity will the carriers commit to your company?

There is no point in conducting a bid and creating a routing guide, only to find out that some of your carriers cannot handle your volume on certain lanes. This can result in an unrealistic estimate of cost savings. In order to conduct a successful bid exercise, it is essential that you match rates to volumes and carrier capacities.

What controls can I put in place to ensure the designated modes are used to the degree specified in the bid?

How often does your company need to expedite freight to offset a slowdown in production or unusual customer demands? Are these shipments reflected in your freight spend and cost savings projections?

What controls can I put in place to ensure the successful bid carriers receive / accept their designated bid awards?

Are there controls in place to identify non-compliance with the routing guide (e.g. tendering freight to carriers that either rank low in the routing guide or are not in the routing guide)? Non compliant behaviour will result in “maverick spend” that will negatively impact on cost savings. Do you have a method of identifying load refusals? This will allow you to take corrective action with your core carriers in order to limit cost overruns?

Does your company have the tools and resources to conduct a bid internally?

A bid can be a large undertaking that requires a combination of transportation knowledge, bid software functionality, negotiating skills and an intensive effort over a short period of time. Do your scare transportation management resources have the time to do this or are you better off outsourcing this to a bid specialist? The ROI of working with a bid specialist can make this a very attractive business investment.

For those of you contemplating conducting a freight bid, it is worth taking the time to answer the questions above as honestly as possible. This will maximize the potential cost savings your company can achieve.

With the recent bankruptcy filings of Al’s Cartage of Kitchener, Ontario and Alvan Motor Freight of Kalamazoo, Michigan, two more well established family run regional LTL trucking firms appear to have been claimed by the high cost of fuel and the current freight recession. Al’s Cartage was an 80 year old southwestern Ontario LTL carrier while Alvan had been around for 67 years and had terminals in Michigan, Ohio, Indiana and Illinois.

What is interesting is that the demise of each company appears to be tied in part, directly to a business decision to focus on the automotive industry. A traditional LTL and container carrier, Al’s Cartage made a huge mistake by going after auto parts work a few years ago, admitted the company’s President, Norm Frohlich in a press release. It wasn't long before Al's was "squeezed out" of the cutthroat sector. "It cost us a lot more than it was worth," he stated. Al's tried to revert back to its old lanes, but to little avail. "We were pretty well back to where we started, but we just couldn't get the volume back up fast enough. The expenses were there, but the volume wasn't."

Alvan President and CEO President and CEO James Van Zoeren indicated that the 87 day strike at American Axle, one of Alvan's top customers, was deadly. "The American Axle strike is absolutely killing us because of the trickle-down effect with the closure of General Motors plants and how that impacts our customers who are first- and second-tier auto-parts suppliers," Van Zoeren said.

However, it was clear that there were a number of other forces at work that contributed to the closure of these two companies. "Alvan was quickly becoming a dinosaur. Our ability to compete with much larger carriers than ourselves was becoming compromised. Our costs were higher and we were struggling to keep up on a technological basis," said Van Zoeren. The general state of the economy in the U.S. Midwestern states was also not helpful.

Overcapacity in the trucking industry has also resulted in increased competition, intense pricing pressure and margin erosion. In addition, the financial crisis in America is resulting in reduced liquidity and more limited credit options for trucking companies. For Canadians, the slumping U.S. economy and the high Canadian dollar are limiting exports making it even more difficult for cross-border carriers to find export loads to the U.S.

There appear to be several lessons to be learned from the departure of these two companies.
1. It is important to maintain a diversified customer base to minimize the impact of a downturn in a particular sector of the economy. It can be very risky to bet the farm (or trucking company) on one specific industry no matter how large and attractive it may appear to be.
2. As a small to medium sized regional LTL carrier, it is important to have a strong niche where the company is able to differentiate itself and achieve some economies of scale.
3. If the company cannot achieve critical mass and establish a core competence in a specific industry vertical or geographic area, it may be best to form a strategic alliance or merge with a stronger player before the wolves are at the door.

Clearly there was much more at play than the current freight recession when you peel away a few layers of the onion and look at what contributed to the departure of these two well known industry names.