Trucking company bankruptcies in the United States more than doubled in the second quarter, soaring 118% from last year. Rising fuel prices and cut throat competition pushed 970 carriers out of business and 88,000 trucks off the road according to Donald Boughton, a stock analyst with Avondale Partners.

Recent reports suggest that the tide may be turning, specifically in the truckload sector of the market. With truckload carriers exiting the market or parking trucks, there appears to be a better balance between supply and demand. Over the past few weeks, volumes have appeared to increase as a result of the back to school shipping activity and the cutbacks in available capacity.

Respondents in Wolfe Research’s August “State of the Freight” report showed a material decreasing bias toward perceptions of “overcapacity” in the TL market during the second quarter. After almost two years of overcapacity, the TL market has reached a state of equilibrium, as indicated by shippers during the second quarter, with 38% of shippers describing an environment of overcapacity, 35% describing an environment of tight capacity, and 27% indicating a sense of balanced capacity. The 38% of shippers who believe there was TL overcapacity during the second quarter compared to 80% in second-quarter 2007and 75% in first-quarter 2008. The seasonally strong second quarter certainly saw capacity shift back toward equilibrium after about two years of a TL market awash with trucks.

A large majority of the shipper respondents now expect TL capacity to tighten over the next 12 months, with 73% anticipating tighter TL capacity year over year versus just 12% who expect TL capacity to increase in the next 12 months. This represents a material shift in expectations of capacity growth from second-quarter 2007. The forecasted bankruptcy rate is expected to decline during the balance of this year.

Some truckload carriers are gaining business by shifting from marginally profitable longhaul lanes to regional trucking. In fact larger truckload carriers (with annual revenues of over $30 million) hauled 4% more loads in the first half of 2008 compared to 2007. Smaller carriers experienced a sales dip of 6%, according to the American Trucking Associations’ Trucking Activity report. The gap appears to be widening.

“Major truckload based carriers have determined that the conventional, longer-haul, irregular route business is not attractive,” stated John Larkin, an analyst for Stifel, Nicolaus & Co. The regional trucking business is producing a higher revenue per mile and greater yields since there are less out of route or empty miles, and it is more energy efficient than the more lengthy irregular route movements.

This is taking market share from the smaller fleets. To compensate, some of the smaller fleets are going after longer haul business. Their higher operating costs and unprofitable backhauls are driving the smaller and weaker carriers out of business more quickly as they struggle with the sluggish economy.

Another factor causing this change in focus is the impact of intermodal transportation on long haul freight shipping. Since intermodal transportation is more fuel efficient than truck, this is causing cost conscious shippers to make the switch according to Jason Seidl, an analyst with Dahlman Rose. This is another one of the trends highlighted in Wolfe Research’s August 2008 “State of the Freight” report. For some of the larger fleets, they are turning to their brokerage division and intermodal transportation to capture the longer haul freight.

In anticipation of a tightening of capacity, the survey suggested that shippers are expecting modest increases in truckload freight rates over the next six months. To achieve rate stability, increasing numbers of shippers are negotiating multi-year rate agreements to lock in rates over the life of the contract.

The outbreak of Listeriosis at the Maple Leaf Foods Inc. plant on Bartor Road in Toronto appears to have resulted from the formation of the listeria bacterium that proliferated in two meat slicing machines. Apparently these machines had been cleaned on a regular basis. Nevertheless, the cleaning and inspection of these machines was obviously not good enough. The resulting outbreak has killed 15 people to date across Canada. The numbers may well escalate in the coming weeks.

According to a recent report in “The Globe and Mail,” there are approximately 10 million cases of food poisoning in Canada each year, and at least 500 deaths, due in large part to poor food handling by consumers. While the report does not contain statistics on the annual number of food poisoning incidents directly related to improper food manufacturing and freight handling, there exists the potential risk of massive outbreaks of disease.

While much of the focus of the current crisis has been on the one Toronto based food plant, the fact is that all food (and pharmaceutical) shipments arrive by truck or rail at a processing location and are then shipped by truck, rail or air to distributors, retailers and consumers. Many of these shipments move on temperature controlled vehicles, either at a specific temperature (or temperature range) or in a frozen state. An improperly maintained refrigerated vehicle can result in not only mold on eggs, stale cupcakes or wilted lettuce; they can also result in the formation of bacteria that can lead to illness and death. Of course they can also have severe consequences for those transportation companies that provide refrigerated service.

The recent downturn in the economies of the United States and Canada and the weakness in certain industry sectors such as automobiles and pulp and paper, has encouraged some carriers to enter the refrigerated transportation industry or to expand their business in this market segment. While people may cut back on purchases of cars and clothing during tough times, we all have to eat and we all (or many of us) have to take our medications on a daily basis. The attraction of moving food or drugs is that there is greater consistency to the freight flows. Of course, this is not entirely true. In fact, for those carriers handling fresh produce (e.g. watermelons or tomatoes), there can be significant seasonality components.

Moving produce, pharmaceuticals or frozen food is very different from moving a load of newsprint. In the latter case, you need a truck that can handle the weight and is free from leaks and jagged edges. The worst thing you can do with a load of newsprint is get some of the rolls wet or tear some of the sheets. In the case of a refrigerated unit that breaks down, the potential consequences can be life threatening.

When you enter the refrigerated transportation industry, the bar is raised. In addition to the standard operating procedures associated with managing a “dry” fleet, you need to add a whole new set of variables. Not all reefer carriers are created equal. Here are some thoughts that carriers and shippers and carriers should consider.

As a carrier, you need to be very focused on the following items:

• Service life of the refrigeration unit
• Maintenance procedures and schedule
• Driver training in the operation of refrigeration units
• Driver procedures for monitoring the refrigeration unit while the vehicle is en route
• Refrigeration unit pre-trip checklist
• Use of satellite tracking to monitor the temperature and performance of the unit remotely
• Locations for refrigeration unit repair en route in the event of a failure
• Establishing and maintaining written procedures that are followed meticulously by employees throughout the company

As a shipper, you need to be very focused on the following items:

• Creating a comprehensive carrier evaluation checklist that looks at a broad range of variables (e.g. size and age of fleet, driver training, equipment maintenance schedule etc.)
• Visual inspections and documentation of all vehicles that arrive at your dock whether for inbound or outbound freight to check for door seals, hinges, latches and vent doors that are not properly aligned and for correct temperature settings for the refrigeration unit
• Obtaining a set of written procedures from your carriers on how they handle temperature controlled freight (A HACCP certificate is ideal but well documented procedures with checks and balances are satisfactory.)
• Utilization of “hobos” or other recording devices to ensure a consistent temperature is maintained throughout the trip
• Carrier scorecards that measure some of the variables that are specific to reefer freight

There are many fine companies in this industry that have implemented and maintained good operating procedures for years. However, with the current economic downturn, some companies may try to extend the life a reefer unto beyond its limits. New entrants to the market may not be as well versed on reefer fleet maintenance procedures as others. Buyers beware.

Clearly there is much that carriers and shippers can do to run a well maintained reefer fleet and to manage a safe and secure cold supply chain. If you would like to discuss your fleet operation or cold supply chain with me or one of my associates, please feel free to contact me at dan@dantranscon.com.

The leading freight transportation publications continue to report on the record levels of bankruptcies in our industry. It has been a very difficult year. As you read the reports on the demise of these companies, you wonder if some of them could have changed their operating paradigms or if they had been more innovative in their thinking, whether they would be still with us today.

What can companies in the freight transportation industry do to become more innovative, to better meet the needs of existing clients and new prospects, to increase their opportunities for survival and prosperity? As I thought about this issue over the summer, some publications crossed my desk that contain some interesting thoughts on this important question. One book that I read while on vacation was “The Future of Management” by Gary Hamel and Bill Breen. In their book, Messrs. Hamel and Breen make the following argument.

“Innovation comes in many flavours: operational innovation, product innovation, strategy innovation and ... management innovation. Each genre makes its own contribution to success but if we were to array these various forms of innovation in a hierarchy, management innovation would come out on top...

At the base of the pyramid is operational innovation. In a world of hypercompetition, operational excellence is essential ... but seldom delivers a decisive long-term advantage.” The authors argue that the short-term advantage from operational innovation (e.g. ‘Velocity Network’) can be quickly replicated other companies in the industry.

“Next up the food chain is product innovation. There’s no doubt that an iconic product (or service) can lift a company from obscurity to cult status in short order... Yet in the absence of enforceable patent protection, most products are quickly knocked off...

Further up the stack is strategy innovation - - - bold new business models that put incumbents on the defensive... A killer business model can generate billions of dollars in market value for the innovator (think iPod / iTunes) - - - but on average, a distinctive business model is more easily decoded and counteracted than a heretical management system...” The authors argue that “only management innovation possesses a unique ability to create difficult-to-duplicate advantages.”

To instil a management innovation model in their companies, the authors argue that the following items need to rise to the top of management’s agenda.

1. Dramatically increasing the pace of strategic renewal in organizations large and small
2. Making innovation everyone’s job, every day
3. Creating a highly engaging work environment that inspires employees to give the very best of themselves

Messrs. Hamel and Breen point to companies that been successful innovators on a one time basis or in spurts (e.g. Kodak, Sony, Sears, G.M.). However, these companies have failed to reinvent themselves. This appears to be the case for some companies in our industry (e.g. Jevic) that have not been able to sustain the success of their original business model (e.g. irregular route large LTL shipment company) during changing times (e.g. high gas prices). They argue that “what distinguishes our age from every other is not the world flattening power of communications, not the economic ascendance of China and India, not the degradation of our climate... Rather it is a frantically accelerating pace of change... The goal then is to build organizations that are capable of continual, trauma-free renewal... And therein lies the challenge: to make deep change more of an autonomic process - - - to build organizations that are capable of continuous self-renewal in the absence of a crisis.”

The book then highlights three companies, Google, Whole Foods Market and W.L. Gore that have embraced this model of continuous self-renewal and innovation. The authors conclude their book with some suggestions on how to become a “Management Innovator.” This is a good read with some interesting and important ideas.

What impact does being innovative have on a company's financial results? The BusinessWeek Innovation Index (businessweek.com/innovate/global_index/) tracks 25 corporations known for their forward-thinking products, processes, consumer experience, or business models. The companies with innovative business models tend to have the highest stock returns and highest average revenue growth of all of the companies in the index. In the next blog I will look at some other avenues that companies are pursuing to become more innovative and successful.

The past couple of years have been particularly challenging for many companies in the transportation industry. The record numbers of bankruptcies suggest that many transport companies have had difficulty reinventing themselves.

With economic storm clouds hovering all around us as a result of the current financial crisis in the United States, this increases the requirement for companies in all industries to become more innovative. As demand contracts and current markets become more competitive, this places increasing pressure on companies to seek out new sources of revenue and profit.

As pointed out in previous blog, the Business Week Innovation Index highlights that innovative companies tend to have the highest stock returns and highest revenue growth. Those companies that are able to create a culture of innovation, that are able to energize their employees to seek out better and more innovative ways of running their businesses are likely to stay ahead of the pack. Citing Whole Foods Market, Google and W. L. Gore as examples, Messrs. Hamel and Breen in their book, The Future of Management, make the case that these companies continue to outperform the competition in their respective industries. In all three cases the companies’ employees are leading the innovation charge.

What else can companies do in the freight transportation industry do to become more innovative and profitably grow their businesses? In this blog I would like to look at another source of innovation, customers. Again, it is instructive to look at other industries.

A few years ago, Dell Computer was the undisputed leader in the personal computer market. Their innovative web based distribution model and low cost manufacturing processes allowed them to become the preeminent supplier of personal computers. Then something happened. As a result of poor customer service, combined with a certain arrogance and rigidity, the company lost its way. Customers began migrating to HP and other brands. Dell’s CEO was removed and Michael Dell took back the reins of his company. What has Dell done to reverse direction?

Dell made an investment in self-awareness. Using Web 2.0 tools, it began reaching out to customers. Through social media, it added blogs and message boards in the hope that irate customers would contact Dell rather than other public forums. It created a squad of 42 employees who spend their workdays interacting with the communities of Facebook, Twitter and other social media.

It then went beyond damage control and started building better products. The inspiration for better products came directly from customers. Dell used IdeaStorm early in the development phase to tap into customers’ suggestions. Dell engineers acted on the stated desires of customers by adding keyboards that light up in the dark, a fast connection technology called eSATA, longer battery life and a rainbow of colour choices. The good news is that consumers are noticing the change. The latest quarterly figures from the University of Michigan’s customer satisfaction Index show that Dell is back at the top of the ratings for Windows PC makers, as rivals HP and Gateway sink.

Some companies are tapping into other tools to find out what is going on inside customers’ minds. Like Dell and many transport companies, retailers are also battling the recessionary forces in the market. One such company is Macy’s which is embarking on a store-by-store strategy to cater to customers’ local tastes. To do so, Macy’s became the latest sales-challenged U.S. retailer to hire a British research shop called dunnhumby. Edwina Dunn and Clive Humby don’t help retailers find new shoppers. Rather, by crunching data from credit card transactions and customer loyalty programs, they reveal hidden and lucrative facts about their clients’ current customers. It can identify who might jump at a particular sale or who will no longer visit the store if a certain product is no longer available. Home Depot and Kroger are two other major retailers that have been benefitting from Dunnhumby’s data analysis expertise. Since employing Dunnhumby, Kroger’s same store sales have increased on average 5% for the past 12 quarters versus the industry average of 2.7%.

What are the lessons for the trucking industry? You have to stay close to your customers and find a way to get into their heads. Whether it is town hall meetings, focus groups, better analysis of CRM data or more modern web based tools such as blogs, message boards and social media, it is critical to continuously monitor customer feedback on service, rates and business practices. Good qualitative and quantitative data can reveal opportunities to add value and help shippers operate more effectively. It is no wonder that one of the growth segments of the logistics industry has been third party logistics companies. These companies are often able to “mix and match” services, to be more creative and to offer a comprehensive portfolio of logistics solutions rather than a limited set of transportation services. By creating close bonds with customers, by identifying “pain points,” by acting on this feedback to create new and better services, this should allow more innovative transport companies to pull through the current economic downturn and emerge financially stronger and more customer centric than ever before.