In the previous blog, I suggested that shippers should conduct an audit of their freight operations in order to craft a strategy to guide the carrier selection process. A set of questions were posed to help you develop your strategy and clarify the objectives of your freight procurement exercise. The objectives should also be based on an analysis of your freight spend data and your freight rates. In the case of the latter, you should benchmark your rates as a starting point before going to market.

In order to execute the carrier procurement exercise, there are a number of critical steps that need to be followed. They include:

1. Capture a year’s worth of shipping data

Share this data with your current and prospective business partners so they have a good insight into the full scope of your shipping activities and the major lanes that you serve. This will allow them to prepare rate proposals that are focused specifically on your business.

2. Cast a wide net in seeking out prospective carriers

Even within a very specific geographic region, there are truckload carriers that provide very short haul service, others that need freight to and from specific states or provinces and others that are looking for longer haul traffic. Some carriers need head haul or back haul traffic on certain lanes while others do not. Make sure you include as wide a group of carriers as possible including some carriers with whom you have not done business in the past. This will make your procurement process is as competitive as possible and increase the opportunities for your company to save money. Of course, look for every opportunity to create round trips and continuous moves that will further reduce costs.

Don’t forget to include alternate modes, where practical. You may be surprised. Some of your lanes may be attractive to service providers in modes (e.g. intermodal) that you may have not used in the past or that you might not think can be rate competitive (e.g. shifting from rail to truck). In view of the current state of the freight market, these options may now be price and service competitive.

3. Negotiate over multiple rounds

There are some carriers that may not be familiar with where market rates are at on certain lanes. Meet with the short-listed carriers in person and conduct your procurement exercise over multiple rounds. This will ensure that all carriers know where they need to be to stay competitive. It allows you to direct the higher quality carriers to where they need to be in terms of price. This places you in a better situation to not only save money. It also allows you to upgrade the quality of your service providers.

4. Confirm Capacity and perform Due Diligence

With so much capacity leaving the market over the past year, it is important to ensure that the carriers you select can handle your business volumes and meet your service requirements. If you are unsure of certain companies, check their references and give them some trial shipments.

5. Give special consideration to your incumbents

In many markets across North America, there are carriers that are very dependent on the businesses in that local community. As long service providers, your incumbents should be given special consideration, if they have been doing a good job. This is where multiple rounds of negotiations are helpful. They allow you as a shipper to see what the market rates are on certain lanes. This then helps you to guide your incumbents if their pricing is not consistent with market rates.

6. Communicate your KPI’s

Let the carriers know the Key Performance Indicators (KPI’s) or SLA’s (Service Level Agreements) that are important to your company so they know in advance how their performance will be measured. In addition to the standard items such as on-time pickups, on time service, load refusals, billing accuracy and claims, include specific variables that are relevant to your specific business (e.g. unloading time at construction sites).

7. Sign multi-year agreements

The agreement should include all the standard terms and conditions, rates, the fuel surcharge formula, the KPI’s, the terms of the contract and the renewal process. As we come out of the current recession, there are a number of carriers exiting the market and others that have cut back on capacity. As a result, you should be signing multi-year agreements with quality carriers at fair, but not necessarily the lowest rates. It is time to take a longer term horizon and protect your company from potential capacity shocks that may lie ahead.

8. Conduct implementation meetings

Conduct implementation meetings with senior operations personnel from your carriers to ensure all pick-up and delivery procedures are well communicated and understood. Phase out the non-performing carriers in a methodical way. Plan for success by making sure all of the affected people in your business and in the businesses of your customers and vendors are aware of the changes you are making. If necessary, arrange meetings with your customers and your carriers’ personnel to make sure their needs are met.

In the two previous blogs, the focus was on the creation of a freight transportation procurement strategy and a process to follow to successfully implement the strategy. This blog will provide an overview of the procedures that need to be put in place to ensure the savings achieved through the carrier selection process are realized.

One of the deliverables from a freight bid or carrier selection initiative is the creation of a routing guide or shipping guide. The guide identifies your primary and backup carriers on every lane. Some companies use paper route guides while others that have a transportation management software system may have an electronic version of the guide. Whether you operate in a manual or electronic mode, the value of the route guides is to ensure that carriers are selected on the basis of criteria that are of importance to your company. Typically they will be some combination of rates, mode, capacity, type of equipment, transit times and customer service.

As you move into the implementation phase, you begin to encounter hurdles that may be caused either by your carriers or your own personnel. Some carriers may over commit during the procurement process and be unable to deliver. In other cases, a carrier may find more profitable freight and allocate more of their equipment to another customer. This can result in load refusals or service failures.

On the shipper side, the roadblocks are of a different nature. In a multi plant environment, the local dispatcher in a particular plant may have a personal relationship with the driver on that route. The previous incumbent’s sales personnel may have built a strong bond with the Traffic Manager. This may result in shipments or loads going to carriers that do not rank on the top of your route guides.

It is precisely for these reasons that compliance tracking is so important. The precious expense dollars saved during the selection process can evaporate if there is a lack of oversight and continuous monitoring. Monthly tracking reports will not be adequate. By the time you identify the problem, you will have incurred too much “maverick spend.” Daily or weekly tracking reports are more effective.

Of course, simply producing reports without follow up action will not do the job. Someone must have the responsibility to challenge the use of carriers that do not rank near the top of the route guides.

In parallel with these activities, there is a need to monitor financial data, in particular freight cost expenses. Specifically, there is a need to verify (audit) that your carriers are charging the approved rates and surcharges. There is also a requirement to check to see if any additional (or accessorial) charges are being imposed. In many cases, these extra charges are a result of poor shipping or receiving practices (e.g. lack of scheduled carrier appointment times, excess waiting time etc.). In the case of small parcel shipments, accessorial charges can equal fifty percent of the freight costs.

The key is to track year/year variances in freight costs, accessorial costs and fuel surcharges on a lane by lane and carrier by carrier basis. These types of analyses, coupled with an ongoing route guide compliance process, will provide you with the tools to ensure your company derives the maximum benefits from its carrier selection and procurement exercise.

Clearly we are moving into a difficult economic environment for the balance of 2008 and into 2009. Job losses are escalating. Cost reduction is a strategy that is being implemented across North America and around the world. With freight costs being such a large percentage of revenues in many companies, a well planned freight cost procurement strategy, an effective implementation process and a strong compliance program can go a long way towards helping your company achieve maximum value for its freight transportation dollars.

Over the past couple of weeks, two stories have dominated the headlines in the North American transportation market. The decision to terminate DHL’s domestic transportation business and lay off 9500 workers signals a major contraction in the small parcel market. The other major announcement was YRC’s decision to integrate Roadway and Yellow, two of North America’s largest LTL carriers, closing 200 of 650 terminals and laying off thousands more workers.

Back in 2003 there were the big three LTL carriers, Roadway, Yellow and Consolidated Freightways. Then Yellow bought Roadway and ran the two businesses initially as independent entities. And now there will be one.

This blog will focus on the consolidation that has taken place and is taking place in the LTL market. In the next blog we will look at some of the lessons to be learned from the merger activities in this market.

Most people who follow the industry know that capacity is leaving the LTL market on a daily basis. As part of the 2500 U.S. based trucking companies that have closed their doors this year, this has included LTL carriers such as Jevic Transportation and Alvan Motor Freight. In Canada, Al’s Cartage has been one of the casualties. A number of companies have announced terminal closures and layoffs. Vitran indicated that it would close more than a dozen terminals in the upper Midwest. More recently Con-Way announced that it would close 40 terminals. Capacity is also coming out of the market as companies park trucks and ship used equipment to Russia and other overseas markets.

As you look at the various mergers and LTL carrier integration activities that have taken place or are taking place, they essentially follow one of three models.

1. The Rebranding/Back Office Consolidation Model
2. The End to End Carrier Integration Model
3. The Side by Side Carrier Integration Model

Each of these models is explained below.

1. The Rebranding/Back Office Integration Model

This is a model that has been followed by FedEx, UPS, TransForce, and others. In essence, the companies that are acquired (e.g. American Freightways, Overnight) are then rebranded (e.g. FedEx Freight, UPS Freight). As part of the rebranding exercise, the company graphics are changed to correspond with the parent company graphics and the fleet graphics for all of the divisions are standardized to provide the companies with a common look.

In some cases, core back office functions (e.g. IT, Accounting, Human Resources) are centralized and the divisions are all required to report and manage their financials according to the parent company’s standard procedures. The individual companies still operate as independent entities within the new corporate structure with their management structure largely intact. They are not merged with other transportation companies unless they do not perform at an acceptable level. In some cases, terminals may be shared by more than one division.

The objectives of this approach are to improve operating efficiencies and shrink the pool of competitors in a market in order to increase margins. On the surface, this would appear to be a low risk approach to consolidation since the companies continue to operate in the same geographic areas with the same operations and sales personnel as before they were acquired. In some cases, multiple divisions may offer essentially the same service in the same markets (e.g. Yellow and Roadway, TST Overland, Canadian Freightways, Daily Transport and Kingsway Transport). The keys to success are driving out redundant costs while retaining key employees and the customer base. The decision to integrate Yellow and Roadway is not what was envisioned back in 2003 when Roadway was acquired. This highlights the challenges that exist in trying to maintain the financial benefits of the back office integration model over time.

2. The End to End Carrier Integration Model

In the end to end model, two trucking companies with complementary geographic coverage (e.g. southwest USA and Midwest USA) are linked together (e.g. American Freightways and Viking Freight). The benefits of this model are that both sets of customers now have access to a larger market area. This can provide the combined company with more revenue potential than the sum of the parts. Cost reductions come from being able to pick up and deliver more LTL freight to and from current and new customers. Other benefits include increased shipment density, particularly in small markets.

3. The Side by Side Carrier Integration Model

These types of mergers have occurred countless times. I have personally been involved with this type of merger on both the buying and selling side. This is in essence what Roadway and Yellow are about to undertake. By combining two companies with overlapping service areas, they plan to reduce their number of terminals by 200 and terminate redundant people and schedules. Excess equipment can be sold off. Cost savings will come from increased terminal and line haul efficiencies and better equipment utilization. Yields can be improved by retaining the highest quality freight and purging money losing accounts. This is a complex undertaking with significant risks.

The Results of Previous Consolidation Activities in the LTL Freight Industry

The track record of mergers and acquisitions in the LTL freight industry is not encouraging. The rebranding/back office integration model is the lowest risk of the three models and there have been some successes, notably FedEx Freight and UPS Freight. However, there have been plenty of failures. The closure of TNT Pilot and TNT Red Star come mind. Looking at the other models, there have been some large and notable failures such as Gateway-Maislin (end to end), Ryder/Pacific Intermountain Express (end to end) and Helms/Burns (side by side model). A look back at the top 50 carriers of twenty-five years ago, in both Canada and the United States, reveals how few mergers and acquisitions have been successful. Published studies indicate that over sixty percent of consolidation activities fail. In the next blog we will look at what are some of the keys to success and failure.

This week I had the pleasure of participating in a shipper – carrier roundtable sponsored by Canadian Transportation & Logistics magazine and Shaw Tracking. Lou Smyrlis, the moderator, raised the subject of industry consolidation with the group that was assembled. The consensus seemed to be that industry consolidation will continue in 2009 as it has in 2008, albeit under a new set of constraints imposed by the current economic downturn.

Bob Costello, Chief Economist of the American Trucking Associations, mentioned in a speech this week at the Canadian Institute Trade and Transport Conference that October freight volumes were unusually weak and reflect the downturn in the North America economy. This is worrisome since October is usually the best month of the year for freight activity. This does not auger well for those transport companies that have been in a survival mode during the “freight recession” of the past couple of years.

Is this the time to buy or sell a freight transportation company? There are several events that are having a direct bearing on the industry at this time. These include the credit crisis that has adversely affected the purchasing of houses and automobiles. Weakening economic fundamentals are causing unemployment levels to rise. In addition, the downturn in the value of housing and the stock markets are causing many middle class folks to feel insecure and fearful and less willing to spend money. The combination of all of these forces is driving down the demand for manufactured goods and retail volumes, the lifelines of freight transportation.

While these forces are at play, shippers are extending payment terms and carriers are facing tougher times borrowing money. Small trucking companies with a limited supply of customers and limited sales resources are particularly vulnerable. The end result is that this is an extraordinarily difficult time to run a transportation company.

We have more struggling transportation companies than ever before and they are cheaper to buy than they have been in many years. Mergers and acquisitions will continue, particularly for those companies with lots of cash on their balance sheets. However, buyers will be more deliberate in their approach. As we are seeing in the stock market, some sellers are simply capitulating and saying that this is the time to get out.

It should be pointed out that a number of studies have shown that over sixty percent of mergers and acquisitions fail. Despite the best of intentions, failure can be a result of several factors. In some cases, inadequate due diligence is done. Some of the assumptions made leading up to the purchase are incorrect. In other cases, no non-compete is signed with the owners. They may leave and form a new entity that competes “head on” with the acquired company. In addition to the owners, some other key people may leave and take some of the business with them.

For a number of mergers, the expected synergies and cost savings don’t materialize and/or the revenue stream does not meet expectations. In certain situations, the merger comes unglued due to poorly planned integration efforts, in sales and/or operations, or due to a culture clash between the employees of the two businesses. Customer affecting service changes, the departure of trusted customer service, dispatch or sales personnel (to a competitor) may drive customers to another transportation company. Many times the old owners find it difficult to function within the new owner’s environment or lose motivation due to the big payday they received.

What can you do to increase the odds of success?

The shipper- carrier roundtable participants suggested that the high failure rate will not stop the freight carrier consolidation movement. The current economic difficulties will likely spur an increase in desperate sellers and interested buyers. Critical success factors include:

• An assessment of the growth that can be achieved organically versus through acquisition, within a prescribed period
• A careful assessment of the synergies that are at play and the integration hurdles that may be faced
• Having a clear focus on whether the proposed acquisition is the right strategic fit
• Performing a thorough due diligence that looks at revenue growth, cost reductions, cultural fit, ROI, risk factors, retention of key employees
• An understanding of the expected competitor behaviour
• Effective management of human resources and customers
• Excellent post implementation follow up
• A thorough assessment of the financial risks and rewards

As has been proven time and time again, even the best due diligence cannot anticipate all of the challenges that lie ahead. Often the post acquisition reality is very different from the picture painted during the period leading up to the purchase. On the other hand, a successful acquisition can fill a void in a company’s service and/or geographic coverage and boost financial results. Therefore the best advice is buyer beware!

It is hard to believe that back in January of 2004, crude oil cost $US 25 a barrel. Over the next four and a half years, it escalated to a high of $US 147 a barrel (in July of 2008) before dropping back to less than $US 50 a barrel in late November of 2008. It took 4.5 years for the price to increase by $125 a barrel and then in the space of a few months, it dropped by $100 a barrel. Welcome to the wacky world of crude oil pricing.

There is no doubt that there has been a major economic contraction over the last year. This would certainly explain part of the price erosion. However, to the best of my knowledge, there have been no significant discoveries or huge supplies of crude oil that have been brought to market during this time period nor has there been a drop in demand that directly correlates with the price decline.

So how do you account for this wild ride? Why are oil prices showing such volatility and where are we likely to go from here? Last week I had the pleasure of attending a presentation given by Bob Costello, the Chief Economist for the American Trucking Associations. Mr. Costello made as good a case as anyone I have heard in explaining what has been going on and where we are headed. This is what I gleaned from his very informative presentation.

Why did crude oil costs increase to $US 147 a barrel?

There are a number of reasons why crude oil has escalated over the past five years. First while demand for crude oil has increased by approximately 20% per annum in the U.S. and Canada between 1980 and 2007, the increase in demand in China during the same period has been 364% and in India 327%. Second, during this period, demand growth has been reducing spare capacity. Third, as the years go by, the percentage of the world’s oil resources is increasingly coming from what are perceived to be nations with a higher “risk premium” such as Saudi Arabia, Russia and Venezuela. While all of this has been taking place, a fourth variable is the value of the U.S. currency that has declined significantly against other key currencies, (e.g. the euro) further driving up the cost of crude oil.

He then went on to explain how rapidly speculation, variable 5, has pushed up the cost of oil. In one of his most interesting slides, he showed how much various commodities have increased or decreased in price over the period January 2008 to July 2008. While some commodities (e.g. gold, lumber, wheat) have gone one up by 12 percent or less or declined in value (e.g. lead, nickel, zinc), crude oil has increased in value by over 50%. Mr. Costello highlighted an article in the Wall Street Journal in June 2008 that showed how the percentage of crude oil holdings has shifted from 37% speculators/63% hedgers in 2000 to 71% speculators/29% hedgers in 2008.

Fear and Greed

Steve Maich, commenting in the Dec. 8 issue of MacLean’s magazine, made the following observations. “There is a fundamental misunderstanding about energy prices, which is exacerbated by analysts and executives who continually insist that prices are driven by supply and demand . . . These days, the price of oil is driven primarily by expectations of future supply and demand months and even years down the line. . . But trying to estimate the future is little more than educated guesswork, subject to the naturally distorting effects of human emotion. That guesswork is further complicated by the fact that global oil supply is routinely manipulated. . . OPEC . . . open and close the spigot arbitrarily, to maximize their own profit, often at the expense of market stability. . . It may be technically true that supply and demand drive the price - - except that demand is estimated, and supply is manipulated.”

Mr. Maich then went on to try to make some sense of the wide fluctuation in price over the past few months. “It’s often said that all markets are driven by the constant war between fear and greed, but the oil market is an exception. It is only driven by fear. Last summer, when oil hit US $150, the fear was of global shortages. . . Now, with oil at US $50, the overriding fear is of a sudden collapse in global trade. The question is no longer whether the world economy is growing too fast, but whether it will grow at all over the next couple of years. Pick your poison: the bulls are all about unstable supply; the bears are obsessed with anemic demand. Right now, the bears are on top, but that’ll change. It always does.”

Alternative Energy Sources and Conservation

This begs the question as to whether alternate fuels could help ease the demand for crude oil. Mr. Costello make the point that all of the vegetable oil in the United States would only satisfy 7% of the country’s trucking industry energy requirements. There is no alternative source of fuel waiting “in the wings” to meet the needs of the North American trucking industry. Hybrid vehicles are only of value in local city P & D operations but are of no use for long haul trucking. The multitude of energy conservation measures (e.g. speed governors, reduced idling time etc.) are all helpful but there is no substitute for diesel fuelled trucks.

Where do we go from here?

As the economy recovers from the current downturn, where are diesel fuel prices likely to go? Perhaps history can teach us a few lessons. Only five years ago, crude oil was $25 a barrel. The laws of (increasing) demand and (decreasing) supplies would suggest that crude oil prices should begin to move upwards in the months ahead. Mr. Costello expressed the view that we can expect to see diesel fuel prices return to $75 to $100 a barrel. Commenting in the November 24 issue of Business Week, Dave O’Reilly, the chairman and CEO of Chevron expressed the view that it was only in 2007 that crude oil exceeded $70 a barrel. In his view, current oil prices are surprisingly healthy.

Another variable is whether President Elect Obama will follow through on his commitment to find alternate sources of energy so as to reduce America’s dependence on foreign oil. It is unlikely that an alternative to diesel fuel will be found for the trucking, rail, marine and airline industries in the next 5 to 10 years. However, over time, there exists the possibility that alternative fuel sources - - solar, nuclear, wind, clean coal, bio fuels etc. - - may be used to power our homes and factories. This could offset the increasing use of diesel fuel in the transportation industry.

However, the world’s economies will be increasing their demands for crude oil. Emerging economies will also serve to increase demand. This would seem to suggest that finding alternate sources of energy may moderate the demand for crude oil but not offset it, certainly not in the short and medium term.

Then there is the issue of fear and speculation. The “wild card” now is how quickly the world economies will take to return to July 2008 levels. As demand begins to increase, will the speculators drive the price to $125 or $150 a barrel or beyond? The current housing crisis/credit crunch can be viewed as an anomaly. But a look back at history would suggest that “irrational exuberance” rears its ugly head every few years. It wasn’t that long ago when thousands of individuals were pouring money into technology stocks with no revenues and no profits. Will the next “gold rush” be the “energy rush” or “energy crusade?’ Will the desire to find alternate sources of energy lead us into a new world of speculation and “irrational exuberance?” Can we search for new energy sources in a pragmatic, rational, methodical way? What if Middle East becomes embroiled in a war and supplies are disrupted?

Nobody could have predicted the “roller coaster ride” that crude oil prices have taken over the past five years. It is impossible to forecast where they go from here and how far and fast they will move. Nevertheless, past history tells us that with supply decreasing and demand increasing, at some point over the next few months or years, crude oil prices are likely to begin their upward ascent again. “Irrational exuberance” about the future coupled with fear of adequate supplies of oil could return at any time, pushing prices back up to mid 2008 levels or beyond.