Throughout North America, the recession is causing many shippers and carriers to reduce costs to bring expenses in line with declining revenues. Job losses in Canada and the United States are averaging over 700,000 per month for the past several months. About 50,000 of those jobs are in the transportation and warehousing sectors.

In previous economic downturns, many firms cut to the bone and when business picked up, they scrambled to rehire the very people that they had de-hired. According to Douglas Reid, professor of business strategy at Queen’s University in Kingston, Ontario, when headcount is slashed, employers also lose “important knowledge about processes, customers and corporate culture that companies have a tough time replacing. So they often end up hiring those people back as consultants – which is insane and costs them more money.”

The challenge for many shippers and carriers is to find cost reductions without cutting valued staff members who have worked for the organization for years. The fact is that many of these experienced employees will be critical to the future success of the company, as the recession comes to an end and business volumes increase. According to recent survey by the Society for Human Resource Management, 37% of human resources managers say they are spending more time devising alternatives to layoffs versus six months ago. Peter Cappelli, director of the Center for Human Resources at the Wharton School of Business, notes that a 5% salary cut costs less than a 5% layoff since there are no severance payments with the former.

In addition to layoffs, there is a range of cost cutting measures that are being utilized. The first group of cost saving opportunities come from reducing non-staff related costs and fixing inefficient processes.

Reduce Discretionary Expenditures

In addition to making staff cuts, many companies are looking at all of their discretionary expenses such as printing and stationary costs, travel, advertising and customer entertainment. They are polling their employees for cost cutting suggestions. They are going through every line in their expense reports, isolating non-critical expenses and putting in place measures to control spending.

Fix Broken Processes

This is an area that deserves more attention than it receives today. Many companies use longstanding processes that include inefficiencies, redundancies and inadequate functionality. Some processes may involve manual labour (e.g. creating Excel reports from company statistics), multiple employees within a company entering and re-entering the same data, or antiquated analytical tools. In certain situations, there is a requirement to spend money to save a much larger sum of money. Savings can come from increased throughput and from being able to do more work with fewer people.

Reduce Office Expenses

There are a number of job functions that can be performed from home or a mobile office. Many types of sales people spend much of their time on the road. This affords companies the opportunity to eliminate office expense or sublease space to another company. With the advent of telecommuting, the internet, smart phones and PDA’s, laptop computers, webinars and Skype, there is much that can be done to reduce real estate, travel, telecommunications and overhead expenses.

Reduce Real Estate Costs

Many LTL carriers have shuttered terminals or combined the operations of various terminals into a particular building. This is resulting in reduced real estate and terminal related expenses.

The second group consists of selectively outsourcing certain functions that are best performed by a third party or amalgamating operations. These include.

Outsource Non-core Functions to Specialists

In cases where a firm is employing a bookkeeper, a human resource clerk or payroll clerk, it may make sense to outsource these activities to firms that specialize in these areas. These can include activities such as factoring receivables where this may serve to improve cash flow and reduce the number of full time employees. In some cases, it may be possible to transfer the employees affected to the third party selected.

The third group deals with reducing compensation or obtaining more output from employees rather than reducing staff.

Reduce Work Hours

These types of reductions are taking a number of forms. These include three or four day workweeks at the same or reduced pay or job sharing.

Train Employees to Perform Additional Functions

Employees in certain functions experience off peak times or down time. They can be taught to perform other functions. For example, customer service personnel can be taught to perform telemarketing when there are declines in inbound calls from customers.

Make your Employees Available to other Firms, for a Fee, to Perform Specific Tasks

As an example, Ben & Jerry’s ice cream sent 15 factory workers to a lip balm manufacturer for a designated period of time to help them handle a holiday rush. The specialized skills of certain resources (e.g. programming, collections) can be made available to other firms (that are not competitors), thereby helping to subsidize their salaries.

Introduce Furloughs, Unpaid Vacations and Unpaid Sabbaticals

In this case, employees are offered unpaid leave. While employees may not wish to take time off, particularly without pay, this beats the option of being laid off.

Reduce Compensation

This can include reductions in salary and/or benefits, freezes in salary increases, reductions in bonuses and/or other perks (e.g. memberships in fitness clubs and golf clubs). The most common approach is to make across the board salary reductions since they affect all levels of staff equally and are easier to justify to employees. The problem with this approach is that a 10% reduction to a $300,000 employee, while bigger in dollars, may have less impact than the same reduction to a $40,000 a year employee. In the case of the latter, if the employee is part of a two income household and one person loses his or her job and the other suffers a 10% pay cut, the results can be devastating. The other problem with this approach is that there is no differentiation between good and bad performers.

Another option is to take a more surgical approach and cut salaries of specific individuals. This allows a company to protect the salaries of its best employees and shelter them from competitive attack. The downside with this approach is that it forces a company to “cherry pick” which employee salaries go “under the knife” and which ones do not. Since employees talk to one another about compensation issues, this “beauty contest” approach can result in a set of morale issues.

There is no doubt that there will continue to be large job losses in the coming months as companies throughout North America seek to reduce expenses. The fact is that mass layoffs can produce declines in morale and productivity. Sudden and repeated downsizing can result in attrition as the retained employees seek more stable work environments. During this year of recession, many companies are also seeking more creative means of retaining good employees. These include the reduction of discretionary expenses, fixing non-productive processes, outsourcing certain functions to specialists while performing other tasks for other firms to defray employee costs. Another approach to maintaining the integrity and core competencies of a company is to seek out ways of cutting salary expenses without cutting staff.

During these difficult times, smart shippers are looking for ways to reduce costs and improve efficiencies. While freight rates continue to fall, there are limits to how much savings a shipper can achieve by continuing to “beat up” on their carrier base. Many are turning to third party logistics companies for the solution. As I speak with my colleagues in the 3PL industry, they are being bombarded with new business opportunities (while many trucking companies are experiencing a sharp pull back in demand). There are a number of reasons why this is happening.

Cost Reduction

Certainly one of the driving forces is cost reduction. Third party logistics companies (as compared to pure freight brokers) develop customized solutions for their clients. Rather than just focusing on freight rates and service, they take a more holistic approach by seeking to improve the efficiency of a company’s supply chain. They look for smarter ways of moving a company’s goods to market by challenging their customers’ supply chain paradigms. A good 3PL will look for opportunities to consolidate shipments, to switch modes (e.g. LTL to truckload, over the road truckload to intermodal), to rationalize and consolidate carriers, to improve loading efficiencies, to optimize warehouse operations and streamline information processing. They bring an expertise and insight to projects that are missing from some more one dimensional asset based transportation providers. This enables them to more easily identify creative cost savings solutions.

Risk Reduction

The value proposition of 3PL’s goes well beyond cost savings and supply chain efficiencies. Since many non-asset based 3PL’s and freight management companies are not tied to the assets of their parent company, they can mix and match an assortment of modes and carriers that best meet the needs of their clients. In other words, they offer a level of risk reduction. If one or more trucking companies withdraw from serving certain lanes, or worse, go out of business, the 3PL can replace them with another carrier or carriers, without “missing a beat.” They can offer the shipper an availability of capacity that doesn’t exist from many of their trucking company providers.

Supply Chain Visibility

Since many 3PL’s have invested in transportation management (TMS) and warehouse management (WMS) software systems, they can also supply a level of information management and supply chain visibility that is not always available to the shipper internally or from their carriers. Quality 3PL’s can create customized dashboards and information alerts that provide significant value to their clients.

Truckers Depend on Business from 3PL's

The growth of the 3PL movement is also being fuelled by the trucking industry. Throughout North America, small and mid size trucking companies, with limited sales horsepower, rely on the sales efforts of the large 3PL’s for business. This has created a level of mutual dependence that is critical to the success of both parties. In addition, larger trucking companies are creating their own in-house 3PL’s to retain market share that might be lost to their 3PL competitors.

Growth with Small and Medium-Sized Shippers

Another development that has helped build demand for 3PL services is the potential business that exists with small and medium sized shippers. For many years, the major 3PL’s were focused on large multinational shippers. The size and scope of their supply chains created more opportunities for cost savings. Now shippers with as little as $1 million in freight spend are finding value in employing a 3PL. Double digit savings are being achieved with small shippers, opening up a much bigger market.

With their technology and experience, 3PL’s are well equipped to create and implement cost saving solutions in a timely manner. In the dark economic sea of 2009, the 3PL value proposition is gaining traction with many shippers.

There has never been a more favourable time for shippers to procure freight services. Even as transportation companies desperately try to reduce capacity to bring it in line with demand, shippers will find carriers that have capacity and are ready and willing to negotiate freight rates. However, the good times will not last forever. They may not even last until the end of this year. When the economic dust settles and demand starts to increase, there will be a shortage of capacity and freight rates will increase.

While this is an opportune time to lock up your freight rates for the coming years, every shipper must proceed with caution. The “brave new world” of 2009 is quite different from what we have seen before. The severe downturn is causing almost every company to reassess its’ business strategies.

1. Engage your Key Stakeholders Early in the Process

Before launching any freight procurement initiative, it is essential to look at the big picture. Basing any procurement exercise on last year’s strategies and volumes could be fatal. To avoid a faulty procurement initiative, engage your key stakeholders (e.g. executive management, customers and vendors) early and gain an understanding of their priorities, cost cutting plans and the key markets and customers that they intend to serve. Your supply chain strategy and freight procurement program should be directly in line with your company’s updated business strategies.

2. Update your Freight Procurement Process

Look back at the previous procurement exercise and think about what should be done differently. Since cost reduction is the mandate for everyone in 2009, this may be the time to combine and leverage your inbound and outbound volumes, to compare non-asset based 3PL solutions with those of asset based transportation providers, to look at opportunities to consolidate shipments on certain lanes to build truckloads on specific days, to ship these loads to certain destinations and then deliver in LTL quantities from these central points, to look at continuous moves or sharing space on a trailer with other divisions of your company.

3. Focus on Risk Mitigation

Risk management must be near the top of the list of variables to consider. Many carriers are trying to replace lost business, to rebalance certain lanes, or to move out of certain markets and into others. There are carriers leaving the market on an ongoing basis, others that are hanging on by their fingernails and still others that will merge. You owe it to your company to surround yourself with carriers that are going to make it through the storm. This means that you have to do more detailed due diligence on your carriers than you may have done in the past. This can include asking for their customer list and on-time service reports, performing reference checks, reviewing their asset list (to see the age of their fleet and what they are doing to maintain its’ viability), obtaining a “D & B” report and/or asking for a report on their current financial situation from their bank manager.

While some carriers may “push back” on these requests, they are necessary in 2009. Do you want your company’s future tied to a carrier than does 70 percent of its business with a major U.S. automaker? With some carriers “cheating” on service to reduce costs, do you want to risk losing a key customer due to late deliveries? In 2009, it is all about managing risks. You need market intelligence to mitigate these risks. You need to ask probing, and sometimes unpleasant questions, to obtain the information you need to protect your company.

4. Revise Historical Shipping Data to Reflect Current Realities

For many companies, there is a requirement to revamp volume projections by mode and by lane. Exchange rates and fuel costs are very different from where they were a few months ago. The U.S. economy and many other economies are so much weaker than before. Therefore, it is important to modify your shipping data to reflect the forecasted realities of this difficult year. It is also important to revisit near sourcing versus off shoring strategies to make a determination of which approach is currently more cost effective.

5. Disaggregate Freight Spend Data

If your truckload rates from last year include fuel surcharges, you cannot conduct an effective freight procurement exercise until you disaggregate your freight spend data. Each of your modes must be looked at individually with each component of your spend (e.g. line haul, fuel, accessorial charges) displayed separately and negotiated individually.

6. Negotiate Capacity, Service and Rates

A company’s freight rate negotiating strategy must be brought in line with current realities. As the year unfolds and the economy improves, some carriers will disappear while others will allocate their capacity to shippers with deep pockets and higher yields. To protect your company, it is important to add carrier bench strength. In other words, it is advisable to insert additional backup carriers in your routing guides and to provide these carriers with volume so they have a vested interest in your company. It is also important to create multi-year rate and capacity commitments. At some point there may not be enough capacity to go around. You don’t want to be the shipper in this position.

Also, remember that it is not all about price. While almost everyone in 2009 has a mandate to reduce costs, it is important to maintain a quality service. Your carrier selection process should strike the right balance between rates, capacity and service.

7. After the Procurement Exercise, Focus on Compliance

The effectiveness of your freight negotiation process will depend on what you do after you select your carriers. It is very helpful to put in place effective compliance tracking tools. With good tools and KPI’s, this will help you track service, load refusals, freight costs by mode and other metrics that are essential to the successful management of the business.

“He who hesitates is lost.” Now is the time for shippers to make their move and lock up freight capacity at attractive (but not necessarily the lowest) rates for the next few years. The good (freight rate negotiation) times will not last forever.

Declining shipment volumes and freight rates are placing increasing pressure on the “asset heavy” segment of the freight industry, LTL carriers. To provide next day and second day service in a broad geographic area, companies in this sector require an assortment of terminals and trucks. In view of the current state of the North American economy and the weak growth projections for 2010 and 2011, LTL carriers are taking a hard look at their real estate assets as a means of reducing costs. As reported in a recent issue of Traffic World, “saving money has moved beyond a means of competing to a key to surviving.” There are a number of trends that are emerging.

Terminal Closures

Two major LTL carriers left the market in 2008. Jevic transportation had 10 terminals in the Northeast, Midwest, Southeast and Los Angeles while Alvan Motor Freight had 15 terminals in the Midwest. Mid-States Express, a Midwest LTL carrier closed its doors this week. In addition to these LTL terminals becoming available, terminal network realignments and downsizing are affecting the real estate market more than bankruptcies. Not since Consolidated Freightways unloaded 280 terminals after its September 2, 2002 closure have as many quality LTL facilities come up for sale.

Con-Way Freight shuttered 40 terminals out of its 303 terminal network that is estimated to save them $30 million. The company plans to sublease 30 terminals it was leasing and sell 10 others. As part of the Yellow Transportation – Roadway Express merger (to become YRC), the combined companies are reducing their terminal network from 704 to 450. Roughly 150 properties are on the open market.

This past week, USF Holland, a regional LTL carrier that is part of the YRC network, indicated that they will be closing 11 terminals in the first quarter. This follows the closure of 21 terminals at USF Reddaway and six terminals at USF Holland that were announced in February. Other carriers have also reduced their terminal networks. With property values down by an estimated 20 percent, there are some good deals available.

Becoming “Asset Light” LTL Carriers

A number of carriers are creating an “asset light” LTL infrastructure. The essence of this model is for carriers to own their large sorting/distribution hubs while leasing terminals in smaller markets. This was the model that FedEx followed in creating FedEx Freight. David Congdon, President of Old Dominion Freight Lines explains it this way. When a terminal gets beyond 40 doors, “we tend to want to own rather than rent....When you go beyond 40 doors, it means you have a substantial amount of business in a particular area, and you don’t want to be at the whim of a landlord that can jack up rates beyond what’s economically feasible. Or if a landlord says, ‘I want to make a strip mall’ and pulls the rug out from under you, you’re left with customers to serve and nowhere to serve them from.”

Congdon also stated that “we’re looking to the future, so we want at least 40 or 50 doors. And if an 80-door facility comes on the market, while we might not necessarily need that much, it could be the only game in town.... We might consider buying with the expectation that we can grow into them.”

Steve O’Kane, President of A. Duie Pyle, echoed the same comments. “We want them big, we build them big, and we keep them big. We’ve always subscribed to that theory - - - we don’t have a small terminal for a small market like Altoona, Pa. Particularly with our focus on next-day delivery, it gives you that critical mass to load directly to all terminals. The whole world is transitioning to bigger rather than small.”

Carriers using Sale – Leaseback to Generate Cash / Expand Networks

In order to reduce costs, free up cash and move toward a more asset light model, some carriers are selling off some of their terminals and leasing them back. YRC agreed to sell terminals to Estes Express Lines and lease them back in a transaction with a purchase price of $122 million U.S. The February 20, 2009 announcement includes terminals in its Yellow Transportation national unit as well as LTL terminals in the USF Reddaway and USF Holland networks. This does not include the 32 facilities that it is selling to North American Terminal Networks under a separate leaseback arrangement.
Wall Street sees the YRC / Estes purchase/leaseback arrangement as a necessary one for YRC in view of its difficult financial situation and a smart one for Estes. Estes bought some valuable real estate at a discounted price. If YRC decides to downsize further, Estes is in a position to move their employees into the buildings and include them in their own terminal network.

Sharing Terminals to Reduce Costs

This approach is being used on both sides of the Canada / U.S. border. In Canada, the Transforce organization has doing this for years by placing its Overland Express, Kingsway and Select Daily operations under one roof in selected locations. There are companies such as Maritime-Ontario Freight Lines and H& R sharing space in a building in Canada. In the United States, Lakeville Motor Express and Averitt Express, two members of the Reliance Network are taking the partnership concept one step further. Averitt is providing local pickup and delivery service for Lakeville out of two Chicago facilities with each company maintaining separate line-haul, sales and customer service functions.

Using Agent Terminals and Marketing Alliances

In addition to the sale, sale/leaseback and other terminal sharing arrangements, one of the most longstanding methods of going “asset light” is to use somebody else’s terminal or terminal network. For many Canadian trucking companies in the 80’s, running line haul to and from a cartage agent or regional U.S. LTL carrier became common practice. This is still a model of choice for carriers in the twenty-first century. This model can be extended to cover a group of provinces or states. As an example, for many years the Armour Group has been a preferred LTL pickup and delivery agent in Atlantic Canada. With 18 LTL terminals scattered throughout the sparsely populated provinces of Prince Edward Island, Newfoundland, New Brunswick and Nova Scotia, Armour has long been a partner carrier for a number of Canadian and U.S. based companies. As reported above, the Reliant Network consists of four other carriers (e.g. Canadian Freightways, DATS, Land Air Express, Pitt-Ohio Express) in addition to Averitt and Lakeville. This allows each carrier to provide extensive coverage of the United States while using the real estate assets of its partner carriers.

Excess LTL Terminal Capacity Still a Problem

While many LTL carriers have parked trucks, cut staff and reduced employee hours, there has not been a significant decline in capacity that would allow for a healthier pricing environment. Nevertheless, some carriers see the current situation as an opportunity to position themselves for future growth. Their real estate moves are clearly a key component of their long term strategies. Through various asset leasing and sharing arrangements, there are opportunities for LTL carriers to add new revenue sources and build their businesses without having to make an investment in real estate.