Various market indicators appear to suggest that we may be at the bottom or approaching the bottom of the current recession. This was clearly the message communicated by Carlos Gomes, Senior Economist for Scotiabank at this week’s Shipper Workshop co-hosted by Dan Goodwill & Associates and Canadian Transportation & Logistics. As a result this is an opportune time for shippers to take a look at their carrier base. Here is why.

The economic downturn has created a situation where carriers have had a difficult time reducing capacity in line with the drop in freight volumes. This has produced a period of very active rate cutting by carriers. Many shippers have taken advantage of the situation by conducting a freight RFP exercise. Some shippers have replaced some of their core carriers to capitalize on the cost savings.

One of the paradoxes of the current recession is not how many carriers have gone out of business but how few, particularly how few medium and large size freight companies. While many freight companies have experienced volume reductions of anywhere from 10 to 30 percent, or more, most of these companies are still in business. Certainly many freight companies have made the necessary cost reductions, through a combination of staff cuts, expense reductions and the parking of equipment, to bring their cost base in line with the decline in volumes. But this is not the case for all carriers.

Some trucking companies are remaining in business because their lenders are allowing them to continue. Since there is currently a limited market for used trucking equipment and freight terminals, foreclosing on a freight company would leave the lender with assets that are not easy to sell at this time. This situation will not last forever.

As the economy rebounds, some banks and other financial institutions are likely to say “enough is enough.” They will be expecting repayment of their loans and will begin to find a market for trucking company assets. It is likely to expect that as the recession comes to an end, there will be a number of trucking companies that will not be able to survive.

This was certainly the message communicated by some leading carriers that participated in a panel discussion at this week’s conference. There are a number of prospectus documents being distributed throughout the industry by carriers seeking an exit strategy. The expectation is that certain carriers may not be able to make a graceful exit.

As a shipper, it is important to ensure that your company’s supply chain is not jeopardized by having a significant volume of your freight loaded on the trailers of companies that face bankruptcy. What can you do to protect your company? A lot. Here is a list of suggestions.

Telltale Signs of a Carrier in Trouble

Be on the lookout for telltale signs of a trucking company in trouble. These signs can include:

- Overzealous sales people selling unsustainable rates
- Carriers promising that they can go anywhere and do anything you ask
- Carriers failing to meet service commitments
- Carriers consistently not having the capacity to service your account
- Excessive claims

Perform Due Diligence on your Prospective Carrier Partners

During these unusual times, it is important to perform due diligence on your prospective carrier partners. As you go through an RFP exercise, it is worthwhile to do some probing in these areas.

1. Find out if the carrier has experience in handling your type of freight. Ask for the names of other shippers in your area for whom they move the same type of freight.

2. Check out the size of their fleet and their major lanes to make sure your company is not part of a carrier’s market expansion test. Verify that they have the quantity and quality of equipment to do the job.

3. Ask for references and check them out. When I have called a carrier’s references, I have found their customers to be quite forthcoming and honest about what the carrier does well and not so well.

4. Ask for their current safety rating (e.g. CVOR rating in Canada, Federal Motor Carrier Safety Administration rating in the U.S.). This document can provide hints about the quality of their equipment and how well they keep it maintained. It can also provide some insights into the quality of their drivers and how well they are trained. This rating can be an important telltale sign that a freight company is trying to extend the life of their equipment beyond what is safe. Your company’s freight can be put at risk.

5. Check their “Dun and Bradstreet” rating. This will provide you with one independent reading of their financial health.

6. If you are still unsure, ask them to provide you with a letter from their bank manager on their current financial situation. You won’t win any popularity contest with your carriers but it can provide you with valuable insights into the financial health of your prospective business partners.

Employ Risk Mitigation Strategies

To further protect your company, employ these strategies to minimize risk.

- Maintain a robust routing guide

- Ensure your company has quality backup carriers on every lane.

- Provide your backup carriers with freight so they will be willing to help you if your primary carrier goes down

There is no doubt that these tasks may require some extra work at a time when you and your team may be short staffed and overworked. On the other hand, a failure to perform these tasks could result in serious consequences for your supply chain, possibly in the not too distant future.