Some years ago, I had the privilege of running one of Canada’s elite IMC’s and freight brokerage businesses. At that time we offered a fairly full portfolio of ground transportation services including LTL, partial truckload, full truckload, intermodal and carload services.

We were proud of the fact that we offered domestic Canada and cross-border LTL services. We sought out carriers that could offer us wholesale (discounted LTL tariff) pricing that we could use to create retail rates. We cobbled together a North American network of LTL carriers that allowed us to provide our customers with a good quality service. While not true marketing partners (in terms of sharing sales leads and unrouted freight), they were valued operating partners that picked up and delivered the freight that we secured on behalf of our customers.

At that time, LTL revenues were a small part of our business. The LTL revenue we provided to our various partners was not a large percentage of their revenues either. We had difficulty finding LTL carriers that were willing to work with us. Shippers were more inclined to sort their business by mode and work directly with asset based providers, particularly in the LTL arena.

Since that time the world changed. The growth in the capabilities, size and scope of 3PL providers along with shipper needs for suppliers with a complete menu of services have shifted the balance of power. Whereas 3PL’s and freight management companies previously had to do the chasing and courting to recruit LTL service providers, these carriers now recognize that 3PL’s have achieved a significant level of control over the customer interface. No longer viewed as “freight pimps” or parasites, 3PL’s now command more respect by virtue of their IT capabilities, supply chain expertise and the higher pecking order they have achieved with many shippers.

As a result, it was with great interest that I read that one of North America’s largest LTL providers, the troubled YRC Worldwide, is forging closer relationships with third-party logistics providers as it tries to rebuild its business. This is being driven by the realization that brokers or logistics intermediaries account for more than a third of YRC Worldwide's revenue.

The company claims it began a sweeping re-evaluation of its relationships with 3PLs last year as it rolled out a restructuring program affecting every corner of its operations. Eventually, it plans to launch new products and services with 3PL partners and closely integrate its less-than-truckload operations into their supply chain networks. It's a step other motor carriers need to take to stay on the road in a fast-changing market, said Bruce Kennedy, YRC Worldwide's vice president of enterprise strategy.

"In August 2009 we began an initiative to change our culture internally and externally from one of frankly competition (with 3PLs) to collaboration," Kennedy said. Kennedy told trucking and logistics executives at last week’s SMC3 meeting in Florida that previously "an intermediary was considered a threat." The carrier started restructuring its 3PL strategy by identifying all the logistics providers in its customer database -- more than 2,000 companies, Kennedy said. It then classified those 3PLs to reflect their marketplace roles, from supply chain managers to forwarders and brokers to price negotiators and "rate resellers." From that initial 2,000, YRC identified a subset of 200 logistics companies "that were significant in terms of their spend and potential spend with us," Kennedy said. "We took action to align ourselves with those partners we truly want to identify with."

There are a couple of things that stand out to me in the YRC initiative. If the statistic above is correct, YRC does not have control of the direct customer interface with a third of its customers. This leaves a significant block of its business vulnerable to third parties that can shift this freight at its discretion. Second, why did YRC wait so long to launch a marketing program targeted at such a large segment of its business? This suggests that YRC is having difficulty attracting shippers through its own sales program.

LTL carriers have also begun to realize that developing close ties with particular 3PL’s can allow them access to a whole new set of clients. When Con-way Freight expanded its business with Caterpillar Logistics last month, it not only gained greater access to freight from the $32.4 billion Caterpillar but also to more than 65 other companies that contract Cat Logistics to manage their supply chains.

Relying more on 3PLs for freight can be a difficult step for trucking executives who built their freight business on direct relationships with shipper customers. But viewed in the context of the slowly recovering economies of North America, the significant share of business controlled by 3PL’s and the need to find growth in the sector of the transportation industry acknowledged to have the most capacity, this appears to be a sound strategy for LTL carriers to employ.

The last five years have seen major swings in the freight pendulum. In the mid 2000’s, carriers called the shots on rates and capacity as business volumes soared. During the latter months of 2008 and throughout 2009, the freight pendulum swung backwards. With the recession and the major contraction in freight, shippers took advantage of being in the driver’s seat by negotiating major decreases in freight rates and dictating to carriers the loads they expected them to carry.

In 2010, we are witnessing a tug of war. Business volumes are increasing. Shippers that have both head haul and backhaul truckload freight moving in the same geographic area are seeking to find carriers that will move one-way loads and round trips. While some shippers are able to cover a significant percentage of their loads, there are certain head haul or backhaul lanes that are a chronic problem for them on a weekly basis.

Certain carriers are telling their clients that they will pick up specific loads of interest to them. When it comes to trying to match head haul and backhaul loads, don’t bother trying. In 2010 truckload carriers are being much more selective and are turning down loads that don’t work for them. These carriers are indicating that they will find their own loads moving in the other direction and balance their lanes themselves.

These comments seem to mirror an interesting discussion that has been taking place on one of the LinkedIn groups, The Truckload, Trucking, Logistics, Supply Chain, 3PL Distribution group. Here is one of the explanations offered in this group.

“We are a small company and do not track the turn downs but we estimate it to be in the range of 20-30 per week. To say it is due to a lack of capacity would be somewhat misleading. Many of the loads that we turn down are due to inadequate rates. We have determined that we will no longer accept freight that does not cover our full costs. We have taken that dreaded "back haul" out of our vocabulary. We certainly could accept more loads but why wear out our trucks, drivers and office personnel for a break even rate. We are also finding that we are receiving calls pleading for trucks at any rate. It is becoming a "can you get it today?" and then what rate do you need to do it. Hopefully we are reaching a point of making a reasonable profit once again.”

Another member of the group added this observation.

“. . . The . . . majority of trucking companies need and want to improve their balance sheets rather than expand. Besides they have plenty of idled trucks that have been sitting on the fence. The real shortage is in "qualified" and I can't stress that word enough. Once CSA 2010 kicks in there will be nobody in those shiny new trucks.”

Clearly carriers are being more discerning on the loads they choose to pick up in 2010 as the volume of business increases. Many are focused on trying to improve their profitability after the ravages on the recession.

This does not mean that shippers should throw up their hands and accept that their core carriers will move loads in only one direction and not the other or accept every rate increase that comes their way. Rather, shippers should be taking a hard look at their inbound and outbound routing guides. While it is fine for carriers to wish to take the higher paying loads that are moving in the lanes where they need more volume, it is entirely appropriate for shippers to expect their core carriers to take the good with the not so good, if the round trip rate is within an acceptable range.

If a shipper has inbound and outbound loads coming from and going to the same geographic areas on a consistent basis, this is the time to have face to face meetings with the carriers that service these areas. Transport companies seeking core carrier status should be focused on building business partnerships with their clients. These relationships should be based on profitability for both parties, service quality, loyalty and reliability. If your so-called business partners are solely focused on their selfish needs and are not willing to be team players, this may be the time to pursue other options.

In 2009, trucking company executives faced the most serious economic challenge since the Great Depression. Many leaders adopted a survivor mentality. The focus was on maintaining essential business while cutting all discretionary costs. Despite the departure of an estimated 3000 trucking companies, most industry leaders were able to right size their business model, park excess equipment, reduce staff and freeze or cut salaries to remain in business.

This year is shaping up to be very different from the previous one as trucking company executives are facing a new set of challenges. Business levels are improving but at an agonizingly slow pace. The European debt crisis has created a new level of uncertainty as to whether or not the economy will continue its growth pace or slip into a double dip recession.

In the LTL sector there is still excess capacity that is making it difficult to increase rates. In the truckload sector, capacity shortages are being experienced on certain days in specific geographic areas. The intermodal business is running at about full capacity.

The new CSA 2010 initiative will raise the bar on truck fleet operational performance at a time when driver shortages are occurring. In the U.S. potential new cap and trade legislation and new emissions standards could have far reaching effects for the trucking industry. Truckers are buying fleet equipment again but mostly as replacements rather than in anticipation of growth. Consumer confidence has taken a step backwards in recent months.

This evolving economic environment will require modifications to the leadership styles of truck fleet executives. The “bunker mentality” of 2009 must be replaced with a new leadership paradigm.

Improved Skill Sets

According to a new survey conducted by ExecuNet of 3,636 executive recruiters and human resource professionals, big changes are under way. Over one in four companies surveyed plan to expand their executive teams with new hires and 56 percent are planning to “trade up.” They are seeking replacements that are better equipped than the incumbents to meet current expectations and market demands.

Drivers of Business Growth and “Quick Wins”

This year industry executives must be able to drive growth. Business owners are looking for “adaptability,” the ability to change course and take decisive action to make things happen. Executives must be able to secure “quick wins,”. . . . “launch new initiatives and make an immediate positive impact on the organization and its bottom line,” according to Craig Herner, a partner with recruiter Odgers Berndtson in Vancouver.

Motivators

This year leaders must be motivators. As reported in a prior blog, many survivors of staff cuts are suffering from “employee layover syndrome,” an emotional and physical state brought on by over work and stress. These employees are looking to their leaders for good direction, a solid plan, support and team building skills.

Retention of High Potential Staff

In a recent Toronto Globe & Mail article, Rick Lash, Toronto-based national practice director of leadership coaching company, Hay Group, expressed the view that “in a recovery, organizations want managers who can retain their high-potential staff because, as the economy improves, top quality staff are usually the first group to look elsewhere for other opportunities.”

Operational Excellence

Trucking company executives will also need to bolster their operational skills to ensure their drivers pass the CSA 2010 checks. For truckers that have not focused on this area, this initiative will force these companies to improve their fleet management processes. This will take operational excellence and quality improvements skills.

In summary, trucking company leaders will need to drive business growth, upgrade their skill sets to meet changing environmental factors and regulation, improve morale, retain their top performers and upgrade operational performance to achieve success in 2010.

Noel Perry, a Partner with FTR Associates, has written a very interesting and thought provoking paper entitled, “The Challenge of Deep Economic Cycles,” In his report, he argues that “the United States has resumed a pattern of high cyclicality. That means bad things for logistics.”

Mr. Perry suggests that most of us tend to operate in a “bipolar” way. As creatures of the present, we interpret a good stretch of economic activity as a constant that will last forever. Our confidence in a continuation of the good times leads us to “end up in an overbuy mode. At some point, usually after a significant overbuy, we realize our error and stop buying. The same focus on the present . . . now causes us to . . . underbuy, again by a significant amount. That is a recession. The economy is bipolar, cycling between euphoria and depression.”

As we become more euphoric, “our neurosis becomes psychosis and the overbuy becomes a ‘bubble.’ At some point the bubble bursts and we get a long-overdue big correction.” Most recently, “the . . . three overbuys of the cycle were consumer credit, home prices and financial risk taking. When those bubbles burst in 2008 the economy collapsed.”

This leads to Mr. Perry’s key thesis that the latest bubble has yet to burst. This bubble will result from the credit problems in Europe and in the United States. “Since I have yet to see the least evidence of the resolve to reduce U.S. governmental borrowing, from either party, I conclude that our creditors will prick our bubble sometime this decade, probably sooner than later. Moreover, the resulting shock to a governmental system . . . will create a wave of . . . taxes and spending policies that will add another level of volatility to the transportation environment.”

Using historical data on previous economic cycles, Mr. Perry demonstrates that recoveries following deep downturns tend to be much shorter (e.g. 10 quarters versus 25 to 28) than the more shallow cycles and the peak to trough is five times worse. “Short recoveries are bad for transportation for a simple reason. The benefits from an upturn take about a year to come in. It takes six months or more for the average manager to realize that there has been a turn; it takes another six months for that manager to take advantage.”

These rapid changes in a short time frame make it difficult to right-size the fleet. “Right-sizing usually falls short of the required amount because the fleets seldom choose to right-size fully and because they can’t right-size fast enough, even if they wanted to. They must complete the job after the rises and falls are complete.” This creates a significant capacity utilization issue. In addition, regulatory changes are expected to take more than 200,000 drivers out of the U.S. workforce. This will create stress for all industry participants. Mr. Perry also argues that “truck pricing has entered a new and radically more volatile phase.” A more volatile environment also creates large swings in trucking company earnings as we have seen the past year.

If we are headed into a more difficult freight environment, what should trucking company leaders be doing? Mr. Perry argues that there are two approaches to developing a cyclical strategy.

“Smoothing The Cycle. Mr. Perry suggests that there are five variants to this option for a carrier:

• Choose a customer segment that is growing, in the hope that the underlying trend will moderate a downturn.
• Choose a customer segment with inherently low cyclicality. The classic example is the reefer segment. Americans always overeat; there is no undereat. . .
• Assemble a diversified portfolio of customer segments that vary in different ways and at different times. Railroads, inherently do this with large portfolio of weather-related commodities (grain, coal) that offset autos and steel that cycle with the economy. . .
• Concentrate on the most stable portion of any customer’s business, usually the base load, dedicated portion. Customers attempt to protect their dedicated operations in a downturn to keep productivity high and cost low. . .
• Attempt to lock in volume during a downturn in exchange for guaranteeing capacity during the next upturn. The catch to this strategy is the tension between market conditions and the smoothed trucker’s earnings. During the downturn those earnings are above industry averages attracting competitive attention. During the upturn the smoothing results in earnings below industry averages, creating pressure for a move. This tension requires very committed manage¬ment and solid relationships with customers.”

The other option is:

“Chasing The Cycle. The alternative is to adopt flexible operations that move with the cycle. One cuts cost aggressively during the downturns . . . then adds capacity rapidly during the upturn—for a price. This approach puts a premium on forecasting and monitoring because the highest returns go to the first adapter. That firm cuts costs before prices collapse in a downturn and scarfs up capacity just before the real capacity crunch.

The deep-cycle economics of the current decade will require managers (and investors) to adopt four new paradigms, heretofore seldom seen in North American logistics. The first is a switch to flexible budgeting and planning, abandoning the comfortable notion that the next year is predictable. This will take a significant increase in market tracking and scenario planning.

The second switch is from short-run profit maximization to full-cycle profit maximization. All of the possible strategies for managing deep cyclicality make the practitioner suboptimal at some point in the cycle. Management (and investors) must fight the urge to abandon the strategy at that point.

The third switch is related; that is the development of full-cycle relationships between shippers and carriers, characterized by much tighter three- to five-year contracts rather than the loose one-year contracts in vogue. Jumping ship has a much higher cost in a deep-cycle economy.

The fourth switch is the change from simple cost minimization to cost minimization with capacity assurance. This will be a major challenge to a shipper base whose value system rejects price premiums and a carrier base shy about extracting capacity premiums.”

Transportation companies maintain data files on sales, operations, accounting, maintenance and human resources. The data can be captured on paper or in computer systems. It is often scattered throughout companies in data bases that are incompatible, incorrect, outdated or inaccessible.

One large trucking company, U.S. Xpress, decided to see what they could “mine” from the data in their company. The $1.4 billion trucking company recruited Tim Leonard away from Dell where he was responsible for their data warehousing architecture to become their chief technology officer. Tim’s mandate was to see what he could glean from U.S. Express’ data to help improve the company’s profitability.

According to a recent Journal of Commerce report, Tim found a “lot of data in different silos in different areas.” He also found a large amount of data streaming in from the company’s computers. “Just with DriverTech, our in-cab information system, we got over 900 data elements with every pull.” This level of data was coming from over 9000 trucks. On top of that, much of the data was “dirty - - incorrect, inconsistent or incomplete. This prevented the company from producing the types of dashboards and business intelligence reports we wanted . . .”

The U.S. Xpress Solution

The company had “cleaned” its data five years ago but it had not maintained this effort thereby allowing the data to become “dirty” and impossible to use. Leonard launched a data quality initiative using applications from Informatica, a software vendor that provides data integration and management tools. He began with a pilot to identify, collect and clean data associated with truck idling time. Leonard created an idle report that linked truck numbers, driver names, and the fleet manager responsible for each particular truck. The project took six weeks to complete and two weeks to test.

Benefits to U.S. Xpress

Leonard and his team produced a report, backed by solid data that is estimated to save U.S. Xpress $6 million a year across its fleet of 9200 trucks. The payback period on the software investment was three months. Leonard then expanded his data cleansing and mining initiative to include maintenance, operations and customer relations management. One maintenance “data-mart” and six executive dashboards replaced 400 reports.

Small and mid size fleets can also benefit from data cleansing and mining. Mesilla Valley Transportation (MVT) is one of the largest transportation providers in Western Texas and Southern New Mexico, with a fleet of 800 trucks and 3,500 trailers that haul goods across North America. To manage costs, MVT sought to watch every penny and count every mile per gallon, per driver. Yet, employees struggled to understand profitability and performance, manually cobbling together information from siloed data sources using various tools and resources.

“We also had a problem on the financial side of the house,” says Mike Kelley, Director of Information Technology at MVT. “Our transportation management system didn’t provide consolidated reports or historical information for trending analysis. Our complex corporate structure includes multiple companies using multiple accounting systems. Producing a consolidated financial statement was a manual, time-intensive process.”

Dean Rigg, Chief Financial Officer at MVT, wanted tools to measure companywide performance. “Business intelligence is about showing employees our goals and encouraging them to perform. We had no way to say to everyone, ‘Here is where we are today; this is where we want to be tomorrow.’ Instead, the route planners and fleet managers had to pull month-old data from a variety of places. They were making business decisions based on a gut feeling rather than from factual information.”

Key performance indicators (KPIs) were calculated monthly, using complex Microsoft Office Excel worksheets. Management turned to the IT department for custom reports on KPIs such as average miles per truck, per day; rate per mile, per area; long idle/short idle data; business by sales representative; and average accessorial revenue per truck (extra services that are billable, such as including several workers to unload goods, or just-in-time delivery). Soon, 3 of the 11 IT staff members were working full time delivering reports. IT staff members struggled to consolidate data from disparate sources. Also, they used different methodologies for reports, which diluted management’s faith in the data.

“We immediately started looking for a comprehensive business intelligence solution from a single vendor,” says Kelley. “In these tough economic times, we didn’t want to pay for a costly, difficult-to-use solution or try to cobble different tools together. The solution had to be easy to deploy and use so we could start seeing the value sooner rather than later.”

The Mesilla Valley Solution

Mesilla Valley Transportation chose a business intelligence solution from Microsoft. The solution provides MVT with a suite of technologies that gathers data from the company’s systems, creates customized reports and dashboards for analysis and drill-down, and makes reports available to employees through familiar Office system technologies. After deploying an interoperable suite of Microsoft business intelligence technologies, staff members can access, manipulate, and share data using familiar Microsoft Office technologies and dashboards with drill-down capabilities. With reliable business data, MVT is measuring the efficacy of its cost-saving initiatives, motivating employees to perform better, cutting costs, and driving profitability to stay competitive. MVT completed the rollout of its business intelligence solution in December 2009. Today, more than 300 employees in 30 departments use it as an integral part of their work environment.

Benefits to Mesilla Valley Transportation

Mesilla Valley Transportation is using its Microsoft business intelligence solution to gain unparalleled visibility into the business so that it can compete in a tough economy. “We depend on our Microsoft BI solution to maximize performance and productivity,” says Kelley. “It’s empowering our employees to take advantage of current data so we can work together to keep MVT trucks on the road. And the more we are able to deliver reliable business insights to improve performance, the better equipped we are to make the right decisions—decisions that save time and money.” Since deploying its business intelligence solution, MVT has improved information access, increased profitability, and improved employee performance and resource utilization—all without incurring extra work for the IT department. Clearly data cleansing and data mining are tools that trucking companies of all sizes can use to improve their profitability.