There is much optimism in the air these days. The stock markets have been on a strong run and have reached levels not seen in the past couple of years. Company profits have rebounded by 23 percent since the fourth quarter of 2007.

However, there are a couple of statistics that paint a different picture of where the economy is going. While profits have been increasing, sales have actually declined by 9 percent during the same period. Consumers are not spending the way they did in the past. In September 2010, the savings rate was 5.3 percent, up 2 percent from 2007. “People are realizing they have to start saving the old-fashioned way, which is by putting more coins in the cookie jar instead of going out and buying more cookies,” says David Rosenberg, chief economist at investment firm Gluskin Sheff. Or, put another way, consumers are learning to look at the cookies but are buying the basics.

Canadian companies are facing the additional challenge created by the rising loonie. Sales growth into the U.S. market, historically a very important market for Canadian goods, is being hampered by the strong Canadian dollar and by the economic difficulties south of the border.

How do we explain a period where profits are going up while revenues are going down? The answer is productivity improvements. Annual growth in productivity, or how much output is produced in an hour of work, averaged 3.4 percent in the five quarters since the 18-month recession ended in July 2009. U.S. companies are improving profits without hiring enough people to bring down the unemployment rate.

American companies slashed 8.5 million jobs during the recession and slowed capital investment. Many companies are asking their workers to work smarter with existing technology and current processes. Much of the focus appears to be on manufacturing or operating processes. Across North America, daily worker-management huddles identify inefficient operations and outline cost savings improvements. Teams are assigned to fix these problems, thereby driving ongoing productivity improvements.

As an example, UPS trucks carry devices that track how many left turns against traffic its drivers have to make. The system helps drivers optimize routes and will save 1.4 million gallons of fuel per year when fully deployed, says UPS spokesman Norman Black. Many other companies across a wide variety of industries are adopting similar approaches and achieving success.

This same attention to detail needs to be applied to freight transportation cost saving initiatives. This is the time to be looking at:

• Consolidating freight and moving the larger size, lower cost shipments on designated service days
• Collaborating with vendors or customers to take advantage of shipping economies of scale
• Outsourcing freight to companies that can transport goods more efficiently
• Taking control of inbound freight so as to create round trips and leverage total freight volumes
• Optimizing networks to make sure that the products moving to each customer are at the lowest cost of distribution
• Creating pool points to ensure more efficient and cost effective shipment deliveries
• Conducting freight RFP’s to optimize modes, consolidate carriers and improve efficiencies
• Creating vendor and customer collaboration programs to facilitate the pick and delivery of freight

In almost every case, there is a requirement to create a cross-functional team to work collaboratively and to think through what is or is not feasible. For inbound freight this may include purchasing and transportation. For shipment consolidations, this would likely involve production, sales, customer service and transportation.

The keys are identifying cost savings opportunities and then ranking them based on financial impact, time to implement, resources and feasibility of implementation. The teams should then be assigned a champion or team leader who can drive the process, facilitate the creation of the work plan and KPI’s and then steer the change to implementation. Changing processes and procedures, whether in manufacturing or transportation, are often difficult but the status quo during a period of stagnant sales is not a great option. Many companies have still not fully tapped the opportunities that are there if they focus on driving freight transportation productivity.

This was another action packed year for freight transportation. The economy began to reset after the challenges of the prior years. This created opportunities and challenges for shippers and carriers. As always, it is difficult to select the top 10 stories of the past year. These are the ones that stood out to me. They are not listed in order of importance.

CSA 2010

The United States Federal Motor Carrier Safety Administration (FMCSA) introduced a new safety initiative known as the Compliance Safety Accountability 2010 and it has been the talk of the trucking industry throughout 2010. The goal of the program is to achieve a reduction in large truck and bus crashes, injuries and fatalities, while maximizing the resources of FMCSA and its State partners. The implementation of CSA2010 brings three major changes.

1. The motor vehicle record or driver abstract is being changed.
2. Individual drivers are being audited and each will be given a personal safety rating.
3. An updated safety rating for each driver and trucking company is issued every 30 days.

The personal safety rating will determine whether or not the driver is considered eligible to continue driving, requires some sort of “intervention,” or is deemed “unfit” to continue operating a commercial vehicle. Similarly motor carriers are facing increased scrutiny under CSA 2010 and will experience harsh fines, corrective action plans and even risk having their entire fleets placed out of service due to violations. It is expected that ten percent of the U.S. driver force or 300,000 drivers will exit the industry due to CSA 2010.

Rob Abbott, VP of Safety Policy at ATA, predicts that as many as 25% of the nation's motor carriers will be getting warning letters from FMCSA starting in December. If carriers do only one thing to prepare for CSA 2010, it is learning as much as they can about all aspects of CSA’s new scoring system.

New Intermodal Corridor Hubs

This was a big year for intermodal transportation. The intermodal service providers experienced significant volume increases in 2010. The North American intermodal freight system is being transformed. The class 1 railways are in the process of making significant investments that will reshape and revitalize this important mode of transport.

These changes are designed to achieve a set of important objectives:

• Speed up cross country transit times by bypassing the congested Chicago container sorting facilities for significant blocks of traffic
• Improve the functioning of Chicago’s intermodal operations, one of the most important rail hubs in the world
• Evolve rail networks so they can ultimately handle double stacked containers across their entire systems
• Take market share from truckers by offering shippers a greener option that reduces emissions, reduces highway congestion and cuts shipping costs
• Enhance the ability of the North American intermodal network to move international ocean cargo arriving via east and west coast ports

Several class 1 railways augmented their service by creating double stack corridors. The CSX National Gateway Intermodal includes a plan to open a 185 acre facility in North Baltimore, Ohio in early 2011. This terminal will become the “nerve centre” for stacktrains coming from the west coast so they can bypass Chicago. Their Columbus, Ohio terminal is being expanded to become a major consumer and freight centre. A planned terminal in Pittsburgh will link this heavy manufacturing area with the interstate highways that traverse this area.

Norfolk Southern’s Heartland Corridor project is a three-year engineering effort to increase intermodal freight capacity by raising vertical clearances in 28 tunnels on a Norfolk Southern rail line between the port of Hampton Roads, Va., and Chicago. Completed in September, 2010, containerized freight moving in double-stack trains is able to shave off about 200 miles and up to a day’s transit time between the East Coast and the Midwest. The Crescent Corridor is a railroad corridor expansion program that will run from the Mississippi Delta, up Interstate 81 through Virginia and eventually into New York and will be a major intermodal corridor linking Louisiana and the northeast.

Wal-Mart’s Inbound Freight Program

Wal-Mart launched its’ MABD (Must Arrive By Date) freight program in 2010. U.S. companies shipping goods to Wal-Mart distribution centers must deliver within a four-day window leading up to a MABD date. The requirement initially applies to suppliers that ship prepaid and truckload freight to Wal-Mart DC’s.

The monthly benchmark was set at 90 percent. Those companies that fall short of this target are assessed a “reimbursement” charge that equates to 3 percent of cost of goods sold. It is worth noting that the penalty applies to shipments arriving prior to or after the 4 day window. While inbound freight programs are nothing new, the structure of Wal-Mart’s program has some unique aspects. Leading grocery chains have similar programs. Canada’s Tim Horton donut chain established their own inbound freight program this year as well.

The Economy Performs a 3 Step

There seemed to be three distinct phases to the economy in 2010. Each phase had significant impacts on shippers and carriers. Much of the first half of 2010 centered on inventory restocking, which led to improved freight volumes, shortages of equipment and higher rates, especially when compared to a trying 2009. By mid year, inventory restocking levelled off and the stubbornly high unemployment levels coupled with a lack of consumer confidence manifested themselves in a slowdown. At year end, there are anecdotal reports of a muted but distinct peak season, the first in several years. In other words, we witnessed three diverse mini business cycles within the same year.

YRC and the LTL Sector Still in a State of Flux

The LTL sector of the freight industry that is characterized by geographically dispersed terminal networks and high overhead costs continued to suffer in 2010. YRC in particular continued to fight for survival. Despite multiple union wage cuts, more terminal closures and a debt for equity swap, revenues declined and sustained profitability remains an elusive goal. Those LTL carriers that tried to run YRC off the road in 2009 by taking non compensatory freight paid the price in 2010. Profits took a hit and casualties were suffered in the executive suite of several major carriers.

GRI’s were announced by many LTL carriers at year end. Time will tell how well these increases will stick. The LTL industry is a work in progress and progress is slow.

The Shrinking U.S. Dollar

This was one of the major freight stories of 2010. It is clear that the U.S. Federal Reserve intends to continue to maintain low interest rates to encourage economic growth in the United States and to facilitate export traffic. The value of the U.S. dollar against other currencies continues to decline. The impacts on freight transportation are being felt around the world. From a Canadian perspective, having a dollar essentially at par with the U.S. dollar means cost savings on the sourcing of raw materials from the United States. However, exports are being hurt and as an exporting nation dependent on the movement of raw materials to the U.S., this creates challenges for the recovery of the Canadian economy.

Crisis Management Helped Right Size Many Trucking Companies

As recessions come to an end, typically those companies that are the most poorly managed and capitalized are forced to cease operations. There were thousands of North America based transport companies that were casualties in 2009. In 2010, the good news is that the number of trucking company fatalities declined significantly. Industry executives focused on right-sizing their companies. This included their personnel, their fleets and their terminal networks. This was one of the positive learning experiences from this difficult period.

Many companies went back to the basics. They looked at their costs and margins, the businesses where they could make money and those where there were treading water or worse. Many made the necessary adjustments to maintain the viability of their enterprises. There were very few large or medium scale bankruptcies in the past year.

Yield Management Became More Prevalent

With reduced capacity and a modest appetite for capital investment in expanded fleets, many carriers became more focused and selective in the freight they targeted. We saw this in their RFP responses. Instead of bidding on any freight that is moving, carriers are identifying those segments of the business they can perform well operationally, with minimal empty miles and with good margins. The survivors of this recession are not taking a “flyer” on a broad spectrum of lanes they cannot service properly. They are looking at their costs and yields and targeting those pieces of business that enable them to maximize capital utilization and profitability.

Capacity Shortages are here to stay

Many of the above mentioned variables came together to shrink the available truck capacity. CSA 2010, declines in business volumes, trucking company closures and right sizing all played a part in reducing the industry capacity by an estimated 12.5 percent in the United States.

Freight Rates Begin to Move Up

Tight capacity coupled with a recovering economy is serving to move freight rates up. Shippers in most transportation sectors have been approached for rate increases, both on contracted and spot business. While the increases are nothing like the spikes in the mid 2000’s, the trend is clearly upwards. After taking a major hit during the recession, fuel costs have also been migrating upward.

Happy holidays to everyone. Best wishes for a successful and prosperous 2011.

We enter a new year that we all hope will take us a step closer to financial recovery. Most experts believe that with continuing high unemployment levels, a depressed U.S. housing market and limitations on governments in Canada and the United States to raise their national debts to spend economic stimulus dollars, the road ahead will be slow and bumpy. This suggests that in 2011 we will likely witness a continuation of the trends that we observed in 2010. Here is what I expect to see.

Slow Growth

The International Monetary Fund is expecting global trade to be slower in 2011 as compared to 2101 in all regions, particularly China. This will put pressure on shippers to keep tight control over their supply chains to maintain low inventory levels.

CSA in 2011

The U.S. government’s Comprehensive Safety Analysis (CSA) is expected to have a positive impact on truckload transportation in 2011. Some capacity may be removed. Fears of a capacity crunch may support carrier leverage in pricing discussions. Concerns over legal liability could reduce the number of carriers that shippers are willing to use. Small carriers and owner operators may struggle with the accompanying administrative burdens.

However, a recent Morgan Stanley report casts some doubt that CSA will be a game changer in 2011. Full implementation will likely face delays. Given state budget shortfalls, funding for more aggressive inspections may be restricted and a lack of training, resources, or uniform interpretation between states may hinder enforcement. High unemployment may dampen the political will to enforce it and CSA's inability to directly terminate drivers leaves open the potential for poor drivers to remain, particularly as pricing improves. The Morgan Stanley report concludes by saying that the improving macro outlook is likely to be a bigger factor for TL pricing in 2011 than CSA.

Shippers will adapt supply chains to take advantage of Multi Modal Options

Intermodal transportation has been on a growth curve the past number of years and this will continue. Shippers will continue to look at their supply chains, their customer ordering patterns and cycle times and then use the combination of modes that provide the best cost and service trade-off. Freight management companies can help shippers consolidate LTL loads into truckloads and ship these via intermodal service on certain long haul lanes.

More Retailers will embrace Amazon.com’s Two Day Flat Rate Shipping Program

Amazon.com launched Amazon Prime, its free shipping service which guarantees delivery of products within two days for an annual fee of $79. It was a huge hit. Some analysts estimate that it may be responsible for up to 20 percent of Amazon’s U.S. sales. Wal-Mart Stores, Best Buy, Target and J.C. Penny unveiled their free shipping programs for the holidays. A consortium of 20 retailers including Barnes & Noble, Sport Authority and Toys “R” Us banded together to offer their own “copycat” $79 two day shipping programs. This intitiative appears to be a “game changer” and will have a big impact on web sales and on small parcel carrier revenues.

More Free Trade Deals are Coming

President Obama is committed to increasing sales of U.S. exports. He recently teamed up with Ford CEO Alan Mulally, unions and U.S. lawmakers to close a trade deal with South Korea. The agreement allows U.S. automakers to send 25,000 cars that meet U.S. safety standards annually to South Korea, even if they do not meet Korean standards. Canada closed a free trade deal with Columbia in June. Watch for more of these deals in 2011 and beyond. Prospects for further agreements have improved with Republicans taking control of the House of Representatives and gaining six seats in the Senate and with President Obama’s focus on exports.

Increased Demand for Large Container Vessels

Shippers and shipping lines are preparing for the completion of the $5.25 billion expansion of the Panama Canal (to be completed in 2014) and the recovery of global trade. Orders for “megavessels” that can carry 20,000 20 foot containers, more than double the capacity of today’s most common ships, are on the rise. Global trade increased by an estimated 11.4 percent in 2010 and is expected to increase by another 7 percent in 2011. Consumer electronics and appliances are best suited to large ships since they hold more cargo and drive down the cost of transportation.

Truck Freight Rates will Rise

A combination of tightening capacity brought about by bankruptcies and industry consolidation, CSA, and driver shortages will likely bring some truck freight rate increases by mid 2011 and more in 2012.

Vessel Freight Rates will be Flat

Slower economic growth and increasing ship capacity will result in expanded vessel space allowing shipping rates to remain flat.

Better Days Ahead for LTL Carriers

The YRCW soap opera has continued for another year. This has kept the U.S. LTL industry in a form of suspended animation. While the fundamentals for the LTL sector are improving, watch for this drama to come to some conclusion in 2011. YRCW’s revenues have shrunk in half, from over 10 billion to approximately $5 billion. Despite YRCW’s plan to close more terminals and its request for more time from the union, something has to give. It is very difficult to shrink yourself to prosperity.

Look for a number of scenarios to play out. YRCW’s rates need to go up considerably and it needs to demonstrate an ability to grow revenues. The rest of the industry also needs rate increases. If YRCW is successful, the overall industry fundamentals will improve. If it fails, it may go down and its revenues will scatter over the other industry participants, another good scenario. If the company seeks rate increases and its competitors go into attack mode, this may damage an already troubled industry.

Shippers will Focus on Leverage and Competence

Shippers will continue to seek ways to leverage their volumes to maximum advantage. Closer working relationships between Procurement and Transportation will allow for more holistic approaches to freight management. A focus on competence and bottom line will propel shippers to 3PL’s and freight management companies. For shippers that can manage the freight competent more cost effectively than a 3PL, if the skills and resources are there and if greater cost savings and control can be achieved, they may bring the transportation function back in house .

Happy New Year! May 2011 bring health and prosperity to all of us.