Two weeks ago I looked at the economic realities we are currently facing. Leading economists are predicting either a number of years of slow growth or a return to recession. Last week I focused on some of the strategies carriers are employing to maintain profitability. In this blog I will highlight some of the strategies shippers are engaging to
optimize their freight spend.

As we approach 2012, shippers are facing a soft economy but tight capacity. After being burned with excess capacity during the 2008-2009 recession, many carriers either parked equipment or left the industry. In the United States, there are estimates that of a 15 to 20 percent reduction in freight capacity, much of which has not returned. Carriers have been prudent and deliberate in adding equipment to replace an aging fleet or for limited growth. They have also become much more focused on yield management to maximize the returns on their assets. Against this backdrop, shippers are seeking ways to provide good service to their clients while maintaining effective control of freight costs. Here are a few of the strategies they are employing.

Manufacturers and retailers that were wary of intermodal service in the past are giving it a try. The intermodal numbers have been one of the bright spots in the transportation data that is published. While still a small percentage of overall freight activity, Intermodal numbers continue to increase. For shippers with freight moving longer lengths of haul (e.g. over 750 miles), that ship to warehouses or can take advantage of weekend transit days, intermodal service can be a cost effective option.

With truckload capacity tight in some areas, shippers are returning to the fundamentals of freight transportation to unlock savings. This can include revisiting their packaging configurations and loading procedures. Wal-Mart has been one of the leaders in challenging its vendors to revisit their packaging and shrink the size of their footprints so as to allow more freight on standard 53 foot trailers.

Shipper collaboration, even among competitors, is a trend to watch. The recent agreement between Hershey Corporation and Ferrero, two large confectionary goods manufacturers has made headlines. The companies will share warehousing and distribution assets to reduce truck miles, greenhouse gases and energy use. In essence, this arrangement will result in the two companies co-loading trailers that will lower the costs to bring their chocolates to market. As reported in a previous blog, Schneider Logistics is one company that is trying to cater to this need by creating a dedicated shared services LTL model.

Look for freight “speed dating” services to evolve as shippers seek partners that can provide top freight on top of base freight or vice versa to fill trailers more cost effectively. For carriers or logistics providers with a diverse stable of customers and good lane data, this would be a natural and much needed service that could gain acceptance.

Network optimization is another key instrument. As shippers expand the geographic scope of their vendors and customers to reduce costs and build revenues, this is necessitating the requirement to revisit the location of warehouses and transportation modes. It increases the need for effective carrier communication and collaboration so as to take advantage of carrier backhaul pricing and optimal mode selection.

Freight RFPs or freight bids continue to be key tool in the shipper’s arsenal to address rising freight costs. With carriers much more focused on allocating capacity to the highest yielding freight, shippers have to raise their game in this area to achieve success. This includes making more use of consulting services and procurement tools. It also includes expanding the scope of the transportation providers they use. Logistics service providers can bring together an assortment of carriers that many shippers may not be aware of. Modal trade-offs, effective data management, skillful leveraging and negotiating strategies are now required to unlock savings in a world of tight capacity.

In addition, shippers should be challenging all rate increases and asking the carrier for justification. Carriers need to demonstrate that they are employing the latest resources to improve fleet utilization and reduce miles per gallon. Shippers that accept carrier GRIs or unsubstantiated rate increases are doing their companies a disservice.

During these challenging times, effective shippers need to be innovative, resourceful and seek out Best Practices to keep their freight costs in line.

The traditional and social media remind us on almost a daily basis that we are seeing the first manifestations of a looming capacity problem. There are already capacity shortfalls in certain geographic areas using specific modes of transport. With 15 to 20 percent of truck capacity removed during the recession and reduced driver availability, this may set the stage for challenging times for shippers in the years ahead as they seek to find reliable means of moving their freight.

The good news is that there is much a logistics professional can do proactively to make sure they protect the integrity of their company’s supply chain. Here are some suggestions.

1. Think Strategically about your Supply Chain, not just Tactically about Transportation

Whether it is sourcing raw materials or shipping to customers, many organizations have options. There may be alternative sources of supply, either domestically or in other countries. There may be a variety of methods in bringing goods to market. This may include shipping to a warehouse or direct to customer, varying order cycle times, changing manufacturing parameters, shipping more volume on slower freight days, increasing safety stock levels, switching modes and a host of other variables. This can also include relocating a warehouse to a more carrier friendly location where head haul or back haul traffic is easier to find.

In other words, it is not just about finding more carriers to handle your current volumes under the existing supply chain paradigms. Securing capacity may require a number of strategic changes to the design of current supply chains.

2. Take a more Strategic and Enlightened Approach to Rate Negotiations

After driving their freight costs down during the recession, many shippers are under the delusion that low freight rates are just one more freight bid away. While freight bids have a valuable place in strategic sourcing, they represent only one tool in the cost containment arsenal. Carriers with good service and limited equipment have come out of the recession with a greater focus on yield management. While there may be some renegade carriers that are willing to break ranks and offer low rates, the overuse of freight bids results in the law of diminishing returns.

Success in rate negotiations must come from clever leveraging of one’s freight, flexibility and shipper salesmanship. Shippers must now present their freight in a way that makes it more desirable for their carriers. They should provide them with quality freight forecasts and schedule loads on dates and times that help their carriers improve their profitability. The freight should be operationally as clean to handle as possible (e.g. the paperwork is ready on time, the freight is packaged in such a way as to make it easy to load and unload with minimal weighting time, carriers have set pick-up or delivery appointments so there is no excessive waiting time). Shippers can also make their freight more attractive by providing their carriers with return trips or continuous, wherever possible.

3. Be Open to Alternate Modes of Transport

If truckload capacity is tight on a certain corridor, would a switch to LTL make sense? Can the LTL be consolidated so as to enjoy LTL capacity while taking advantage of partial truckload rates? In the reverse, is it possible to combine LTL freight with freight from affiliated companies or even competitors? Has your company ever considered switching some of its freight to intermodal service, particularly on longer lengths of haul when there is a buffer on delivery requirements? Would a dedicated fleet operation provide consistent capacity at a reduced rate?

In summary, changing times require new ways of thinking. In particular, a more strategic approach to supply chain management rather than a tactical approach to Transportation may be the key to unlocking more freight capacity for your company.

On several occasions I have commented in this blog about a looming truck capacity shortage. A soft North American economy coupled with political uncertainty and concerns about Europe and China, are discouraging carriers from making investments in their fleets. Truckers are seeking to maximize the utilization of their existing assets and improve yields, particularly with rising equipment costs, increasingly burdensome government regulations, and a shrinking pool of qualified drivers. However, the on demand truckload model creates uncertainty as truckers wait for shippers to book a load and/or to balance a lane.

Shippers are becoming increasingly concerned about finding the capacity they need to move their freight. They are also concerned that tight capacity will lead to rising freight costs. Capacity shortages in various North American markets this year have caused shippers to seek out options to current transportation processes.

A “Mutually Beneficial Antidote” to Securing Capacity and Rate Stability

One solution to these problems is dedicated contract carriage—the practice whereby, as the name implies, a trucker dedicates equipment and drivers to serving an individual shipper, allowing that customer to lock in rates and capacity with that carrier for a multi-year period. John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., calls dedicated trucking the "mutually beneficial antidote" for carriers that want to get paid for capacity and shippers that want to know it's available.

"Both shippers and carriers are increasingly realizing that dedicated trucking may be just the solution that meets both their needs," Larkin wrote in early October. He stated that shippers who own and operate private fleets could "see 10-percent savings right off the bat" from switching to dedicated service. That's because specialized operators can usually manage fuel, insurance, maintenance, equipment utilization, and driver schedules more efficiently than a shipper that operates its own trucks can, Larkin notes. What's more, companies that outsource their fleet needs can free up their balance sheet capacity and reinvest more of their cash into their core business, which is generally not transportation, Larkin says.

It should also be noted that many private fleets lease their equipment from companies like Ryder Truck Leasing and Penske Truck Leasing, which charge premiums for using their vehicles. Those premiums may go away when a shipper converts from a private fleet to dedicated carriage. A company that shifts from private fleet ownership to a dedicated operation can shave its costs by up to 15 percent, while securing dependable capacity for constant, or "baseload," volumes while using third parties like asset-based on-demand trucking services or freight brokers to handle unexpected surges in demand.

Some Shippers Have Seen “The Light”

Michael Cole, senior director of transportation for food and confectionary titan Kraft Foods, recently stated that Kraft this year will have 400 rigs at its disposal for dedicated carriage, up from 220 in 2010. About 30 percent of Kraft's total 2011 rig count will be privately held or dedicated, up from 22 percent in 2010, according to Cole. Since converting part of its fleet to dedicated, Kraft has seen an eight-percentage-point improvement in its on-time delivery metrics from its distribution centers to retailer warehouses, Cole adds.

The Criteria for a Successful Dedicated Trucking Operation

Dedicated trucking is not for everyone. For shippers with sporadic or erratic freight flows, with significant seasonality requirements, it may not work as well. Ideally this option works best for companies that move commodities (e.g. food, consolidated loads of LTL freight to stores or warehouses) that have consistent flows throughout the year, where forecasts can be made with reasonable accuracy, where there is the possibility to create round trips and continuous moves, and that can commit to specific volumes and sign multi-year agreements.

For shippers that meet these criteria, the dedicated option can provide capacity at a reasonable rate. For carriers, they can purchase and allocate their assets in the knowledge that they have a predictable, profitable revenue stream over a 3 to 5 year time horizon. Watch for dedicated trucking to become more popular during this period of tight capacity and rising freight rates.

Last Thursday night, I had the distinct pleasure of participating in a Shipper-Carrier Roundtable along with a number of old friends and colleagues. The event was organized by CITT, sponsored by Shaw Tracking and moderated by Lou Smyrlis, editorial director of Business Information Group, publishers of Canadian Transportation & Logistics and MotorTruck Fleet Executive.

As I was driving home, I tried to reflect on some of the most important messages I heard from my fellow panelists that night. There were two that stood out.

First there was a comment from Doug Munro, president of Maritime-Ontario Freightways, about the importance of delivering good service. While this may seem so obvious that it is not worth mentioning, it was the passion with which Doug delivered this message that stood out for me. Doug made reference to the airline industry and noted that there is no acceptable norm other than 100% arrival of its planes. Nothing less can be tolerated. While it is fine for a surface transportation freight carrier to report a 98 or 99% on time service ratio, these statistics acknowledge that the company is failing 1 or 2 times out of every hundred deliveries.

Doug mentioned that one of the keys to his company’s success is to provide excellent service. He highlighted that Maritime-Ontario Freightways is able to gain market share either through the service failures of his competitors or poorly executed acquisitions. He emphasized how he and his management team which he highlighted was the best he ever had, were all focused on instilling this message in their employees.

This message repeats itself in almost every shipper project that my company gets involved in. During a carrier procurement exercise, shippers focus as much on service as they do on price. A carrier that submits competitive pricing, but has not been able deliver consistent service will often find itself replaced during a freight RFP process.

A second major theme that emanated from the discussion was the concept of delivering solutions, not just transportation service. This idea was mentioned by both Heather Felbel, vice president, logistics of Indigo Books & Music, and J.J. Maislin, president of Maisliner, a Quebec-based freight carrier. Shippers are looking for transportation organizations that are problem solvers and can pull together a combination of resources to meet each cluster of customer needs. Shippers are looking for solutions providers that can provide a range of services and modes, that can offer storage when requested, and that can make available value-added information services as needed.

J.J. highlighted how his asset based company has tried to acquire or build organically a unique combination of international and domestic freight transportation services. Being a solutions provider is at the heart of his company’s business strategy.

This message was repeated when Lou Smyrlis asked the question about the rise of logistics service providers and whether this trend will continue. It was my view that 3PLs have done a good job, in some cases, of assembling a group of carriers and/or warehouses and/or value-added services. In many cases they have replaced carriers as the direct interface with the shipper. Certainly as many carriers look down their list of customers, they will find many more logistics providers and freight brokers than they did a decade ago.

Delivering consistent, quality service and being a solutions provider are two of the keys to success for service providers to the freight transportation industry.