Much has been said and written about the Great Recession and its impact on the freight market. The question on the minds of many shippers, carriers and consultants as we approach the end of quarter 1, 2012 is what is the current state of the freight recovery and where are freight rates going? When one tries to assess the state of demand for freight services and the level of capacity, how do these compare to pre-recession levels?

This week considerable light was shed on this topic during a webinar hosted by the Journal of Commerce. The webinar focused on the current and projected state of supply and demand in order to provide some insight into projected changes in freight rates over the next 6 to 18 months. Here are some of the highlights.

John G. Larkin, Managing Director, Transportation & Logistics Equity Research at Stifel Nicolaus made the case that retail sales (excluding food) in America, despite lingering high unemployment have returned to pre-recession levels. The ISM Purchasing Managers’ Index has been above 50 since January 2010, signaling a growing economy. The Weekly Market Demand Index (MDI), a measure of relative truckload demand, has been In favor of the trucking industry since January 2011.

Large fleets (with greater than $30 million in revenue) are now at 9.5% below their capacity at the peak (Dec.06) while smaller fleets are 17.9% below their peak (in December 2003). Drawing on other sources, Mr. Larkin highlighted that truck fleet removals are forecast to remain at historically low levels. Since peaking in May 2007, the number of LTL power units has declined 19.3% as of December 2011. October and November 2011 saw slight year-over-year increases in the tractor fleet, which had last occurred in March 2008, but December 2011 reverted back to a slight year-over-year decline.

Drawing on data supplied by the American Trucking Associations, Mr. Larkin then showed that after the huge disconnect in 08 and 09, with truckload capacity tightening, truckload demand and supply have come back into line. Surprisingly, Mr. Larkin’s data also showed that LTL demand is now exceeding supply.

Gary Girotti, Vice President, Chainalytics PLC then took the microphone to talk about the impact of market dynamics on freight rate pricing, present and future. Drawing on his company’s data base of 92 shippers of various sizes with $15 billion in freight spend, he presented some very interesting findings.

With supply and demand in balance, shippers are able to find capacity today. One big issue is going to be driver availability which will be determined in part by compensation. Driver pay was reduced during the downturn and it has not kept pace with the growth in consumer price index or with the salaries of private industry workers. The lifestyle of the long haul driver is not attractive to many unemployed people. To attract enough drivers to meet the needs of the shipping community, this will likely put upward pressure on driver wages and freight rates.

The average length of haul of truck fleets is decreasing as intermodal transportation is gaining market share at distances down to 500 to 550 miles. Trucking companies are showing more of a willingness to work with railroads. The rails have spent $40 billion in capital investments over the past 5 years and have improved their service, particularly on short haul lanes in the eastern USA.

Mr. Girotti highlighted that smaller shippers tend to pay less than larger shippers since the former are better able to find niche carriers at more competitive rates. He talked about the “sweet spot” of $1 million to $5 million per carrier per annum in the United States (probably $100,000 to $500,000 in Canada) being the level at which to secure optimum pricing. Shippers tend to receive less favourable rates as carriers are tendered volumes beyond the $5 million range.

Participants in his shipper consortium expect capacity to tighten over the balance of the year. Freight rates will rise about 2.5% over the next six months and about 5% in a year’s time. Dedicated fleets, which became less attractive during the downturn and the subsequent decline in freight rates, are expected to become a growth area as freight rates increase. The webinar provided some very useful information to practitioners in the freight industry.

CSA 2010 was created by the U.S. Department of Transportation's Federal Motor Carrier Safety Administration (FMCSA) to remove unsafe commercial drivers from the America's roads. CSA, short for "Compliance, Safety and Accountability," uses a complex methodology to rate motor carriers on safety. It incorporates a "Safety Measurement System," or SMS, that assesses a trucker's on-road performance over the most recent two-year period and indicates whether the assessment should prompt the agency to dig deeper into the carrier's operational fitness.

The SMS includes seven "Behavior Analysis and Safety Improvement Categories" known as "BASICs." Embedded in the seven categories are more than 640 infractions that a driver and vehicle can be cited for. The SMS database is populated by data generated from roadside inspections triggered by infractions such as speeding on an interstate or state highway. A speeding violation gives law enforcement "probable cause" to pull a truck over and conduct what is known as a walk-around inspection of the vehicle and driver. Any infractions that are then found will accumulate as points on a company's safety "scorecard," which is updated monthly.

Fatigue Driving (hours of service), Vehicle Maintenance and Unsafe Driving are the three areas of most concern. Should the point total exceed the FMCSA's threshold for safety compliance, government inspectors will conduct an in-house audit or intervention of the company's operations. From there, a determination will be made if the driver is fit to continue behind the wheel. American, Canadian and Mexican carriers are all subject to inspection. An estimated ratio of 1 in 5 carriers is at risk of an intervention.

The CSA program is expected to have multiple impacts on the freight industry. While the system is imperfect and controversial, it is projected to move 10 percent of America’s 3.5 to 4.0 million drivers out of the industry, exacerbating the driver shortage that already exists. It will likely have an impact on insurance costs and driver training costs. Cost increases coupled with fewer drivers will serve to drive up freight rates that are already on the upswing due to the improving economy and carriers’ reluctance to make fleet additions.

The question for shippers and freight management companies is where do CSA scores fit in the selection and procurement of freight transportation services? Concerns over legal liability seem to be playing a role in carrier choice. A late 2011 shipper survey conducted by Morgan Stanley & Co. found that 55 percent of those polled were afraid to use a carrier if even one of its seven BASIC scores came in above the CSA threshold. If those shipper attitudes become more entrenched, carriers with a positive safety history but a poor CSA record may be “blackballed” and pushed out of business, according to the program's critics.

Shippers and freight management companies can expose themselves to enormous legal risks in the event of a fatal or serious accident involving a carrier they've selected and if a jury finds that they failed to give CSA scores sufficient weight when evaluating the driver and carrier. A jury could find them "vicariously liable" for damages resulting from an accident involving a carrier that they thought was a good safety performer.

This leads to the first conclusion that CSA scores should not be ignored. On the other hand, a carrier’s safety performance is still only one albeit important variable in the carrier selection process. An FMCSA spokesperson has stated that those looking to investigate a carrier's safety record should also rely on the agency's "Safety and Fitness Electronic Records System," or SAFER, which officially rates a carrier based on its most recent on-site compliance review, as well as the agency's "License & Insurance Website," which confirms that a carrier has active operating authority and adequate insurance. The agency said that by combining all three resources, users can get an "informed, current, and comprehensive picture of a motor carrier's safety and compliance standing with FMCSA.

C. Thomas Barnes, president of Con-way Multimodal, the brokerage arm of Con-way Inc., takes a “hybrid” approach toward CSA. His company monitors carriers' performance under the CSA BASICs to ensure vendors remain within the acceptable thresholds. However, the CSA scorecard is just one part of a "weighted average" calculation in determining if a carrier is fit for service. This leads to the second conclusion that other factors such as historical service performance, meeting contractual commitments, financial viability, IT capabilities, strategic importance and how a carrier addresses failures should be part of the carrier assessment.

Like Barnes, Joshua Dolan, director of global logistics and customs compliance for Philadelphia-based auto parts and service giant The Pep Boys, considers CSA scores to be a "component" of the carrier selection process. Pep Boys also uses other criteria and will drop a carrier that doesn't measure up and doesn’t take corrective action. Dolan advises companies to use outside services like Carrier411, a Norcross, Ga.-based provider that monitors CSA scores and creates quarterly alerts for customers to keep track of carrier performance.

Dolan said CSA will force shippers and freight management companies to care more about carrier choice than they have in the past, adding that "there is an expense associated with that." Safe and experienced drivers will be able to command higher salaries and benefits, and driver wages in general are likely to rise from current levels, he said. "It will become a strategic goal on the part of companies to keep drivers," he said. "Drivers will be picking and choosing companies, not the other way around."

This leads to a third conclusion. Whether you love or hate CSA, it is here to stay. Shippers and freight management companies must closely monitor the evolution of CSA and the multiple impacts it is having on the freight industry. CSA will result in improved safety which is a good thing. Unsafe drivers are a drain on a trucking company’s bottom line. But CSA will drive up costs for driver recruiting, training and compensation (to secure and retain the better drivers) and trucking company insurance. It will certainly drive up freight rates.

For the past several years I have been a participant in and fan of LinkedIn. It is an amazing social media tool for business. Recently I have joined and studied the discussions in a variety of LinkedIn freight transportation groups. There are many of them available to transportation professionals. Some deal with LTL freight, procurement, load postings, networking and recruitment, to name just a few.

Since Best Practices in Surface Freight Management is a passion of mine and a focus of my business, I thought it would be valuable to create a separate group to exchange ideas on this important topic. Effective today, I have launched this group on LinkedIn.

The Mission of the Group

Freight Management Best Practices welcomes transportation professionals interested in sharing, developing and implementing innovative and cost effective Best Practices in Surface Freight Transportation. We encourage members to discuss the challenges, opportunities and changes facing shippers and carriers in the freight transportation industry. Our goal is facilitate the sharing of knowledge and create a dialogue between shippers, carriers and other industry professionals. The intent is to identify and improve processes, to reduce inefficiencies in order for shippers to derive the best value from their transportation spend.

Topics for Discussion

The intent is to create a forum to discuss the full range of topics associated with running a Best in Class freight management operation. The group’s topics will include Best Practices in:
 Transportation Strategy – as part of a company’s Supply Chain Strategy, how to develop strategies that will differentiate a company from its competitors and give it a competitive advantage

 Packaging – designing innovative packaging that will minimize cube utilization and damages

 Loading and Unloading – Best Practices in loading/unloading trailers, containers and boxcars including the use of software that optimizes cube utilization

 Network Optimization – Best Practices to create the most efficient transportation network

 Procurement of Freight Services – Best Practices to select the most cost and service effective carriers, logistics providers and modes

 Technology to manage freight transportation – Transportation Management Software (TMS) and other software solutions that allow shippers to optimize the management of their freight spend

 Carrier Performance Management – The creation of key performance indicators (KPI’s) and the management of freight carriers to ensure communication, compliance, quality service and collaboration

 Private Fleet Utilization – Best Practices on how to run an in-house fleet and/or when to consider outsourcing to a for-hire carrier or logistics provider

 Border Crossing – Best Practices on how to move goods across the NAFTA borders as expeditiously and cost effectively as possible

 Energy Efficiency – Best Practices in how incorporate energy efficient processes in freight management

 Freight Audit and Payment – Share ideas on how to best manage freight expenditures

Who can join?

First you have to have a LinkedIn profile. Once you are on LinkedIn, the group is open to shippers, carriers, consultants, logistics service providers, software vendors, government officials, trade associations, media and other transportation professionals who have expertise or an interest in North American surface transportation. Sales solicitation of freight, software or consulting services is not permitted in the group. Those interested in recruiting transportation professionals or posting loads can join one or more of the other LinkedIn groups that have a focus in this area. Please join the group and share your Best Practices with your colleagues.

Last weekend I was struck by an interview on leadership lessons in The New York Times. It appeared in the “Corner Office” column of the Sunday Business section. The interview was conducted with Tracy Matura, general manager of the Smart car division of Mercedes-Benz USA. During the interview, Tracy was asked a question about what she asks prospective candidates whom she is seeking to hire. Here is what she said.

“Tell me who your favorite boss was and why, and tell me who your least-favorite boss was and why.” Tracy commented that this gives you a sense of what leadership style works best for this individual. “I would also then ask them about a time they took a risk and failed. I have never hired people who have told me they’ve never failed. You don’t learn if you don’t fail.”

The interviewer then challenged her on the issue of whether anyone ever admits that they have never failed. Tracy responded by saying that people might say, “You know, I don’t think I’ve ever really had a complete failure. Really. I don’t even ask the question in terms of just business. Everybody has had some failure in their life.”

This led the interviewer to try to understand the underlying rationale for the question. This was her response. “Here’s what I want: My leadership style is to be transparent and authentic, so if you’re going to tell me you’ve never failed, then it makes me wonder if you always hide your failures. I don’t like that - - surprises are bad for everybody. I can’t fix or try to fix something I don’t know about. Some people have that fear factor if they admit to failure, as if they say to themselves, “If I say I failed, she’s going to think I’m a loser and not hire me. Quite the opposite.”

While Ms. Matura’s comments reflect what she is looking for in a prospective employee, the person being interviewed has an obligation to try to determine the management style of the prospective boss. In order to make this assessment, the interviewee needs to ask a similar set of questions. “Tell me about the employees you hire with whom you have had the most successful relationship and why, and tell me about the employees you hired that were the least successful and why. How would you describe your leadership style? Please share with me some of your teams’ successes and failures. How do you describe your goal-setting process, how do you measure results, how do you communicate those results and what is the performance review process? Also, please describe the work environment that you try to create.”

During or at the end of an interview, many interviewers will ask the question, “Do you have any questions you would like to ask me?” Well, this is your opportunity to ask these key questions that can determine your potential success or failure with your new employer. Take advantage of this opportunity to do your due diligence.

This issues raised in the interview caused me to reflect on my many years in the corporate world and the other ramifications of the question being asked by the interviewer. Success and failure are terms that have relevance in the context of specific measurable outcomes. This goes back to Tracy’s question about good bosses and bad. Chances are your good bosses worked with you to set challenging but attainable goals. The yardsticks were clear and understandable, the communication was good, the support was there along with the autonomy when needed. As you progressed towards the mutually agreed upon goals, you received progress reports along the way. The result is that success comes from working with a boss who is honest and open, who communicates well and provides an environment within which one can succeed. Failure often comes from working with a boss who is not as forthcoming, not as supportive, where the goals are not clear and who does not communicate well.

Success or failure will come from hiring good people as Ms. Matura defines above. But it will also come from prospective employees selecting “good bosses” with whom they can work in a collaborative and productive environment.

Note: A new Freight Management Best Practices group was created on LinkedIn last week. Over 80 people became members of the group in week 1. Please feel free to join the group and share your thoughts on how to improve our industry.