As the cost of diesel fuel hovers around $4.00 a gallon in the United States and $1.30 a liter in Canada, trucking companies (and politicians) are again focusing on strategies to control energy costs that have risen forty percent since 2010. President Barack Obama firmly defended his record on oil drilling last week and ordered the government to fast-track an Oklahoma pipeline while accusing Congress of playing politics with a larger Canada-to-Gulf Coast project. Alberta, home to the world’s third largest pool of oil reserves, is working to increase capacity to transport crude amid opposition from environmental groups as companies such as Exxon Mobil Corp. and Suncor invest about C$20 billion annually in the oil sands.

In addition to increasing supply, trucking companies are instituting measures to ensure these energy supplies are utilized as efficiently as possible. Three such strategies were highlighted in a recent paper prepared by Derek Singleton, ERP Analyst at Software Advice. Here are some excerpts from Derek’s paper and from other industry sources.

Careful planning and the use of predictive technologies–such as distribution business software–can minimize the impact fuel costs have on the bottom line. Companies that manage a fleet can cope with rising fuel costs using three general strategies:

1. Streamline fuel procurement;
2. Improve operations and fleet management; and,
3. Better plan delivery routes and shipment loads.

Streamline Fuel Procurement

Managing fuel costs isn’t just about taking steps to control the costs. According to David Zahn, VP of Marketing at FuelQuest, significant savings can be realized simply by building predictability into fuel procurement budgets. Gas prices typically swing five cents per gallon, up or down, on any given day. When purchasing thousands of gallons of gas, buying at the wrong time can be devastating to a company’s bottom line.

Technology solutions like FuelQuest give companies that store gas a way to forecast demand, monitor on-hand fuel, and procure at the best market price. Automating the fuel procurement process, says Zahn, typically saves companies four to six cents per gallon.

Long-haul carriers don’t have the luxury of being able to fill up on-site. Companies that transport long-haul freight should consider fuel optimization programs that indicate where to refuel and how many gallons to fill at each location to minimize total fuel costs. Maps with turn-by-turn directions – even those designed for truckers – are available free from a number of web sites, including Truckinginfo.com (powered by ProMiles Software Development Corporation). These services do a good job of routing and costing. On the other hand, full-featured, trucking-specific routing and mapping software used by many large carriers can do much more than tell you which highway to take, when to turn left and right and calculate a trip cost.

Many packages are integrated with a carrier's management and dispatching software to not only give drivers detailed driving instructions, but also provide fleets with useful management data and automate many record-keeping tasks. When tied into a fleet's business management software, some routing packages can become powerful sales and management tools. These packages can calculate miles for billings and settlements, optimize fuel purchases, locate truck stops and fueling sites along the route, record state mileage data for fuel tax reporting, identify truck restrictions or construction along a route and compute lane rate information.

The most recent demand is for fuel optimization programs. ProMiles now includes a fuel optimization module built into its flagship software and offers a stand-alone fuel program. Over the last year, fuel purchase optimization has become the most requested feature since it saves money for fleets and owner-operators.

With the ProMiles fuel-optimization module, users enter their fuel network information, mpg, tank capacity, a beginning fuel level and an ending fuel level. The program then looks at the truck's fuel level at any point along the route and suggests where to fuel and how much to buy. This allows the user to optimize retail price or price minus IFTA taxes collected at the pump.

Improve Operations and Fleet Management

Any cost savings from purchasing fuel at low prices can be nullified by transporting with an inefficient fleet. Most efficiency improvements–such as streamlined trailer aerodynamics or retrofitting the engine for renewable fuel use–require significant capital investments. However, there are several controllable factors that can boost fuel efficiency for a fraction of the cost.

One of the biggest boons to fuel efficiency is employing highly-skilled drivers, which can improve fuel efficiency by five to 20 percent. Roy Craigen, President of Transcom Fleet Services, suggests testing drivers beyond licensing standards to ensure they’re versed in industry-standard driving techniques, such as accelerating smoothly and minimizing idling. Beyond that, routinely monitoring things like tire air pressure and speed go a long way toward conserving fuel. Here are a few quick stats Craigen shared with Derek in a recent conversation that show the impact driver actions can have:

• A three percent variance in air pressure impacts fuel efficiency by one percent.
• For every 10 MPH over 55 MPH, you consume 10 percent more fuel.
• A 100 truck fleet operator can add over $700,000 to its bottom line by improving fuel efficiency just a half a mile per gallon.

Better Plan Delivery Routes and Shipment Loads

A final strategy for reducing fuel costs is to plan more intelligent routes and truckload shipments. Both of these goals can be accomplished with transportation management system (TMS) software. TMS software helps fleets suppress fuel costs by planning routes in a way that minimizes miles travelled and the number of stops. The resulting efficiency gains can help fleets make more deliveries within comparable operating hours. When used in conjunction with a well-trained dispatcher, this can be a great way to minimize things like time spent in fuel-wasting commuter lanes.

Creating intelligent routes is complemented by load planning features that ensure trucks leave with a fully-stocked load to reduce return trips. This limits fuel surcharges incurred by making less frequent shipments. It also helps make difficult decisions, such as whether to drop off the heaviest load first–even if it’s farther away–to make the rest of the drops with a lighter, more efficient vehicle.

As Derek stated, companies that put these strategies to use will be prepared to deal with the high fuel prices of today and tomorrow. By reducing the impact of rising fuel prices, companies with fleet operations can maintain competitiveness without sacrificing their bottom line.

Two experts in trucking company acquisitions predicted this week that we are in store for an upswing in industry consolidation in 2012. This was one of the highlights of the Driving for Profit event that was held in Mississauga this past week. Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics interviewed two gentlemen who play significant roles in these types of activities, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc.

In the initial stages of the interview, Lou asked these gentlemen about why we did not see more consolidation during the recent recession. The key takeaway from this discussion was that during this difficult period, trucking companies hunkered down into a “survival mode.” The recession created devaluations of trucking company businesses. Most truckers decided to tough it out until valuations improved. Lenders, who saw trucking as a core industry, chose to support the industry until economic conditions improved.

The two investment advisors now believe that M & A activity will now increase. They base this conclusion on the fact that after a 3 year hiatus, there is a pent-up demand. There is a “ton of cash” waiting to be invested. Balance sheets are healthy again. During the recession, many trucking companies right-sized their businesses. Investors will now see more efficient, stable businesses.

Demographics will also play a part as many baby boomers who are seeking an exit strategy are three years older and their timetable for leaving the industry is now shorter. We now have willing buyers, sellers and bankers. While the two gentlemen do not predict a “feeding frenzy,” they do expect to see a doubling in the volume of trucking company acquisitions as compared to what we saw the last three years.

Lou then asked these advisors about the types of deals we are likely to see. They expressed the view that there will likely be more “bolt-ons” where companies seek to expand a core business. These types of deals allow companies to “improve overheads, bring margins into line” and “reduce dependence: on certain “key customers.” When asked a question about whether we can expect to see a blockbuster deal like the Yellow-Roadway merger in the U.S., Doug Nix made the observation that the money would be there if the right plans with the right people are put in place. However he opined that he does not think Canadians have the “chutzpah” to make a deal of this nature.

With respect to the issue of Canadian companies buying U.S. based firms, or vice versa, these gentlemen reminded the audience about the poor track record Canadian companies have in buying and running successful businesses in the United States. With Canada being one tenth the size of the United States, Canadian companies are of less interest to American truckers. While Celadon has expressed an interest in acquiring Canadian truckers, their focus appears to be on “distressed” companies that are available at essentially no cost.

One of the interesting comments made by these industry advisors was the need to “grow or die.” Truckers that try to maintain their existing footprint are in danger of “overhead creep” and “complacency.” They suggested that it is time to sell if you are happy with the size of your current company and there is no longer a desire to grow the business. Over time, this could lead to stagnation or possibly risk of diminishing profits. For companies that are having success in building their businesses, the question then becomes one of whether its management team will have the competence to lead the larger organization. Will the star salesmen be able take on the role of sales coach, mentor and leader? In next week’s blog, I will share the views expressed by these individuals on how to buy and sell a trucking company, what earnings multiple is used and how to ensure a successful acquisition.

Note: The new Freight Management Best Practices group is up and running on LinkedIn. The group now has over 120 members and there are some very interesting discussions taking place. Please feel free to join the group.

At a recent Driving for Profit Seminar in Toronto, Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics Magazine, led two trucking company investment advisors, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc. through a discussion of how to buy and sell trucking companies in 2012. Here is what they had to say.

From a buyer perspective, they encouraged companies to be proactive in seeking out prospective acquisition candidates. Since so much about buying is timing, it always important to plant the seed and remain in contact. While a trucking company’s leaders may not be ready to sell their enterprise in the second quarter of 2012, it is at least important as a purchaser to express your interest. One should also keep in mind that the purchase process itself can take six to nine months or more complete.

The buyer should carefully think through some key questions such as “why” make this purchase, what are the underlying business risks of a potential acquisition, do they have the investment advisor team in place to guide them through the process and do they have the “bandwidth” (management team) to manage the acquisition? In other words, can the company manage its current base of business while it is trying to assimilate new customers, new employees and possibly fit two cultures together?

The two advisors mentioned that they use a valuation multiple for an asset-based business of 3.75 X normalized EBITDA. The word “normalized” is an important concept since this refers to what the earnings will look like when certain expenses or withdrawals that are taken out of the company by the current owners are removed from the income statement to better reflect what the business will look like on a going forward basis.

The purchaser must look at a number of variables in determining how to pay for the company. The advisers related it to buying a home. The purchaser looks at what they can make in terms of a down payment and the level of mortgage they wish to carry. Similarly, when buying a trucking company, one needs to consider the financial structure of their offer. This involves an evaluation of cask payment, business loan and earn-out. The latter is a common term that refers to principle of paying the seller part of the purchase price from monies earned by the business over a period of years. If the sellers remain with the business after implementation and help maintain the income flow, they are rewarded with a business retention bonus for their efforts.

The quality of the business is another very important issue to consider. “Quality is remembered long after the price is negotiated.” Another expression one often hears is that “you get what you pay for.” Fixating on a “bargain basement price” can result in disappointing results. The investment advisors also cast doubt on the notion of buying trucking companies for the purpose of acquiring drivers. They suggested that if you are interested in acquiring drivers, one is better served to purchase a driver service company.

From a seller perspective, they argued that it is the “right time to sell when you are ready to sell.” Clean up your balance sheet by normalizing earnings before the company is offered for sale. Also clean up the office and the fleet to make the business look as attractive as possible. Engage in a competitive bidding process to ensure you receive the best price for the business. They also encouraged sellers to give some serious thought about what they wish to do with the rest of their lives.

Just as considerable planning should be put in place to ensure a successful purchase, sufficient resources should be applied to the post-close implementation. In addition they cautioned the purchaser against “betting the farm on an acquisition.” There are companies that placed their businesses in jeopardy by making an ill planned purchase. They highly recommend that the vendor should be incented (e.g. earn-out) to retain a vested interest in the success of the post-purchase venture. To ensure client retention, they suggested that the business has a good customer relationship management (CRM) system in place so the purchaser will have visibility in this most important area.

This was clearly a very informative interview. Congratulations to the event organizers and Lou Smyrlis for hosting and running such a valuable seminar.

This past week I had the opportunity to speak with some of North America’s leading truckers. Other than the “head shots” in this year’s National Hockey League playoffs, the other number one topic of discussion on everyone’s mind is the issue of driver shortages. I also had an opportunity to read what the Canadian Trucking Alliance labels “a new, eye-opening report” from the Blue Ribbon Task Force they established in 2011 to address the impending shortage of qualified commercial drivers in Canada.

In this blog, I would like share a few thoughts on this hot topic.

The problem is real

There are some shippers who believe that this issue is manufactured by the trucking industry to help sell freight rate increases. Let me assure my shipper friends that this is not correct. Trucking companies all over North America are having difficulty attracting “qualified drivers.” By this term we mean skilled professional drivers or people interested in becoming professionals.

This shortage is being created by an aging workforce, lifestyle issues (e.g. having to spend time away from home), a lack of interest from women, the challenges of the work, the level and structure of the compensation and the fact that driving truck is not viewed as a profession. The fact is that while there are millions of Americans and Canadians out of work, driving truck is not considered an option for most people.

There is no “quick fix”

This problem is going to be with us for a while. It is going to begin having a significant impact on truckers that don’t craft a well thought out driver recruitment strategy. They are going to begin losing business to those companies that have drivers.

It is also going to begin having a more significant impact on shippers. Some companies are going to have problems moving their freight. They are going to have trouble finding carriers with capacity. They are going to have to switch from truckload to LTL or begin paying more. Get used to it and begin expanding your carrier base to minimize the impact of the problem.

What will it take to solve the problem?

Take responsibility for solving the problem

The Task Force prides itself on the fact that truckers are taking ownership of the problem. According to the report, "industry leaders need to make a strong statement demonstrating to current and future drivers that we are serious about coming to grips with the issues that underpin the driver shortage." The CTA report sends a loud message that the leading trucking organization in Canada has a sincere concern and is seeking solutions to the problem.

Create a Recruiting Strategy

This responsibility falls on governments and trucking companies to solve. Governments need to develop immigration policies to encourage skilled drivers or those individuals seeking a driving career to come to North America. The CTHRC and other governmental bodies are working on this. Trucking companies also need to craft strategies to secure the type and number of drivers best suited to the needs of their organization. This varies from company to company.

Address the Lifestyle Issue

Truckers need to look at making the profession more attractive. This includes looking at how to create more turns and relays so drivers can be home at night and have better quality of life. Increasing the use of intermodal service for long haul movements also has to be part of the solution. Dispatcher training is critical to ensure drivers are treated with dignity and respect.

Make Truck Driving a recognized Profession

This will take collaboration between government, carriers and shippers. There needs to be a universally recognized truck driver certification program. The program will need to address safe driving skills, interpersonal skills, making effective use of computers and communications, diet, exercise, personal and lifestyle management. This will create a pool of professionally trained safe drivers. Trucking companies need to invest in these programs and shippers will need to seek out companies that employ professionally trained and certified drivers.

Start Building Capacity now

Almost every trucker is singing the same song these days. We will replace our fleet but not make any additions for growth until there is a demonstrated upswing in the economy. This is a direct result of the impact of the Great Recession that caused many truckers to park equipment.

The CTA report concedes there is merit – at least in the short-term -- in the argument that a driver shortage is good for the industry in that it creates tightness in capacity which in turn places upward pressure on freight rates. Obviously the “industry” referenced in the quote is the trucking industry and not shippers or the economy.

The market is going to take care of this problem in the years ahead. As the economy improves, there will be increased demand for trucking services. Shippers will gravitate to carriers that invest in their fleet and drivers. Carriers that are trying to harvest their current fleet and not make the necessary investments will lose customers and be left behind. This is what will drive carriers to move from their current yield optimization strategies. More carriers need to begin planning their growth strategy now for both equipment and drivers.

Make CSA a North American Program

While some argue that the CSA program in the United States (that applies to drivers who cross the U.S. border as well) is a cause of the driver shortage, the fact is that this program, that is in the process of being refined, elevates the quality of the profession and weeds out substandard trucking companies that do not put a proper priority on safety. Long term, this is a good program for the trucking industry. The CSA program needs to become a North American program and needs to be refined over time to maximize its effectiveness.

Create Best Practice Driver Compensation Programs

During my discussions with truckers this past week, I heard a number of proposals on how to improve driver compensation. These range from paying drivers an hourly wage rather than rate per mile to tying incentive pay to the achievement of various metrics (e.g. stops per hour, safety record, etc.). Improving compensation is clearly part of the solution.

Shipper support for Carriers employing Professional Drivers

Truckers must focus on making their operations as productive as possible. This includes using the most advanced TMS systems linked to the most cost effective tractor and trailer tracking. In other words, truckers have a responsibility to run the most efficient operations possible. Shippers don’t have to pay for the inefficiencies of their carriers.

People who are potential truck drivers have career options. They can go into construction or a host of other jobs. Driver compensation will have to keep pace with remuneration in other professions.

Freight rate increases should go to those carriers that are the most efficient and can demonstrate how these increases are tied to investments in making their operation even more efficient.

Shippers must be part of the solution to the driver shortage problem. There is a cost associated with recruiting, training and compensating professional drivers. Shippers will likely continue to have the choice between using lower quality carriers that have inefficient systems and don’t train and pay their drivers well to companies that use carriers that provide a high quality service, utilize the best technology and the most skilled drivers. The latter will likely come at a premium.

Summary

Carriers need to plan now to ensure they have the fleet capacity, drivers and technology to run a productive and efficient operation. Otherwise, they risk being left behind. Shippers need to understand that the driver shortage problem is real and that they are part of the solution. Part of the solution is selecting carriers that invest in technology, equipment and professional drivers.

This is a very interesting year in the world of freight transportation. The economy is improving but at a very slow pace. Supply and demand for freight transportation services are pretty much in balance. Trucking companies are all singing the same song. Their number one problem throughout North America is finding qualified drivers. Carriers are replacing equipment that comes to the end of its service life but are not making additions to their fleet for potential growth. Adding capacity without the drivers to move the rigs and customers that commit to provide the freight is not a sound business approach.

Carriers are being very strategic in how they allocate their capacity to their customer base and to uncommitted prospects. Improved asset management technology is allowing transport companies to manage their fleet more effectively and to pinpoint (and charge for) abuse. Freight rates are on the rise. This is confirmed by some of the better known published freight rate indices.

While the pendulum has not totally swung back in the carrier’s favour, it has certainly tilted in their direction. Shippers are not having the same easy time reducing or controlling their freight rates as they did during the Great Recession.

While freight bids are still prevalent, there are less of them in 2012. Some shippers are receiving a rude awakening. Shippers that put their freight out for bid to the same core group of carriers as they have in the past, run the risk that the result of the exercise will be higher rather than lower rates. For shippers that cannot find the capacity and rates they are seeking, they run the risk of an even nastier surprise if they put their business on the spot market. Freight that may have moved for $1.30 a mile may be moving at $2.00 a mile on the spot market.

What can shippers do to mitigate freight rate increases in 2012? For companies that have not put their business out for bid in the last couple of years, it always worth testing the market with a high quality RFP that is sent to a broad range of carriers and logistics companies.

But there is so much more a shipper can do. It is always important to do an audit of one’s freight transportation business practices or hire a qualified company to do this for you. As businesses change and transportation services evolve, it is always essential to challenge all of the assumptions that are the underpinnings of a company’s freight program.

It starts with looking at the location and volume of business coming from vendors and going to customers. For many companies, this is changing rapidly. As order sizes are altered and companies become more global in their outlook, shipping patterns can vary significantly from what they were even a few years ago. As customer locations shift, it is necessary to revisit pool points, warehouse locations, shipment delivery intervals, shipment sizes and modes of transport. Shippers also need to make their freight as “friendly” as possible and work collaboratively with their carrier partners to take costs out of their transportation and warehouse operations.

The transportation industry is evolving as well. Intermodal transportation is becoming cost and service effective on lanes as short as 600 miles. Experts are predicting some industry consolidation over the next couple of years as certain baby boomers seek to exit the industry while other companies seek to add customers, drivers and trucks to their fleet.

While the economy is in the process of a turnaround, there continue to be ominous clouds. Oil prices seem set to escalate and could hit jump if there is more unrest in the Middle East. The continuing economic problems in Europe and the possible slowdown in China raise further question marks about the sustainability of the recovery. In this uncertain world where capacity is tight, drivers are hard to find and freight rates are on the rise, shippers need to look at their full range of supply chain processes and at the full arsenal of cost reduction opportunities that exist to keep their freight spend under control.

The new Freight Management Best Practices group on LinkedIn now has over 150 members. Feel free to join the group and don't be shy to share your views on how shippers and carriers can run more efficient, profitable operations.