The world of freight transportation is changing rapidly. The signs are there and they are unmistakable. Recognizing and responding effectively to these signals may help determine which shippers and carriers will survive in the years ahead. Let’s examine the components of the new paradigm of freight transportation.

The Era is Cheap Oil is Over

The steep escalation in fuel prices this year is a harbinger of things to come for shippers and carriers. This time there will likely be no major recession to bring energy prices down. The sad fact is that 95 percent of transportation modes, passenger and freight, run on petroleum products and the likelihood of finding new sources of supply or of shrinkage in global demand is highly unlikely. In fact the use of petroleum in countries such as China and India is on the rise.

The result will be tighter truck capacity, greater use of intermodal rail services, the electrification of transportation systems, the relocation of factories and distribution centres and the slow shift to cleaner, cheaper fuels. It will drive more LCV’s (long combination vehicles) or “turnpikes” and more triple trailer configurations. This may be the impetus to harmonize our laws throughout North America to remove barriers to the movement of the most energy efficient vehicle combinations across our highways. To curb use, many countries will have to begin looking at the Danish example of higher taxes on fuel inefficient vehicles and higher taxes on petroleum. Get used to it.

The Driver Shortage is Real

The driver workforce in North America is aging. The “route 66” lifestyle of the long haul truck driver no longer appeals to most people. Like everyone else, truck drivers want to be home with their families most nights of the week. After all these years, driving truck is not a certified recognized profession. The compensation for truck drivers (e.g. $40,000 to $50,000) is not great. The relentless push for freight cost reductions makes it difficult for trucking companies to raise driver wages and remain competitive. There is no “quick fix” and the problem will get worse before it gets better. Like the energy problem, the solution to this problem will take time.

Driver compensation and as a result, freight rates will have to increase. Immigration policies will have to change to bring more foreign existing and potential drivers to North America. Driver training programs will have to improve to expedite the process of providing the new pool of drivers with the required skill sets to perform as professional drivers. Shippers will have to look at their supply chains and seek out cheaper modes (e.g. rail intermodal) and more local sources of supply. The time to plan for driver shortages is now.

The key word for Shippers and Truckers will be Efficiency

Modern computer and communications technologies have revolutionized many industries and they are in the process of revolutionizing freight transportation. TMS (Transportation Management Systems) for shippers and FMS (Freight Management Systems) for carriers allow for the efficient and optimized movement of freight. An electronic on board recorder (EBOR) is an electronic device attached to a commercial motor vehicle, which is used to record the amount of time a vehicle is being driven. The relatively new Hours of Service (HOS) legislation in the United States and Canada are rules intended to prevent driver fatigue, by limiting the amount of time drivers spend operating commercial vehicles. Modern asset tracking devices can provide information on the precise location of every tractor and trailer so as to maximize their utilization. In other words, tools are now available to manage the activities of every driver and company asset. They can pick up on the time worked by each driver, identify drivers who are not energy efficient or spot trailers sitting in a yard for more than 48 hours. Not all fleets have or can afford the new technologies. In the case of some tools such as trailer tracking, they are significantly underutilized and undervalued.

The effective use of technology will separate the “men from the boys.” It will accelerate the exodus of poorly managed, inefficient fleets. It will drive down costs. The market will dictate that freight business will go to the carriers that have the most efficient networks utilizing the most efficient technology. It will go to the modes and carriers that best manage people and assets.

Social Media are revolutionizing how we Communicate with one anther

For some people, Facebook is a place with their children connect with their friends and share pictures of the daily life. LinkedIn is that annoying service that sends you invitations to connect to the networks of people you barely know, don’t want to know or don’t know at all. Twitter is a service that allows people to send out short trivial messages about where they are having dinner or their favourite singer on American Idol. You Tube is the place to find rare video clips of James Brown signing different versions of “Sex Machine.”

For those of you who think this way, you have missed the boat. These so-called social media are changing entire industries including transportation. This is the places where truckers communicate. This is where people go to hire and be hired. This is the location to find prospects and to obtain business. It is the tool to use to provide demos of your service. It is where to find loads and carriers and to learn about Best Practices in Freight Transportation. To sum up, social media are not just the place where your granddaughter posts her prom pictures; it is where your employees and customers are discussing your business. Find a tutor, read a book (online) and then get involved.

These trends are unmistakable. Avoid them at your peril. This is where the transportation business is today.

In the most recent Transportation Buying Trends Survey undertaken by Canadian Transportation & Logistics magazine, there is an interesting set of questions that pertain to fuel surcharges. Over 68% of shippers support the view that “fuel surcharges are necessary as long as fuel costs continue to be highly volatile.” Slightly less than half of the survey respondents believe “carriers apply fuel surcharges correctly.” Over 61% agreed with the statement that “fuel surcharges are a way for carriers to squeeze additional revenues from their customers to improve their profits.” Over 55% of shippers support the view that “carriers should adjust their freight charges to market rates that include fuel surcharges and as a result simplify their billings.”

Perhaps the most interesting finding is that 25.8% of shippers have created their own fuel surcharge index. Since I interact with both shippers and carriers in my daily work, I would like to weigh in on this topic. This set of responses begs a few questions. Should shippers be taking their precious time to create fuel surcharge indices and formulas? How should shippers approach the topic of fuel surcharges? What should shippers do to optimize their freight costs? Here are my thoughts.

For shippers that use both private fleet and for-hire carriers, it is essential to be fully informed on all aspects of fuel costs and fuel surcharges. Even for carriers that use exclusively third party carriers, there is a requirement to have some familiarity with the leading indices and the current surcharges being applied. For Canadian and cross-border shippers, a subscription to the Freight Carriers Association of Canada’s weekly fuel calculation bulletin will provide you with one of the industry standards for LTL and truckload shipments. For shippers that use intermodal service or are considering it in their freight programs, they should obtain a copy of the railway/IMC fuel surcharge formulas. These differ (e.g. are lower) from the over the road surcharge numbers.

The next thing a shipper should do is to gain an understanding of the components of a freight rate. One needs to understand that a carrier’s freight rate or tariff is based on several components. There is the cost of pick-up and delivery, the line haul component, the cost for any special handling (e.g. residence, construction site deliveries, etc.) and of course, the fuel component. For LTL and small parcel shipments, there are a number of other variables that come into play such as shipment weight, density, cube, packaging etc.

Shippers need to understand that each carrier has its own mix of freight, its own fleet size and specifications (e.g. straight trucks, tandem, tri-axel etc.), its own head haul and back haul requirements in terms of both yield and volume and its own primary and secondary markets. In other words, fuel costs and surcharges are a large piece of the puzzle but they represent one element of a carrier’s total cost structure. At the end of the day, the carrier looks at each shipper’s freight and relates it to their costing model, business requirements, profit objectives and of course, market rates to determine their rate structure.

For shippers that “squeeze” carriers hard and insist that they will pay, for example, 80% of the current FCA proposed surcharge, they need to understand that their carriers will have to augment their base rates or accessorial charges to ensure they are achieving satisfactory yields on their freight. It is somewhat analogous to a carrier doing research on the costs of corrugated paper and pallets. Certainly they are important elements of the cost of the shipper’s freight but they represent only one piece of the pie.

In my view, shippers should make sure their freight programs are as efficient as possible. They should focus on those areas where they have control.

• Packaging optimization
• Shipment size optimization
• Network optimization
• Mode optimization
• Consolidation/deconsolidation opportunities
• Carrier optimization

In the case of the latter, they should do a comprehensive annual bid to make sure they are paying market rates for freight transportation, accessorial charges and fuel surcharges. To make their lives easier when it comes to analyzing the bids they receive, they should standardize on one fuel surcharge formula. In addition, they should make their freight as “carrier friendly” as possible.

The other thing they should do is have a checklist in place to evaluate their carriers on efficiency. One of the key questions for me is not what a carrier is charging for fuel; It is how well are they performing in the area of fuel economy. That will be the topic on next week’s blog.

Carriers and the transportation media have laid out a compelling case as to why transport companies should be receiving rate increases in 2012. As the Great Recession of the late 2000’s unfolded, shippers put significant pressure on their carriers to roll back their rates. For many carriers, rates have not returned to pre-recession levels. The driver shortage is putting upward pressure on driver pay. Government regulations (e.g. CSA, HOS) are being cited as some of the causes for a shrinking driver pool. Despite the recent easing in fuel costs, petroleum costs have also been on the rise this year. The increased cost to purchase insurance and upgrade fleets are driving further cost increases. Shippers are being told to accept the proposed rate increases to ensure they have available capacity if the economy begins to grow at a more rapid pace.

These are compelling reasons and the various Canadian and American rate indices suggest that shippers are consenting to rate increases. What can shippers do to help mitigate these increases in their supply chain costs?

Here are a few suggestions. In my last blog I outlined a number of steps that shippers should take. These include looking inward at their current packaging, taking advantage of consolidation (e.g. combining small LTL shipments into larger shipments), modal conversions (e.g. over the road truckload to intermodal) and other related opportunities to reduce costs.

Every shipper should also look outward at the market rates for their freight. An annual freight bid that goes to an extended range of carriers and logistics service providers is also a must to ensure the company is paying competitive rates.

The operating ratios of publicly traded transportation companies are easy to access. While costs have certainly gone up for most transport companies, one of the “dirty little secrets” of the Great Recession is that many costs have gone down. Many trucking companies parked equipment, reduced wages, changed their operations (e.g. switched some long haul trucking business to intermodal) and improved their efficiency. In other words, they adjusted their cost base to correspond with their reduced volumes. This begs the question of what level of increase should a shipper accept?

The days of a freight salesman walking in and saying that my management is asking us to secure a 6.9% rate increase this year should be long gone. This is not the time for shippers to “roll over and play dead.” Carriers need to do more than “cry the blues” and talk about cost increases. They should lay out a “business case” as to why they need a specific level of increase. The business case should not be generic but tailored to the specific requirements of each shipper. I encourage shippers to prepare a checklist of items to see if their carriers are doing everything possible to improve efficiencies. The list should include:

• A summary of the cost increases they have incurred and what they are doing to mitigate them
• Their financial performance over the past 3 years (Some privately held companies may resist this question but it is legitimate if they are asking you to pay more).
• The miles per gallon they are currently achieving with their fleet and what is their plan to improve in this area (The better managed fleets are in 6.5 plus range.)
• Are they a SMARTWAY carrier and what are their SMARTWAY scores?
• What are their fleet management (e.g. tractor tracking and trailer tracking) processes? (This is an important indicator of efficiency.)
• What are their CVOR and CSA scores (which are available online)? (Good scores are a sign of a safe, well maintained fleet)
• Asking about their use of technology (e.g. EBOR’s), systems and participation in new programs (e.g. long combination vehicles) to improve efficiencies

Finally shippers should be asking their core carriers about how they can work together more effectively. What can the shipper do to remove obstacles and streamline processes to reduce costs and mitigate rate increases?

The key is to be prepared for these exchanges. Certainly shippers should try to maintain their relationships with their core carriers if they are performing well and if they are operating efficiently. In fairness to carriers, fuel costs and driver wages are largely driven by market conditions. On the other hand, transportation executives have a responsibility to their employers to filter “boilerplate” rate increases and engage in a thoughtful exchange of information so as to make responsible and informed decisions that affect an important component of their costs and profit margins.

The proxy battle at CP Rail is unprecedented in Canadian business since it resulted in the resignation of the company’s CEO and 4 directors. It is hard to recall another proxy battle in recent history that produced such a profound and dramatic result.

It is easy to discount what happened at CP Rail as the result of the work of a determined, experienced shareholder activist who was able to convince other shareholders that the company could achieve superior financial performance with a new executive team. If that is the only takeaway from this “palace revolt,” that would be unfortunate.

From my perspective, there is so much more to learn from the changing of the guard at CP Rail. The fact is that CP Rail was an “underperforming” company in its segment of the transportation industry for a long time. A rail renaissance has been under way for more than a decade. Smart investors like Warren Buffet and more recently Bill Ackman realized that there are only 7 class 1 railways in North America and that there are large barriers to entry. As an oligopoly, the industry has huge pricing power. As energy prices rise and driver shortages increase, rail transportation becomes a very cost and service competitive option to trucking. Moreover, many truckers are converting much of their long haul and even medium haul (e.g. 500 miles) movements to rail. The growth prospects for rail are excellent.

One cannot criticize the CP Rail CEO, a CP Rail “lifer,” who was ousted, and his team, as inexperienced railroaders. One cannot criticize the chairman and the board of CP Rail as not being a “blue chip” group of experienced business leaders. The “rub” is that this team did not keep pace with where the industry was going. An inbred management team coupled with a “clubby” board did not produce results in line with other top performing railroads. It took an activist investor to shake the tree to remove some of the apples.

The question is what would have happened at CP Rail if Bill Ackman had not come along? How long would the company have continued to drift under its leadership team? How many other public transportation companies are in the same position?

There are several key messages that shareholders and senior business leaders across North America should be taking from the shakeup at CP Rail. First, where does your publicly traded company rank against the leaders in your segment of the transportation business? What is the plan to take the company to the top rank in that segment? Are the board and leadership team driving the level of profit growth that is in line with the elite companies in the industry? If not, the CP Rail battle should be a “wake-up” call.

The leaders of privately held transportation companies should also be receiving and digesting the implications of the proxy battle. Is your company Best in Class in its segment of the business? Are you looking at those metrics, whether operating ratio, miles per gallon, market share etc. that provide an outside perspective on how well-run companies in your segment of the industry are performing? Do you have an advisory board or outside resources that you can contact to obtain an independent critique of your results? When was the last time your leadership team tried something new, entered a new market, took courses at a university, and/or participated in one or more social media? When was the last time someone from the outside joined your leadership team? Are there opportunities that are passing you by because you don’t have the resident expertise on your team?

There aren’t many Bill Ackmans around today. That means that the leaders of many companies need to be their own Bill Ackman. They need to challenge their leadership team, their plan and their results. If they don’t, they may be the next leadership team to be replaced or the next company to leave the industry.