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.

In last week’s blog, I tried to capture what appears to be the sentiment of a majority of economists.  Their prediction is for slow growth not just for 2012, but also for several years after that.  In the next two blogs, I will outline some of the approaches taken by shippers and carriers to bolster profits during the upcoming slow times.  The following are a number of the strategies that are playing out among North American carriers.

Maximize Yields from the Current Fleet

It is that time of year when many companies are in the process of finalizing their business plans and budgets for 2012.  We end 2011 with political upheaval in the Middle East, a major unresolved debt crisis in Europe, political gridlock in the United States and a slowing economy in China.  The United States still has the world’s largest economy that has been an engine of growth for so many years.  The U.S. is still Canada’s largest trading partner. However, as we saw this year, GDP growth of 3.5 percent cannot last forever.

As one reflects on where we have been and where we are today, there are large question marks about the potential economic growth we will see in the United States and in those countries that trade with it. Interest rates there are down to zero.  Two big stimulus initiatives have not pulled the U.S. out of recession. The U.S. has its own debt crisis and cannot continue to spend money, at least not the way it has done in the past.

U.S. consumers that got caught up in euphoria of ever rising home prices have seen their personal debt rise from 50% to 135% of annual income. But high unemployment, high under-employment, the drop in property values, and job retention fears, have created jittery consumers.  Since consumers represent 70% of total purchases, we have a big problem.  This problem cannot be overcome quickly, no matter what leader and political party is elected next year.

The bottom line on all of this is that there is no quick fix.  There is no political party or economic policy that can turn the ship around quickly.  The U.S. cannot spend its way to prosperity or cut interest rates to give Americans the “big bang” we would all like to see.  Two prominent economic minds (Jim Allworth, Vice Chairman of the RBC Investment Strategy Committee and Noel Perry, a senior economist with FTR Associates), speaking totally independently of each other, forecast the same future - - - slow GDP growth in the 2% range for the foreseeable future. While this may not sound too bad, when compared to what we have become accustomed to, this will likely make people feel that are stuck in quicksand.

What does this all mean to truckers and shippers? The pressure to maintain lean inventories will allow manufacturing to continue to grow at a modest pace, slightly in excess of 1.5% per annum for the next decade.  This slow growth will put the brakes on any rapid expansion in freight volumes.  Capacity will remain tight as carriers exhibit caution in adding to their fleets and as more regulation in the United States, (e.g. hours of service, CSA) reduces the labor pool.  Mr. Perry forecasts a gap as large as 500,000 drivers by the year 2014.  While fuel costs have moderated, rising equipment costs and driver pay will likely put upward pressure on costs.  Rates will continue to increase albeit at a moderate level.

Wal-Mart launched a program in mid-2010 to reduce costs and deadhead miles, leverage the retailer’s logistics skills and scale, improve visibility and control of its merchandise by taking control of deliveries of inbound freight.  The company believed they could find opportunities to do the work better and at a lower cost than vendors could do under prepaid freight terms.

The shift to increased use of freight-collect terms by the world’s largest retailer, worried shippers that had been trying to leverage their volumes to secure attractive carrier pricing.  For shippers that had spent years optimizing their freight network and negotiating preferred rates, the threat of losing control of their freight to one of their largest customers became a major issue.  When program details were first released, there were reports that Wal-Mart was using some fairly heavy-handed tactics in its discussions with vendors, both in terms of not really negotiating as to what would be the best overall transportation decision, and in asking for larger than acceptable "allowances" for picking up the freight against the contractually defined price that included transportation.

Greg Forbis, a senior director in Wal-Mart's inbound transportation group, announced last week at the CSCMP annual conference in Philadelphia that the world's largest retailer has made some changes to the program.  In an unusual about-face for Wal-Mart, Forbis stated that Wal-Mart realizes that "every situation is unique," implying that Wal-Mart will discuss various options with its vendors and look for the best total solution, instead of simply mandating that a vendor move from a prepaid to collect freight program. 

Some suppliers had efficient transportation operations that Wal-Mart was hard-pressed to improve. “One of the key learnings was that we weren’t as good as they were in some cases,” Forbis said.  Wal-Mart’s discussions with suppliers on changes to its inbound transportation were “a very open book,” with discussions of how to reduce costs and improve supply networks, he said. “Some wanted to share, some didn’t want to share. Those that didn’t want to share, we just kind of move on and go to the next supplier and say, "What are our opportunities?"

Nevertheless, Forbis made a strong case that in many situations, the vendor would benefit about as much as Wal-Mart from making the transition. He noted that many vendors, for example, want to focus on manufacturing and branding, and are happy to leave logistics execution to Wal-Mart.  Recognizing this, Wal-Mart has focused on smaller suppliers where the retailer can bring its scale and expertise to bear.

This week the world lost a business and technology giant with the passing of the iconic Steve Jobs, for many years the leader of the Apple organization.  Steve Jobs’ name will forever be associated with launch of the iPod, iPhone, iTunes, iTouch and iPad, that helped propel Apple to the status of second most valuable company in the world.  In the coming days, there will be many books written about this remarkable individual and the leadership skills that he displayed. Here is my take on a few of his unique leadership skills and some of the lessons that trucking company executives should learn from him.

Steve had vision.  He understood customer needs and was able to envision innovative methods of meeting these needs.  While other company experimented with music downloads and tablet computers, they were not able to create products that were useful to large groups of customers and commercialize them for widespread sale.  He was able to assemble a team of talented individuals and mobilize them to execute his vision.  Steve could see the finish line and he was able to take Apple there.

One of the driving forces that made Steve and Apple so successful was a single-minded focus on providing customers with a superior, easy to use product or service.  Apple designed products with the customer in mind.  Every feature was planned to create an exceptional user experience.  Apple didn’t just build a customer base; they created fanatical, adoring fans. Steve would not allow a new product or service to be introduced until it met his exacting standards.   

Steve also saw how important it was to create synergy between his products and services.  The value of an iPod or IPad is the ability to easily download music or videos from the iTunes store.  He also saw the value in linking to services of other companies.  The thousands of applications designed by other companies, at their expense, to work on Apple’s products, make Apple products so much more useful.  Collaboration with business partners, while taking a sizeable cut of their revenues, is smart business.

So many trucking companies are internally focused.  They think about balancing lanes and truck utilization.  They believe that by measuring and tracking on-time service and billing accuracy, they are meeting the needs of their customers.