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A little over a year ago, I wrote a blog entitled “How do you know when it is time to conduct a freight bid?” (http://www.dantranscon.com/index.php/blog/entry/how-do-you-know-when-it-is-time-to-conduct-a-freight-bid ). In that blog, I outlined a set of general conditions that shippers can use as a guide to reach this decision point. Half way through the first quarter of 2017, I find myself thinking about this issue again. Here’s why.

The stock markets in North America are hitting record levels on an almost daily basis. Usually this is a sign of good economic times ahead. The US Consumer Confidence Index in December of 113.7, reached its highest level since 2001, a sure sign that people are ready to open their wallets and buy things. The National Purchasing Manager’s Index increased to 54.7% in December 2016, an increase of 150 basis points over the previous month and the 91st consecutive month for growth in the overall US economy.

The Shippers Conditions Index for October 2016 increased to a neutral reading of 0.4. FTR, an American transportation consulting service, expects that shippers will see a couple more months of neutral market conditions before they may be impacted in the latter half of 2017. The impact would in part be due to potential capacity issues stemming from the Electronic Logging Device (ELD) implementation scheduled for the end of 2017.

ACT Research’s For-Hire Trucking Index sees freight rising faster than capacity, increasing the gap to levels not observed since 2014. January freight volumes for TransCore’s Link Logistics continue an upward trend after a surge in freight volume in December 2016. Although the record for highest load volumes for January was set in 2014, last month’s load volumes are the second highest recorded for the month of January, and compared to last year load volumes have leaped 43% year-over-year.

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The objective of a freight bid project is to secure a range of carriers and logistics service providers that are best able to supply a shipper with the service (e.g. transit times, customer service, shipment tracking information), capacity (e.g. drivers, tractors, trailers, straight trucks) and pricing to ensure the company has a competitive advantage in the market. It takes time to do this right.

If your company has conducted a professional bidding exercise, you should be able to rank your service providers on a set of variables at the end of the first round of bidding. If the bidding process has been conducted effectively, there will likely be some significant cost savings, particularly for companies that have not gone to the market for several years.

There is a temptation on the part of some shippers to “take the money and run.” This could be a big mistake.

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There are thousands of freight carriers, load brokers and logistics service providers throughout North America. One of the important elements of an effective freight bid is to seek out those carriers that can provide the best combination of service, capacity and rates to meet the unique needs of your business.

Over the years, we have observed some companies that do freight RFP exercises but limit the carriers they contact to the same group of companies year after year. My colleagues and I will hear comments like “we used that carrier in 2002 but their service was poor” or “most carriers in that lane have the same rates” or “we know the carriers that can handle our freight effectively.” It is our view that conducting an RFP is a great time to learn more about the various players in the industry.

Times change and so do carriers. New management will strengthen some carriers while weakening others. The quality level can vary significantly from carrier to carrier.  There can be a wide disparity between carriers in their ability to serve certain geographic areas.  

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As we approach the end of February, most truckers would acknowledge that this is a good year for the North American motor carrier industry. Business volumes remain strong, in fact stronger than they have been during the first few months of prior years. Supply and demand remain in pretty good balance. Capacity is tight as experienced drivers remain in short supply. Low diesel fuel costs are keeping this operating expense in a more manageable range than it has been in some time. For Canadian manufacturers, the eighty cent dollar is helping drive exports to the United States. Many shippers are receptive to rate increases to ensure they retain their core carriers. There hasn’t been a better time in years to improve yields.

In the past, truckers would go to their low margin accounts during the good times and seek a significant rate increase or de-market some accounts in the hope that new, more profitable accounts would be added. As economic conditions worsened and revenues declined, these same truckers would often go back to the accounts they de-marketed and then try to re-secure them. This feast or famine approach to yield management did not appreciably improve the business on a long term basis. Some companies have learned from experience that there is a better way. During these fairly buoyant times, the opportunity exists to make some significant and sustainable improvements to the bottom line of your trucking business. Here’s how.

Get an Accurate Reading on the Margins on all of your Accounts

If you haven’t invested in a good cost accounting system, now is the time to do so. As a starting point for any yield management initiative, it is critical that you don’t guess at the margins of your accounts. A good costing system will supply you with high quality estimates of the margins of your clients. The system should supply you with a list of your accounts in descending order by contribution margin by lane. There is a need to fully understand what is driving these numbers.

Which specific costs are contributing to the low margins on some accounts? Does a particular account incur too much waiting time? Is the freight difficult to load? Does the driver have to incur too many out of route miles to pick up or deliver the freight? Are the costs in line but the rates are non-compensatory? Do the rates not sufficiently cover fuel or accessorial charges or freight density? What are the factors that are producing an inadequate return on the account? Where do the rates have to be to achieve a satisfactory yield on the account? This will serve as a partial roadmap as to where improvements are required.

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This year, all signs point to rising freight rates. With driver shortages across North America, driver wages are on the rise. On an almost daily basis, there are reports of trucking companies offering signing bonuses and pay for performance (productivity) packages to attract more drivers (at a higher cost) to their firms. Capacity shortages, government regulations and increases in fleet costs are all driving upward pressure on costs. In addition, economic growth is increasing the demand for transportation services as freight carrier consolidation, particularly in Canada, reduces the range of carrier choices.  New pricing methodologies (e.g. Dimensional Pricing) will also serve to push up freight rates, particularly for low density LTL shipments.

Shippers have been using Freight RFPs or Freight Bids for years in an attempt to keep freight rates under control. The question is whether FRPs still work effectively in a climate of rising freight rates? As a company that has been conducting freight bids for over ten years, the answer is yes, but they take more thought, more planning and more work than is the past. Here are a few tips to ensure your company achieves the best value for its transportation dollars.

1. Leverage your volumes

Your company’s volume of freight, in the traffic lanes where your vendors and customers are located, is the deck of cards your company brings to the table. One of the keys to success is to leverage these volumes as effectively as possible. To do so, it is helpful to consolidate (for purposes of rate negotiations) the freight volumes you have across multiple plants, divisions, sister companies and/or even competitors, if possible. Larger freight volumes give you a bigger bargaining stick.

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Freight rate increases are coming this year. The economy is on the upswing. Truck capacity is tightening as driver shortages, government regulations, cost overruns from a very challenging winter and carrier financial prudence all push freight rates in one direction - - - higher What can shippers do to mitigate the impact? A lot. Here is my list.

1. Capture your Freight Costs

Take a look at your freight costs and compare them to prior years. Look for opportunities to fix negative trends (e.g. lack of discipline in moving less than optimum size shipments, too much expedited or air freight etc.) that may have arisen.

2. Benchmark your Freight Costs

Obtain rate quotes from carriers that serve your traffic lanes. Compare their rates to yours. If your company ships high volumes, consider obtaining a benchmark freight rate service on at least your major lanes of traffic. The study will at least tell you if your company is paying market rates or higher and identify carriers that provide the same service at lower rates. There are also companies that provide an ongoing fee-based benchmarking service.

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At the end of each year, I like to take stock of the major freight transportation stories of the past twelve months and look ahead to the trends that will drive the industry in the coming year.  The two blogs that I write are prepared from my perspective as a consultant to shippers and carriers.

This year I would like to hear from you.  Those of you who follow this blog observe trends in your segment of the industry.  Please take a minute to share them with me.  Please post them on this blog or send a private e mail to dan@dantranscon.com

Please feel free to select any major trend or trends that are having or will have a major impact on our industry, whether regulatory, economic, technological, demographic, consumer behavior, environmental, modal shifts or business strategy.

To broaden the range of inputs and perspectives, I will also post this request on Facebook, LinkedIn and Twitter.  In the coming weeks I will be preparing my two lists.  The lists will include a blend of my observations and yours.  Look for these two blogs in mid-December.  Thank you to those of you who take the time to share your observations with me.

 

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Last week the Council of Supply Chain Management Professionals released its 24th annual State of Logistics Report. Last year, business logistics costs were once again 8.5 percent of U.S. Gross Domestic Product (GDP), the same level they hit in 2011, the new report says. That means freight logistics was growing at about the same rate as the GDP. Inventory carrying costs and transportation costs rose "quite modestly" in 2012, said the report's author Rosalyn Wilson. Year-over-year, inventory carrying costs (interest, taxes/obsolescence/depreciation/insurance, and warehousing) increased 4% y/y as inventory levels climbed to a new peak. Meanwhile, transportation costs were up 3% y/y predominantly from an increase of 2.9% in overall truck transportation costs.

This "new normal" is characterized by slow growth (GDP growth of 2.5% to 4.0%), higher unemployment, slower job creation (which will primarily be filled by part-time workers due to higher healthcare costs), increased productivity of the current workforce from investment in machinery/technology (and not human capital), and a less reliable or predictable freight service (as volumes rise but capacity does not increase fast enough to meet demand). Wilson noted that slow growth and lackluster job creation has caused the global economy to wallow in mixed levels of recovery. "This month will mark the fourth year of recovery after the Great Recession, and you're probably thinking that here has not been much to celebrate," said Wilson. "Is it time to ask, 'Is this the new normal?'"

For logisticians, the "new normal" means less predictable and less reliable freight services as volumes rise but capacity does not. In areas such as ocean transport, Wilson said, this can mean slower transit times. "I do believe the economy and logistics sector will slowly regain sustainable momentum, but that we'll still experience unevenness in growth rates," Wilson predicted.

For cutting-edge logistics managers, however, the current environment also means great opportunities to secure increasingly tight capacity in an era of shrewd rate bargaining. This is partly because the trucking industry, in particular, is facing a lid on capacity because of higher qualifications for drivers while top carriers are becoming increasingly selective in their choice of customers and in the allocation of their assets.

"Truck capacity is still walking a fine line—few shortages, but industry-high utilization rates," Wilson explained. Truckload capacity continues to remain stagnant (with the majority of new equipment orders for replacement or dedicated fleets and the copious amount of truckload capacity sapping regulations coming down the pipeline) and the assumption that freight demand will continue to modestly increase (as the economy continues to muddle along at low single digit GDP growth in combination with population growth), a less predictable and less reliable freight market is developing (as described in the "new normal").

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Freight Transportation Adjusts to a Resetting World Economy

The year 2011 was another momentous one that was shaped by events on all continents of the world.  Uprisings in the Middle East and the overthrow of Hosni Mubarak and Muammar Gadhafi, the European debt crisis, the Occupy Wall Street Movement, the assassination of Osama Bin Laden, the earthquake and tsunami in Japan, the wedding of Prince William to Kate Middleton, and the premature passing of Steve Jobs were just a few of the signature events of another action-packed year. 

Closer to home, the three countries in North America all faced significant challenges.  The powerful drug cartels in Mexico are threatening its very existence as a democracy as the country gears up for elections in 2012.  The untimely death of Jack Layton, the very popular leader of the New Democratic party and the demise of Michael Ignatieff and the Liberal Party have given Steven Harper a majority government and a free hand at steering the Canadian economy over the next four years.  The U.S. situation is exactly the opposite as Democrats and Republicans cannot reach agreement on almost anything and as a result the country is in gridlock on most economic initiatives to spark its economy. 

Against a background of 8.6 percent unemployment in the U.S., millions more underemployed, one in four homes is worth less than the value of the mortgage, tight credit, anxiety over job security and a possible relapse into another recession, the economy is resetting.  Americans are saving more.  As various generations of families live together to better withstand the current economic uncertainties, home builders are erecting homes with two master bedrooms to address the social consequences of these challenging times.   Smartphones, tablets and the internet are reshaping so many of our day to day activities.  The economies of North America and around the world are being reset by this confluence of forces and by the rise of China and other developing nations around the world.

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