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.

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

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.

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.”

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

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.