Rosalyn Wilson presented the CSCMP’s annual State of Logistics Report at the National Press Club in Washington, DC on June 15. Each year this very valuable publication outlines the major economic forces shaping the world of logistics and highlights the results of these impacts. Here are some of the findings that struck me as significant.

The year 2010 was clearly better than 2009 but not on par with the economic rebound we have seen after previous recessions. “Consumers are not leading the charge as they have in other recoveries because of the fragile state of the economy and their personal wealth.” Persistent unemployment, substandard job creation, declining home prices, rising food and fuel costs all adversely affected the net worth of consumers, dampening their spending patterns. While industrial production was up by 5.3 percent in 2010, consumer production was almost flat.

After declines in 2008 and 2009, logistics costs increased by 10.4 percent in 2010. Even in a relatively soft year, transportation costs rose by 10 percent, driven by higher volumes, rate increases and rising fuel surcharges. Logistics as a percent of GDP increased to 8.3 percent, lower than any year but 2009 in the past decade.

While freight volumes ebbed and flowed in 2010, capacity was tight due to the large exodus of equipment and drivers during the Great Recession. The report indicated that industry capacity is lower than it was in 2007.

Consumers changed their behaviour. They became more “disciplined” and focused more on sales and discounted products. Manufacturers have responded by reducing packaging sizes while holding the line on price.

Last week I had the opportunity of seeing the famous ex-CEO of General Electric, Jack Welsh, interviewed on CNN’s Piers Morgan show. There were several things that Jack said that were interesting, one of which is highlighted in this blog.

Jack made the point that good leaders are able to craft, communicate and sell their vision of the future. This is one of the reasons why Barrack Obama was able to defeat John McCain a few years ago to become President of the United States. A majority of Americans bought into his vision that he would be the change agent.   He and his party would be best able to lead America out of its economic downturn and into a more financially successful future. Of course, President Obama’s charisma and his skills as an orator were very helpful in selling his message of hope to the American electorate.

The same skills are very helpful to army generals and business leaders. Military personnel and company employees want to know where their leaders are taking them, what is the roadmap for success and how they will each personally and/or professionally benefit from the successful execution of the leader’s vision?

As a Republican, Jack expressed the view that Tim Pawlenty, one of the candidates for the Republican Presidential nomination, has the most coherent and logical vision for the future of America. While he may not be charismatic, his vision makes the most sense of the various candidates in the running. Since President Obama has not been able to fully energize the American economy during his tenure to date, this may leave him vulnerable to Mr. Pawlenty’s vision for the future. Even if President Obama is able to craft a strong and revitalized vision statement, in his bid to gain re-election, this begs the question of whether or not he would be more successful if he is granted another four years in office?

Over the past few days, I read the article on the future of YRC National in the current issue of the Journal of Commerce. This brought back Jack’s comments about vision.

The less than truckload segment of the freight market was hit particularly hard during the Great Recession. This asset-heavy component of the freight market faced a number challenges. Truckload carriers siphoned off some of the larger LTL shipments, parcel carriers picked off a segment of the smaller LTL loads, and overcapacity placed downward pressure on rates while less volume adversely affected the economic viability of the sector. To make matters worse, some of the industry leaders targeted YRC’s freight, the struggling LTL giant, further eroding their profitability and the profitability of the entire industry. The total revenue in this sector declined by an estimated 25 percent during the Great Recession. It regained only a fraction of this volume in 2010. The industry is still trying to dig out of the hole that was created.

A variety of variables are helping to put the industry on stronger footing. Tight truckload capacity and higher truckload and intermodal rates have encouraged some shippers to shift some freight back to LTL transportation. With driver shortages, LTL carriers are being selective as to what they will move and are opting for smaller, more profitable shipments. The slow pace of the economic recovery is serving as a moderating force on inventory levels.

At the same time, truckload carriers are reserving their capacity for direct to customer full load deliveries and cutting back on multi stop partial truckload shipments. Some of this tonnage is moving back to LTL transportation. With tighter capacity, this allows LTL carriers to raise rates. “The mix is shifting more toward the lighter-weight LTL, but that’s a good thing because it adds to our density on our pickup and delivery routes,” commented David Congdon, president and CEO of Old Dominion Freight Lines. “Our business is strong, and it’s taking up a lot of our excess capacity.”

The top 25 LTL carriers in the United States control 87.6 percent of the market. Nine companies with in excess of $1 billion in sales account for 77.1 percent of the business. Most of the major LTL players are showing good increases in tonnage. Not all of the top 25 LTL carriers are benefiting evenly from the improving economy.

A look at a few key pieces of data helps explain the variation in results. Saia, UPS Freight, Con-way, Roadrunner, FedEx Freight and ODFL are all showing increases in yields of 8 percent or more. YRC National and Regional and ABF Freight have produced increases in yield of about 2 percent.   YRC blamed the poor increase in yields on customer mix, a reliance on national account customers that come with volume discounts, heavier shipments and “relatively” stable pricing year/year. ODFL did a better job of balancing costs, freight mix and other variables than other publicly traded companies.

One of the highlights of last week’s Transportation Company Workshop that was held in Toronto was the panel discussions on rate increases. The two shipper panels contained some of Canada’s largest retailers and manufacturers (e.g. Loblaw Companies, Nestle). The six shippers were in agreement that to obtain a freight rate increase, the burden of proof falls on the carrier. The carrier must provide a sound business case for any rate adjustments.   In fact the panellists took the discussion a step further by highlighting how important it is for their carriers to bring cost savings opportunities to the negotiating table.

The truckers and logistics company on the carrier panel expressed the view that rate increases are required this year to cover cost increases and to maintain profitability. These opposing views set up a potential “tug of war” in Transportation Manager offices across North America. How can shippers and carriers reach a “meeting of the minds” on this fundamental issue?

The key is to look at the “end game.” Beyond the actual rate agreement itself, there is a need for shippers and carriers to understand that they are forming ongoing business partnerships. Once the ink is dry on the paper, the two parties will need to work with one another for an extended period of time (e.g. usually a minimum of one year, sometimes longer). Both participants must achieve their goals, including their financial goals, to establish a durable relationship.

Where do you start? Before addressing the numbers, there is a requirement to create a healthy business environment, one in which the parties can share information and communicate openly. This requires a certain level of honesty and integrity, in some cases with the help of mutual NDA agreements. For shippers this means that they have to treat their incumbents and new carrier prospects fairly. Why would a carrier want to engage in a discussion with a shipper that has a history of shopping back competitive rates and using them as leverage with their incumbents, particularly those that stay with the same carrier or carriers year after year? Why would an incumbent carrier “open its books” and share confidential cost information with a shipper that is not going to maintain the confidentiality of this data.

Over the past decade, freight bids have become very popular with shippers across North America.  Freight bids, reverse auctions, freight RFP’s and freight RFQ’s are being employed by shippers of all sizes and industry groups to source carriers and manage freight costs.

Carrier responses range from excitement at the possibility of securing new business to dread at the potential of losing a valued account to frustration at having to expend valuable time and resources on an exercise that is often a waste of time. Many carriers perceive freight bids as a stick that shippers employ to drive down the rates of the incumbents.

In our consulting practice, we work with shippers in designing and executing freight bids. On other occasions we work with carriers that need assistance in responding to these requests. This provides us with insights into Best Practices and the keys to success.

Despite what many carriers may think, responding to freight bids can be a productive exercise. It is important to remember that over 90 percent of the time, the freight is awarded to carriers, large and small. In other words, one or more carriers walk away with the business. An unwillingness to participate or a half-hearted response will not enable your company to achieve success in this area.

As a company that has been involved with these types of projects for more than seven years, we have observed a set of factors or Best Practices that enhance a carrier’s opportunities for success. Here they are.