Executive Briefings

Better Economy, Tighter Capacity May Shift Trucking To Sellers' Market

In recent years the trucking industry has experienced rapidly rising costs in a rapidly falling economy. Now, with business up and capacity down, the industry may find the leverage it needs to improve profitability.

Trucking always has been a thin-margin business, but in the past three years a convergence of factors have sent operating costs skyrocketing, while a poor economy and excess capacity made it harder than ever for carriers to make rate increases stick.

High costs for insurance, fuel and equipment still are a challenge, driver shortages continue to loom and changes in the Hours of Service rules, effective this month, are a troubling unknown. But in 2004, improving economic conditions and a tightening of capacity could give trucking companies more marketplace leverage than they have enjoyed for years.

That could mean higher transportation rates, significant accessorial charges for customers that delay drivers and, possibly, a capacity shortage severe enough to cause disruptions in the supply chain. It also could be a catalyst for real cooperation between carriers and shippers to streamline receiving practices, become more creative in pricing negotiations and achieve greater efficiency overall. It's too early to tell which of these scenarios will be the more prominent, but analysts say beginning signs of a capacity crunch already are apparent.

"If you talk to shippers, most are already having a hard time finding capacity in some instances," says Adrian Gonzalez, director of the Logistics Executive Council at ARC Advisory Group, Dedham, Mass. "And from the truckers perspective, they have been hit so hard with all these cost increases, plus the difficulty in finding drivers, that they are going to be careful about adding any new capacity. I think the message, particularly from the large, most influential carriers, is that they are going to look to the types of freight that are most profitable, look to customers that are easier to work with and more collaborative, and prioritize who gets the capacity they have."

At a recent productivity conference sponsored by Schneider National, the nation's largest truckload carrier based in Green Bay, Wis., Schneider Vice President Scott Arves underscored that carriers no longer carry excess capacity for surges as they once did. "They simply can't afford it," he said.

William Zollars, chairman and CEO of newly merged Yellow-Roadway, Overland Park, Kan. and Akron, Ohio, also stressed the capacity issue in an interview with The Business Journal of Kansas City about the merger of the two largest LTL carriers. Zollars said the combined company might shed some customers that aren't profitable as demand increases with economic recovery. "We've got capacity that we need to fill with the most profitable business that we can," he said.

Business began picking up for trucking companies early in the second half of 2003 and has continued strong. "This economy is totally different than in the first half of 2003 - totally different," says Gerald Detter, president and CEO of Con-Way Transportation of Ann Arbor, Mich. "Our business was stronger in July than anticipated, it stayed strong in August, got stronger still in September and October and we had a record month in November. The first few days in December (when this interview occurred) also were "very strong." Con-Way is the transportation and logistics arm of CNF Inc. and specializes in regional and inter-regional less-than-truckload (LTL) freight. Other truckers report similar results. Dave Geyer, vice president of Schneider National, says the levels of demand and requests, both from regular and occasional customers "has been very steady and very strong." He adds: "It has been quite some time since we have seen this level of demand."

Even a slight shift toward a seller's market would be a welcome respite for trucking, which has been under tremendous cost pressures. "With this industry, you no longer can talk about the 'straw that broke the camel's back,'" says Gonzalez. "It's more like the steel beam. There is only so much an industry can bear."

Over the past two years, the price of diesel fuel has risen dramatically and carriers have been able to recover only a portion of this increase in the form of fuel surcharges. In addition, since the terrorist attacks on 9/11/01, liability insurance costs have soared and new security requirements have added more costs. A perennial driver shortage means higher recruitment, training and retention costs. And new engine emission rules that went into effect in 2002 - and that will toughen again in 2007 - are raising the cost of acquiring and operating equipment.

Fast Cycles
"The newer engines are more costly and less efficient," says Detter of Con-Way. "I have heard estimates that the fuel efficiency of these engines is 8 percent less and when you think about the life of an engine and the fact that they were only getting 7 miles to the gallon before, the increased operating cost is tremendous. I have to question whether there is really a benefit from the standpoint of pollution because we end up burning more fuel for less mileage, so we are consuming more fuel to produce less productivity."
Douglas Duncan, president and CEO of FedEx Freight, the Memphis-based LTL division of Federal Express, said his company has had very good luck with the new Cummins engines. But given the more demanding service requirements from customers, he says, "we didn't have a choice" about replacing equipment. "Our equipment has to be reliable enough to meet our fast-cycle service standards."

Changing customer demands have pushed carriers in the LTL sector to reduce transit times to one- or two-day service in most lanes, he explains. "Our customers are focused on taking inventory out of the supply chain and replacing it with rapid, reliable transportation. As a result, what we have seen in LTL trucking is that more and more of our business is in the next and second-day markets and not in the long-haul market. Customers are placing inventory at three or four strategic locations around the country and using LTL regional freight services for rapid, reliable delivery."

This requires that trucks operate on precise schedules, he says. "I can't be on time some of the time, I have to be on time all of the time, because if I miss a delivery time it is not just a problem on a service report, it is a shelf that doesn't have a product or an auto manufacturer that doesn't have a part. The problems created by missing service times have gone up dramatically, so what you are seeing are networks like FedEx Freight where we run a scheduled, engineered network that moves all the freight, every night on very strict cut times."

FedEx Freight doesn't hold any freight "for any reason whatsoever," he says. "It doesn't matter if there is one skid on a truck or 100 skids on a truck, it has to move to its destination tonight, which means I have to run a lot of half empty trucks up and down the highway."

Duncan emphasizes that this is not change for change sake, but "to meet the needs of customers who are more and more tightly managing the supply chain.

"I'm smart enough to recognize that what they really want from me is next-day delivery and the only reason they accept some of my second-day delivery points is that they haven't yet found anybody else who can give them next-day," he says. "It is a constant battle to figure out how we can find minutes and hours to reduce a second-day point down to a next-day point." This is behind FedEx Freight's decision earlier this fall to implement, for the first time, a no-charge, money-back guarantee on its delivery commitments, he says.

ABF Freight, Ft. Smith, Ark., also is shortening transit times. "We have cut a full day or more from 70 percent of our lanes," says Chris Baltz, director of marketing. Baltz also notes that ABF is offering new services requested by shippers, such as its turnkey service that includes customized set-up and packaging removal along with delivery. Select drivers are trained to perform this service, then refreshed on procedures via a downloaded video when the service is required.

Hours of Service
The issue dominating the truckload sector is the potentially huge productivity hit, increased costs and operational changes associated with the Hours of Service rules that went into effect the first of this year. The new rules add an hour to allowed driving time each day, but reduce total "on duty" time by an hour and prohibit drivers from logging themselves "off duty" for periods of less than two hours, such as when they are waiting to unload. The result will be more trucks and drivers required to deliver the same amount of freight and fewer stops possible on multi-stop shipments.

While emphasizing the need for cooperative mitigation efforts, carriers are making it clear that they cannot absorb the increased costs associated with this rule change. Tightening market conditions adds strength to these assertions. And the imposition of accessorial charges for multiple stops and excessive dock delays may well be enough to spark some shippers to address long-overdue improvements in processes for receiving freight.

"If the financial burden is big enough, it will drive those inefficient companies to improve and adopt best practices and we may actually see a little improvement in productivity," says Matt Ehlinger, director of transportation at NCH Corp. and first vice president of the National Small Shipments Transportation Association. "I think carriers out there will sit down with high-cost shippers and receivers and will put rules in place to recapture some of the dollars required to cover those additional costs - and that is what's needed," he says.

"This is going to bring even more focus to inefficient receiving operations," says Brooks Bentz, associate partner at Accenture Consulting, Florham Park, N.J. "People will no longer be able get away with demanding payment for services that they require because they are inefficient, and that's a positive change."

At Schneider's productivity conference, shippers stressed, however, that the Hours of Service changes do not constitute a blank check and that they will need to see clear evidence of increased costs in any rate negotiations. While large carriers like Schneider have systems to track and report cost information, software providers are working on providing that capability to carriers that may not.

"The shippers we talk to say they are more than willing to listen to their carrier partners, but that those conversations need to be fact based," says Matt Menner of Manhattan Associates, an execution software provider based in Atlanta. "They want carriers to have technology capable of capturing, at the shipment level, the services being performed on a shipper's behalf and to be able to come back and present that as evidence." Manhattan has developed a set of "profitability tools" to do just that. "On the flip side, our transportation management solution allows a shipper tendering freight to understand exactly what additional requirements he is placing on a carrier to perform, for example, a multi-stop delivery."

Multi-stop deliveries are one of the biggest potential problems under the new hours regulations because of the added time involved. At the Schneider productivity conference, carriers said that the number of stops per trip will be limited and that stop charges likely will increase. A few participants speculated that this might drive some freight back to the less-than-truckload sector.

ABF Freight is one LTL carrier preparing for that possibility. It has established an 800 number to give affected shippers spot quotes. "A lot of these shipments really fit better in an LTL network," says Baltz. "Shipments in the 5,000-pound to 10,000-pound range with three to five stops are perfect for LTL and I definitely think we will see some of this freight migrate back to where it belongs."

Schneider's Geyer says his company already is working with shippers, per their requests, to identify inefficiencies that exist. "We are doing all that analysis and sharing that information with our customers," he says. Most of the focus is on detention activity at dock locations and "just some of the inherent inefficiencies that occur with multiple-stop orders." While he says that "most customers will experience some sort of cost increases, the increases will be applied where the inefficiency occurs.

"We are trying to do this in a collaborative way so that we drive out a lot of the inefficiency," he says.

Geyer also notes that Schneider continues to inspect and weed out inefficiency in its own internal operations. "The trucking industry is no different from any other industry - there are inefficiencies that still exist within our operations, so we are inspecting our maintenance procedures, for example, and our trailer activities to see how we can better manage our resources. We want to be sure that when a driver needs a trailer, we can communicate that efficiently and ensure that the location we give is accurate so we are not wasting the drivers' time in those ways."

To that end, Schneider recently launched a trailer tracking initiative that will eventually track the location of every trailer as well as its load status via satellite technology. "To the extent we can get better with our own internal processes and drive out waste, we can help mitigate the cost of the new regulations," Geyer says. "So we are working at this internally as well as in the dialogues we are having externally with our customers."

Jeff Ryan, a principal at Tigris Consulting, New York, says that the changing market for transportation services will impact the way shippers and carriers negotiate rates. "Buyers have had such leverage in the past that they have taken a rather cutthroat approach," he says. "It often has been about using a big stick and a big stick has gotten the job done."

One result of this approach, he says, is that carriers often have been forced to take freight that doesn't match their network or their strengths in order to get freight that does. "We find that our clients do considerably better by trying to fit their business in with the carriers' business," he says. It's just a fact that carriers all have different infrastructures and if your business doesn't match their infrastructure, you can cause them significant pain. It's better to realign your set of carriers." Ryan notes that electronic bidding and procurement software enables carriers and shippers to manage more complex bids and proposals.

The costs and challenges facing the trucking industry do have one advantage - the creation of at least some barriers to entry. 'It's not quite as easy as it used to be to just buy a truck and start hauling," says Accenture's Bentz. While this fact will help constrain capacity, he warns that any marketplace shift in leverage will be short-lived. "As soon as rates start to go up, people will say, 'Hell, I didn't used to be able to make money at this, but now I can,' and capacity will expand," he says.

"Market dynamics are market dynamics," adds Con-Way's Detter. "If people believe they can make money by adding capacity, that's what they will do."

Trucking always has been a thin-margin business, but in the past three years a convergence of factors have sent operating costs skyrocketing, while a poor economy and excess capacity made it harder than ever for carriers to make rate increases stick.

High costs for insurance, fuel and equipment still are a challenge, driver shortages continue to loom and changes in the Hours of Service rules, effective this month, are a troubling unknown. But in 2004, improving economic conditions and a tightening of capacity could give trucking companies more marketplace leverage than they have enjoyed for years.

That could mean higher transportation rates, significant accessorial charges for customers that delay drivers and, possibly, a capacity shortage severe enough to cause disruptions in the supply chain. It also could be a catalyst for real cooperation between carriers and shippers to streamline receiving practices, become more creative in pricing negotiations and achieve greater efficiency overall. It's too early to tell which of these scenarios will be the more prominent, but analysts say beginning signs of a capacity crunch already are apparent.

"If you talk to shippers, most are already having a hard time finding capacity in some instances," says Adrian Gonzalez, director of the Logistics Executive Council at ARC Advisory Group, Dedham, Mass. "And from the truckers perspective, they have been hit so hard with all these cost increases, plus the difficulty in finding drivers, that they are going to be careful about adding any new capacity. I think the message, particularly from the large, most influential carriers, is that they are going to look to the types of freight that are most profitable, look to customers that are easier to work with and more collaborative, and prioritize who gets the capacity they have."

At a recent productivity conference sponsored by Schneider National, the nation's largest truckload carrier based in Green Bay, Wis., Schneider Vice President Scott Arves underscored that carriers no longer carry excess capacity for surges as they once did. "They simply can't afford it," he said.

William Zollars, chairman and CEO of newly merged Yellow-Roadway, Overland Park, Kan. and Akron, Ohio, also stressed the capacity issue in an interview with The Business Journal of Kansas City about the merger of the two largest LTL carriers. Zollars said the combined company might shed some customers that aren't profitable as demand increases with economic recovery. "We've got capacity that we need to fill with the most profitable business that we can," he said.

Business began picking up for trucking companies early in the second half of 2003 and has continued strong. "This economy is totally different than in the first half of 2003 - totally different," says Gerald Detter, president and CEO of Con-Way Transportation of Ann Arbor, Mich. "Our business was stronger in July than anticipated, it stayed strong in August, got stronger still in September and October and we had a record month in November. The first few days in December (when this interview occurred) also were "very strong." Con-Way is the transportation and logistics arm of CNF Inc. and specializes in regional and inter-regional less-than-truckload (LTL) freight. Other truckers report similar results. Dave Geyer, vice president of Schneider National, says the levels of demand and requests, both from regular and occasional customers "has been very steady and very strong." He adds: "It has been quite some time since we have seen this level of demand."

Even a slight shift toward a seller's market would be a welcome respite for trucking, which has been under tremendous cost pressures. "With this industry, you no longer can talk about the 'straw that broke the camel's back,'" says Gonzalez. "It's more like the steel beam. There is only so much an industry can bear."

Over the past two years, the price of diesel fuel has risen dramatically and carriers have been able to recover only a portion of this increase in the form of fuel surcharges. In addition, since the terrorist attacks on 9/11/01, liability insurance costs have soared and new security requirements have added more costs. A perennial driver shortage means higher recruitment, training and retention costs. And new engine emission rules that went into effect in 2002 - and that will toughen again in 2007 - are raising the cost of acquiring and operating equipment.

Fast Cycles
"The newer engines are more costly and less efficient," says Detter of Con-Way. "I have heard estimates that the fuel efficiency of these engines is 8 percent less and when you think about the life of an engine and the fact that they were only getting 7 miles to the gallon before, the increased operating cost is tremendous. I have to question whether there is really a benefit from the standpoint of pollution because we end up burning more fuel for less mileage, so we are consuming more fuel to produce less productivity."
Douglas Duncan, president and CEO of FedEx Freight, the Memphis-based LTL division of Federal Express, said his company has had very good luck with the new Cummins engines. But given the more demanding service requirements from customers, he says, "we didn't have a choice" about replacing equipment. "Our equipment has to be reliable enough to meet our fast-cycle service standards."

Changing customer demands have pushed carriers in the LTL sector to reduce transit times to one- or two-day service in most lanes, he explains. "Our customers are focused on taking inventory out of the supply chain and replacing it with rapid, reliable transportation. As a result, what we have seen in LTL trucking is that more and more of our business is in the next and second-day markets and not in the long-haul market. Customers are placing inventory at three or four strategic locations around the country and using LTL regional freight services for rapid, reliable delivery."

This requires that trucks operate on precise schedules, he says. "I can't be on time some of the time, I have to be on time all of the time, because if I miss a delivery time it is not just a problem on a service report, it is a shelf that doesn't have a product or an auto manufacturer that doesn't have a part. The problems created by missing service times have gone up dramatically, so what you are seeing are networks like FedEx Freight where we run a scheduled, engineered network that moves all the freight, every night on very strict cut times."

FedEx Freight doesn't hold any freight "for any reason whatsoever," he says. "It doesn't matter if there is one skid on a truck or 100 skids on a truck, it has to move to its destination tonight, which means I have to run a lot of half empty trucks up and down the highway."

Duncan emphasizes that this is not change for change sake, but "to meet the needs of customers who are more and more tightly managing the supply chain.

"I'm smart enough to recognize that what they really want from me is next-day delivery and the only reason they accept some of my second-day delivery points is that they haven't yet found anybody else who can give them next-day," he says. "It is a constant battle to figure out how we can find minutes and hours to reduce a second-day point down to a next-day point." This is behind FedEx Freight's decision earlier this fall to implement, for the first time, a no-charge, money-back guarantee on its delivery commitments, he says.

ABF Freight, Ft. Smith, Ark., also is shortening transit times. "We have cut a full day or more from 70 percent of our lanes," says Chris Baltz, director of marketing. Baltz also notes that ABF is offering new services requested by shippers, such as its turnkey service that includes customized set-up and packaging removal along with delivery. Select drivers are trained to perform this service, then refreshed on procedures via a downloaded video when the service is required.

Hours of Service
The issue dominating the truckload sector is the potentially huge productivity hit, increased costs and operational changes associated with the Hours of Service rules that went into effect the first of this year. The new rules add an hour to allowed driving time each day, but reduce total "on duty" time by an hour and prohibit drivers from logging themselves "off duty" for periods of less than two hours, such as when they are waiting to unload. The result will be more trucks and drivers required to deliver the same amount of freight and fewer stops possible on multi-stop shipments.

While emphasizing the need for cooperative mitigation efforts, carriers are making it clear that they cannot absorb the increased costs associated with this rule change. Tightening market conditions adds strength to these assertions. And the imposition of accessorial charges for multiple stops and excessive dock delays may well be enough to spark some shippers to address long-overdue improvements in processes for receiving freight.

"If the financial burden is big enough, it will drive those inefficient companies to improve and adopt best practices and we may actually see a little improvement in productivity," says Matt Ehlinger, director of transportation at NCH Corp. and first vice president of the National Small Shipments Transportation Association. "I think carriers out there will sit down with high-cost shippers and receivers and will put rules in place to recapture some of the dollars required to cover those additional costs - and that is what's needed," he says.

"This is going to bring even more focus to inefficient receiving operations," says Brooks Bentz, associate partner at Accenture Consulting, Florham Park, N.J. "People will no longer be able get away with demanding payment for services that they require because they are inefficient, and that's a positive change."

At Schneider's productivity conference, shippers stressed, however, that the Hours of Service changes do not constitute a blank check and that they will need to see clear evidence of increased costs in any rate negotiations. While large carriers like Schneider have systems to track and report cost information, software providers are working on providing that capability to carriers that may not.

"The shippers we talk to say they are more than willing to listen to their carrier partners, but that those conversations need to be fact based," says Matt Menner of Manhattan Associates, an execution software provider based in Atlanta. "They want carriers to have technology capable of capturing, at the shipment level, the services being performed on a shipper's behalf and to be able to come back and present that as evidence." Manhattan has developed a set of "profitability tools" to do just that. "On the flip side, our transportation management solution allows a shipper tendering freight to understand exactly what additional requirements he is placing on a carrier to perform, for example, a multi-stop delivery."

Multi-stop deliveries are one of the biggest potential problems under the new hours regulations because of the added time involved. At the Schneider productivity conference, carriers said that the number of stops per trip will be limited and that stop charges likely will increase. A few participants speculated that this might drive some freight back to the less-than-truckload sector.

ABF Freight is one LTL carrier preparing for that possibility. It has established an 800 number to give affected shippers spot quotes. "A lot of these shipments really fit better in an LTL network," says Baltz. "Shipments in the 5,000-pound to 10,000-pound range with three to five stops are perfect for LTL and I definitely think we will see some of this freight migrate back to where it belongs."

Schneider's Geyer says his company already is working with shippers, per their requests, to identify inefficiencies that exist. "We are doing all that analysis and sharing that information with our customers," he says. Most of the focus is on detention activity at dock locations and "just some of the inherent inefficiencies that occur with multiple-stop orders." While he says that "most customers will experience some sort of cost increases, the increases will be applied where the inefficiency occurs.

"We are trying to do this in a collaborative way so that we drive out a lot of the inefficiency," he says.

Geyer also notes that Schneider continues to inspect and weed out inefficiency in its own internal operations. "The trucking industry is no different from any other industry - there are inefficiencies that still exist within our operations, so we are inspecting our maintenance procedures, for example, and our trailer activities to see how we can better manage our resources. We want to be sure that when a driver needs a trailer, we can communicate that efficiently and ensure that the location we give is accurate so we are not wasting the drivers' time in those ways."

To that end, Schneider recently launched a trailer tracking initiative that will eventually track the location of every trailer as well as its load status via satellite technology. "To the extent we can get better with our own internal processes and drive out waste, we can help mitigate the cost of the new regulations," Geyer says. "So we are working at this internally as well as in the dialogues we are having externally with our customers."

Jeff Ryan, a principal at Tigris Consulting, New York, says that the changing market for transportation services will impact the way shippers and carriers negotiate rates. "Buyers have had such leverage in the past that they have taken a rather cutthroat approach," he says. "It often has been about using a big stick and a big stick has gotten the job done."

One result of this approach, he says, is that carriers often have been forced to take freight that doesn't match their network or their strengths in order to get freight that does. "We find that our clients do considerably better by trying to fit their business in with the carriers' business," he says. It's just a fact that carriers all have different infrastructures and if your business doesn't match their infrastructure, you can cause them significant pain. It's better to realign your set of carriers." Ryan notes that electronic bidding and procurement software enables carriers and shippers to manage more complex bids and proposals.

The costs and challenges facing the trucking industry do have one advantage - the creation of at least some barriers to entry. 'It's not quite as easy as it used to be to just buy a truck and start hauling," says Accenture's Bentz. While this fact will help constrain capacity, he warns that any marketplace shift in leverage will be short-lived. "As soon as rates start to go up, people will say, 'Hell, I didn't used to be able to make money at this, but now I can,' and capacity will expand," he says.

"Market dynamics are market dynamics," adds Con-Way's Detter. "If people believe they can make money by adding capacity, that's what they will do."