Executive Briefings

Logistics Companies Emerge from Recession Leaner, Wiser And Ready for Better Times

Logistics and transportation companies were hit early and hard by the economic downturn. Those that survived had to adapt operations and adopt new ideas and strategies. Many of those will remain and provide competitive benefits as the recovery takes hold.

The Great Recession that began in 2007 and is only now starting to wane took a tremendous toll on logistics and transportation companies. Consumers slammed the brakes on spending in the face of tumbling markets and massive layoffs, causing freight volumes at transportation companies to drop precipitously. Intense pricing pressure further depressed revenue as logistics customers responded to their own cost-cutting mandates and to a glut of transportation capacity.

Asset-owning carriers were particularly hard hit and began taking equipment off line. The American Association of Railroads estimates that the rail industry had assets worth approximately $43bn standing idle as of last month. This includes 440,000 freight cars - around 28 percent of the industry's total fleet - and thousands of locomotives. Similarly, the number of idled containerships reached a record 800,000 TEUs in January, with 303 ships at anchor. Trucking companies and owner operators parked a huge number of vehicles during 2009, while hundreds, if not thousands, of smaller trucking companies closed down completely.

All of this was not enough to prevent brutal operating losses across much of the industry, including at some of the largest, sector-leading companies. Earnings for the last quarter of 2009 "continued to be disappointing, but were not surprising," says Adrian Gonzalez, director, Logistics Viewpoints, at ARC Advisory Group, Boston. "The excess capacity out there has driven down prices across all modes, which in turn drives down profitability," he says. "It continues to be a challenging environment."

Railroads have fared best, posting lower but positive profit margins. "The railroads have been hammered, but they are all making money and the still have fairly significant capital spending on the books for 2010 and 2011," says Brooks Bentz, associate partner in Accenture's supply chain management practice. This is partly because commodities like coal and grain held up better than consumer goods, but also because the railroads were effective in cutting costs, Bentz says. "To me they are a textbook case of how to manage a business under bad conditions. But it's much tougher in the ocean carrier and trucking businesses."

Things are looking up for 2010, however. The consensus is that the market environment for logistics and transportation is gradually improving and revenue, after months of bumping along the bottom, is beginning to show faint signs of growth.

"What has been happening over the last nine to 12 months is that bloated inventories have been bled down," says Joe Dagnese, vice president at Menlo Worldwide Logistics, a Con-way company based in San Mateo, Calif. Before the recession, "companies positioned inventory to ensure that they would always have safety stock to draw on, regardless of circumstance," Dagnese says. "We are just now reaching an equilibrium where that inventory has been consumed."

Latest data confirms that traffic is on the rise. Seasonally adjusted truck tonnage surged 5.7 percent in January compared with January 2009, according to an index published by The American Trucking Associations. This was the best year-over-year reading in five years and the second consecutive monthly increase. For all of 2009, the tonnage index was down 8.7 percent, which was the largest annual decrease since a 12.3-percent plunge in 1982.

ATA Chief Economist Bob Costello says that the latest tonnage reading, coupled with anecdotal reports from carriers, indicates that both the industry and the economy are clearly in a recovery mode. "While I don't expect tonnage to continue growing as robustly as it did in January, the industry is finally moving in the right direction. Although there are still risks that could throw the rebound off track, the likelihood of that happening continues to diminish," he says.

Rates will be slower to rise because of excess capacity in the market. "Rates for trucking are still generally lower or flat and will not jump back up until a capacity balance is restored," says Roslyn Wilson, a consultant and author of The Annual State of Logistics Report published by the Council of Supply Chain Management Professionals. Wilson sees some "green shoots," however. "Container rates have started to go up and railroads have been able to raise rates a little," she says.

Wilson doesn't see real strength returning to the logistics market until late in 2010 or early 2011 and, for some sectors, she says it will be 2012 or 2013 before the market gets back to pre-recession levels. "I don't think this is going to be a fast turnaround at all, nor do I think it will be a straight upward progression," she says. "There is just not enough confidence in the market on either the consumer or the business side. Until that confidence returns, we won't see much spending."

Gonzalez agrees that confidence remains a problem even as things begin to stabilize. "There is still a conservative and short-term mindset in terms of managing costs and productivity," he says. "If a company is going to make an investment, it will be in something that will lead to cost savings and productivity improvements within three months."

This mindset may keep some carriers and companies from being ready to take full advantage of the recovery, says Jason Richard, associate vice president, logistics and distribution at Infosys, a global company that designs and delivers IT-enabled business solutions. Even if companies are feeling battered right now, they should start making investments to positively position them for the future, he says. "We see a widening gap between those companies who are still dealing with the recession vs. those who are preparing for the recovery," he says. "Companies that are positioned to take on new customers quickly and provide a high level of service will gain more business and have a faster growth rate than those focused just on keeping the lights on. As the recovery picks up, that gap will continue to widen."

He offers an example of a logistics company that Infosys is working with to implement a new learning management system. "This system can be used to organize, track and facilitate driver certifications and other data so that if the company needs to bring back a thousand employees quickly, it will know that all their licenses are current and everything is in order. That's a case of a company that was hurting during the downturn, but still willing to invest in new capital projects that will help them when the economy recovers."

New Normal

Some of the operating and strategy changes made by logistics companies and their customers to survive the recession seem likely to become permanent, contributing to a "new normal" that will influence how this recovery evolves.

"We know that folks who lived through the Great Depression changed their economic and buying behavior and I think we will see that here as well," says Bentz. "I don't think people are going to be so quick to hire workers back and once those workers are back on a payroll I don't they will be so quick to go out and buy a new TV or a new car," he says.

"We are a year and a half into this and I definitely think people are making changes in the way they purchase and how much debt they are willing to take on," agrees Wilson. "Businesses are doing the same thing."

At many businesses this shift is translating into much leaner inventory policies, says Dagnese. "I don't think retailers are willing to take the risk of having excess inventory at the end of the season or at the end of a production run," he says. "We are in a zero-waste or lean-management environment that holds, 'if I have three buyers, I need to make three widgets -- not four or five.' No one wants to hold the inventory. No one can afford it."

Another inventory-related change that often has been talked about and that now may take hold is SKU rationalization, says Simon Ellis, who leads the supply chain strategies practice at IDC Manufacturing Insights, Framingham, Mass. "We are hearing a lot of people say that there are too many SKUs that result in frivolous or unnecessary choices," he says. Rethinking the SKU portfolio would have a direct impact on costs and efficiency, he says.

One change mentioned by almost everyone interviewed for this article, is an increased openness to new ways of doing business.

"One of the few positives to come from the recession is that companies everywhere are now ready to consider and discuss any changes within their business if it benefits their bottom line," says Ulrich Ogiermann, chairman of The International Air Cargo Association. "Previously there were too many taboos that left no room to manoeuvre. These have disappeared. There are no more 'kingdoms' in companies that are protected at all costs. This is a positive shift in change management because companies will leave anything behind that does not add value."

"A lot of companies have been making some very strategic changes in the way they are going to do business," agrees Wilson. "Everyone is looking at their flexibility, the relative efficiency of different modes, the location of their distribution centers and whether they may be willing to wait a little longer and pay a little less for deliveries. I believe these are structural changes that will continue into the recovery."

While leading companies always have analyzed different scenarios and strategies, there is much more focus on that now, says Gonzalez. "Innovative companies are asking: What if demand doesn't come back to prior levels? What if oil goes to $150 a barrel? The good news is that this is driving creativity in terms of how companies are going to market and selling and pricing their goods," he says. "It is prompting companies to ask tough questions to find if there are ways to work smarter or be more flexible and resilient so they can get over whatever bumps may come."

Dagnese agrees, noting that Menlo has been able to meet with many companies that previously had been unwilling to look outside for new ideas. And those conversations often go well beyond basic logistics offerings. "We are acting more as a change agent, bringing together groups within an organization that don't normally talk to one another," he says. Because Menlo has implemented lean principles in its own organization, "we are able to take them trough value-stream mapping that allows them to see where there is waste in the process, so they can have an intelligent conversation about how to remove it and get the most value from limited resources," he says. "Clients are very open to that now."

Logistics companies themselves have come out of the recession leaner and more efficient. "As we settle into some state of normalcy, we are finding that we can do a lot more with less," says Dan Van Alstine, vice president of dedicated service at Schneider National. "We have challenged a lot of our cost structure and we have taken a great deal of cost out. This has allowed us to be more competitive and to keep pace with the erosion in pricing." While painful at the time, decisions that Schneider made to cut costs "have made us stronger," Van Alstine says. "We were in a paradigm where we thought that we had to make tradeoffs around customer service or driver home-time that meant absorbing more empty miles. What we have found is that we can continue to deliver performance to our customers and continue to get our driver associates home, but do it in a different way that takes those empty miles out."

"Air cargo companies will be leaner, more cost efficient and very much wiser as a result of the unprecedented economic collapse we have experienced," says Ogiermann. "The difficult decisions forced on companies will mean that they will at least be in a stronger position as business levels start to recover."

Logistics businesses will need to be strong going forward because they still are headwinds that could make the recovery a very bumpy ride. The cost of fuel is an ever-present issue, but companies seem less concerned about that since they have a good deal of experience at managing fuel volatility. Of more concern is what the government and the consumer will do. "There are a number of things we cannot predict that could have drastic impacts on our industries," says Van Alstine. "The federal government could take actions in a number of areas and consumer confidence, which drives so much of our business, can shift dramatically. There are just a lot of unknowns."

One thing can be said with near certainty, however. For the companies that survived the Great Recession, 2010 will be a better year. 

Resource Links:

The Association of American Railroads, www.aar.org
The American Trucking Associations, www.truckline.com
ARC Advisory Group, www.arcweb.com
Accenture, www.Accenture.com
Council of Supply Chain Management Professionals, www.cscmp.org
Menlo Worldwide Logistics, www.con-way.com/menlo
Infosys, www.infosys.com
IDC Manufacturing Insights, www.manufacturing-insights.com
The International Air Cargo Assn., www.tiaca.org
Schneider National, www.schneider.com

The Great Recession that began in 2007 and is only now starting to wane took a tremendous toll on logistics and transportation companies. Consumers slammed the brakes on spending in the face of tumbling markets and massive layoffs, causing freight volumes at transportation companies to drop precipitously. Intense pricing pressure further depressed revenue as logistics customers responded to their own cost-cutting mandates and to a glut of transportation capacity.

Asset-owning carriers were particularly hard hit and began taking equipment off line. The American Association of Railroads estimates that the rail industry had assets worth approximately $43bn standing idle as of last month. This includes 440,000 freight cars - around 28 percent of the industry's total fleet - and thousands of locomotives. Similarly, the number of idled containerships reached a record 800,000 TEUs in January, with 303 ships at anchor. Trucking companies and owner operators parked a huge number of vehicles during 2009, while hundreds, if not thousands, of smaller trucking companies closed down completely.

All of this was not enough to prevent brutal operating losses across much of the industry, including at some of the largest, sector-leading companies. Earnings for the last quarter of 2009 "continued to be disappointing, but were not surprising," says Adrian Gonzalez, director, Logistics Viewpoints, at ARC Advisory Group, Boston. "The excess capacity out there has driven down prices across all modes, which in turn drives down profitability," he says. "It continues to be a challenging environment."

Railroads have fared best, posting lower but positive profit margins. "The railroads have been hammered, but they are all making money and the still have fairly significant capital spending on the books for 2010 and 2011," says Brooks Bentz, associate partner in Accenture's supply chain management practice. This is partly because commodities like coal and grain held up better than consumer goods, but also because the railroads were effective in cutting costs, Bentz says. "To me they are a textbook case of how to manage a business under bad conditions. But it's much tougher in the ocean carrier and trucking businesses."

Things are looking up for 2010, however. The consensus is that the market environment for logistics and transportation is gradually improving and revenue, after months of bumping along the bottom, is beginning to show faint signs of growth.

"What has been happening over the last nine to 12 months is that bloated inventories have been bled down," says Joe Dagnese, vice president at Menlo Worldwide Logistics, a Con-way company based in San Mateo, Calif. Before the recession, "companies positioned inventory to ensure that they would always have safety stock to draw on, regardless of circumstance," Dagnese says. "We are just now reaching an equilibrium where that inventory has been consumed."

Latest data confirms that traffic is on the rise. Seasonally adjusted truck tonnage surged 5.7 percent in January compared with January 2009, according to an index published by The American Trucking Associations. This was the best year-over-year reading in five years and the second consecutive monthly increase. For all of 2009, the tonnage index was down 8.7 percent, which was the largest annual decrease since a 12.3-percent plunge in 1982.

ATA Chief Economist Bob Costello says that the latest tonnage reading, coupled with anecdotal reports from carriers, indicates that both the industry and the economy are clearly in a recovery mode. "While I don't expect tonnage to continue growing as robustly as it did in January, the industry is finally moving in the right direction. Although there are still risks that could throw the rebound off track, the likelihood of that happening continues to diminish," he says.

Rates will be slower to rise because of excess capacity in the market. "Rates for trucking are still generally lower or flat and will not jump back up until a capacity balance is restored," says Roslyn Wilson, a consultant and author of The Annual State of Logistics Report published by the Council of Supply Chain Management Professionals. Wilson sees some "green shoots," however. "Container rates have started to go up and railroads have been able to raise rates a little," she says.

Wilson doesn't see real strength returning to the logistics market until late in 2010 or early 2011 and, for some sectors, she says it will be 2012 or 2013 before the market gets back to pre-recession levels. "I don't think this is going to be a fast turnaround at all, nor do I think it will be a straight upward progression," she says. "There is just not enough confidence in the market on either the consumer or the business side. Until that confidence returns, we won't see much spending."

Gonzalez agrees that confidence remains a problem even as things begin to stabilize. "There is still a conservative and short-term mindset in terms of managing costs and productivity," he says. "If a company is going to make an investment, it will be in something that will lead to cost savings and productivity improvements within three months."

This mindset may keep some carriers and companies from being ready to take full advantage of the recovery, says Jason Richard, associate vice president, logistics and distribution at Infosys, a global company that designs and delivers IT-enabled business solutions. Even if companies are feeling battered right now, they should start making investments to positively position them for the future, he says. "We see a widening gap between those companies who are still dealing with the recession vs. those who are preparing for the recovery," he says. "Companies that are positioned to take on new customers quickly and provide a high level of service will gain more business and have a faster growth rate than those focused just on keeping the lights on. As the recovery picks up, that gap will continue to widen."

He offers an example of a logistics company that Infosys is working with to implement a new learning management system. "This system can be used to organize, track and facilitate driver certifications and other data so that if the company needs to bring back a thousand employees quickly, it will know that all their licenses are current and everything is in order. That's a case of a company that was hurting during the downturn, but still willing to invest in new capital projects that will help them when the economy recovers."

New Normal

Some of the operating and strategy changes made by logistics companies and their customers to survive the recession seem likely to become permanent, contributing to a "new normal" that will influence how this recovery evolves.

"We know that folks who lived through the Great Depression changed their economic and buying behavior and I think we will see that here as well," says Bentz. "I don't think people are going to be so quick to hire workers back and once those workers are back on a payroll I don't they will be so quick to go out and buy a new TV or a new car," he says.

"We are a year and a half into this and I definitely think people are making changes in the way they purchase and how much debt they are willing to take on," agrees Wilson. "Businesses are doing the same thing."

At many businesses this shift is translating into much leaner inventory policies, says Dagnese. "I don't think retailers are willing to take the risk of having excess inventory at the end of the season or at the end of a production run," he says. "We are in a zero-waste or lean-management environment that holds, 'if I have three buyers, I need to make three widgets -- not four or five.' No one wants to hold the inventory. No one can afford it."

Another inventory-related change that often has been talked about and that now may take hold is SKU rationalization, says Simon Ellis, who leads the supply chain strategies practice at IDC Manufacturing Insights, Framingham, Mass. "We are hearing a lot of people say that there are too many SKUs that result in frivolous or unnecessary choices," he says. Rethinking the SKU portfolio would have a direct impact on costs and efficiency, he says.

One change mentioned by almost everyone interviewed for this article, is an increased openness to new ways of doing business.

"One of the few positives to come from the recession is that companies everywhere are now ready to consider and discuss any changes within their business if it benefits their bottom line," says Ulrich Ogiermann, chairman of The International Air Cargo Association. "Previously there were too many taboos that left no room to manoeuvre. These have disappeared. There are no more 'kingdoms' in companies that are protected at all costs. This is a positive shift in change management because companies will leave anything behind that does not add value."

"A lot of companies have been making some very strategic changes in the way they are going to do business," agrees Wilson. "Everyone is looking at their flexibility, the relative efficiency of different modes, the location of their distribution centers and whether they may be willing to wait a little longer and pay a little less for deliveries. I believe these are structural changes that will continue into the recovery."

While leading companies always have analyzed different scenarios and strategies, there is much more focus on that now, says Gonzalez. "Innovative companies are asking: What if demand doesn't come back to prior levels? What if oil goes to $150 a barrel? The good news is that this is driving creativity in terms of how companies are going to market and selling and pricing their goods," he says. "It is prompting companies to ask tough questions to find if there are ways to work smarter or be more flexible and resilient so they can get over whatever bumps may come."

Dagnese agrees, noting that Menlo has been able to meet with many companies that previously had been unwilling to look outside for new ideas. And those conversations often go well beyond basic logistics offerings. "We are acting more as a change agent, bringing together groups within an organization that don't normally talk to one another," he says. Because Menlo has implemented lean principles in its own organization, "we are able to take them trough value-stream mapping that allows them to see where there is waste in the process, so they can have an intelligent conversation about how to remove it and get the most value from limited resources," he says. "Clients are very open to that now."

Logistics companies themselves have come out of the recession leaner and more efficient. "As we settle into some state of normalcy, we are finding that we can do a lot more with less," says Dan Van Alstine, vice president of dedicated service at Schneider National. "We have challenged a lot of our cost structure and we have taken a great deal of cost out. This has allowed us to be more competitive and to keep pace with the erosion in pricing." While painful at the time, decisions that Schneider made to cut costs "have made us stronger," Van Alstine says. "We were in a paradigm where we thought that we had to make tradeoffs around customer service or driver home-time that meant absorbing more empty miles. What we have found is that we can continue to deliver performance to our customers and continue to get our driver associates home, but do it in a different way that takes those empty miles out."

"Air cargo companies will be leaner, more cost efficient and very much wiser as a result of the unprecedented economic collapse we have experienced," says Ogiermann. "The difficult decisions forced on companies will mean that they will at least be in a stronger position as business levels start to recover."

Logistics businesses will need to be strong going forward because they still are headwinds that could make the recovery a very bumpy ride. The cost of fuel is an ever-present issue, but companies seem less concerned about that since they have a good deal of experience at managing fuel volatility. Of more concern is what the government and the consumer will do. "There are a number of things we cannot predict that could have drastic impacts on our industries," says Van Alstine. "The federal government could take actions in a number of areas and consumer confidence, which drives so much of our business, can shift dramatically. There are just a lot of unknowns."

One thing can be said with near certainty, however. For the companies that survived the Great Recession, 2010 will be a better year. 

Resource Links:

The Association of American Railroads, www.aar.org
The American Trucking Associations, www.truckline.com
ARC Advisory Group, www.arcweb.com
Accenture, www.Accenture.com
Council of Supply Chain Management Professionals, www.cscmp.org
Menlo Worldwide Logistics, www.con-way.com/menlo
Infosys, www.infosys.com
IDC Manufacturing Insights, www.manufacturing-insights.com
The International Air Cargo Assn., www.tiaca.org
Schneider National, www.schneider.com