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If there were medals for surviving the Great Recession, they might well be inscribed with the famous Nietzsche quote: "That which does not kill us makes us stronger."
It's a sentiment that sums up what many transportation executives are saying as they emerge from the extremely difficult economic conditions of the past two years.
"When you go through a period like this, it forces you to really examine every detail of your business," says Herb Schmidt, president of Con-way Truckload. "You eliminate anything that is not necessary and really scrutinize every expenditure. This time around we had to get a lot more introspective and challenge our people more than ever before because it was truly survival of the fittest."
Schneider National also challenged its cost structure, taking out a significant amount of spend "to be more competitive and to keep pace with the erosion in pricing," says Dan Van Alstine, vice president, Dedicated Services. Actions included "staying the course" on a program to lower the speed of its fleet and optimizing equipment use by having two drivers share a single tractor in some operations.
Schneider also made strategic investments, moving forward with an ongoing project to add the newest Qualcomm communications technology to all of its tractors. This improvement, which Van Alstine describes as a "game changer," will save drivers time and improve their work environment by providing GPS mapping and text-to-voice messaging. It also gives shippers more timely information about the status of deliveries.
Schneider changed a number of business processes as well, Van Alstine says. "We have seen dramatic improvements in operating metrics like empty miles per load because we are managing flows, equipment and demand differently than we did prior to the recession."
While some decisions were painful at the time, he says the company has emerged from the recession "as a much stronger organization. "Frankly, there was work we were doing before that we can see now was simply not necessary," he says.
Derek Leathers, chief operating officer at Werner Enterprises, agrees that it takes tough times "to really force you to challenge how you are spending every dollar and to measure and ensure that there is a return on every investment you make." Suddenly survival depends on being able to keep costs in line with the market, he says, and those who survive "will be in a position to thrive when the economy turns."
YRC, the nation's largest LTL carrier, was working to integrate the acquisition of its largest competitor, Roadway, when the economy imploded. It took aggressive actions to reduce costs but still was forced to restructure its balance sheet with a debt-for-equity swap at the end of last year. "We continue to work through those issues and are moving forward," says President Mike Smid, who also is chief operating officer of YRC Worldwide. "At the same time, we have built a lot better company with a better set of services. We took the path of redesigning ourselves, rebuilding and repositioning to ensure that we will have the ability to respond to future changes in the market."
For an asset-heavy LTL company like YRC, this meant paring down and adding flexibility to its fixed-cost structure. Smid notes that YRC went into the recession with 700 facilities, including Roadway's former network, and emerged with about 340. The company also adopted more flexible staffing models and equipment utilization programs. "And we redesigned our transportation networks to better align with market demand," Smid says. "In each of our companies we providing more tailored solutions that in many cases are specific to a particular business or industry."
Asset providers have to move in this direction "or be left behind in the traditional role of competing on price for standard LTL transportation," he says. "That is not where any carrier wants to be going forward."
C.H. Robinson is an asset-light company, offering truckload, intermodal and other 3PL services, but Senior Vice President Jim Butts agrees with this assessment. "Everybody went after low rates last year because it was easy to do, but a company can't achieve its supply chain and customer service objectives through low rates," he says. "Carriers need to bring value-added services to the table that enable them to achieve their goals in other ways, such as by taking advantage of intermodal or better consolidation strategies or shorter lead times."
Butts does believe, however, that asset-light companies are less vulnerable to economic downturns. "We have a variable-cost model and that helped us get through this period," he says. "I think you will find that a key characteristic of companies that weathered the recession well, regardless of industry, was a reliance on variable costs and the ability to lower costs rapidly."
This observation is underscored by IDC Manufacturing Insights in its top 10 supply chain predictions for 2010. The overall theme for the predictions "is the notion of rethinking supply chain structures in an effort to move to more of a variable-cost-driven rather than a fixed-cost-driven network." IDC's research indicates that this mandate will drive an acceleration in supply chain modernization as the economy recovers, with a focus on capabilities like strategic outsourcing, shared capacity and collaborative innovation.
Such capabilities require partnerships between carriers and shippers, however, and recessionary cost pressures revealed many logistics partnerships to be only skin deep.
"The severity and length of this trough challenged more of those partnerships than we ever have seen previously," says Leathers. "A lot of folks that we thought of as partners decided in the end to treat transportation and their supply chain more as a commodity, and that is unfortunate."
At the same time, there were cases where prior investments in relationships paid off and customers were willing to work with them to look for ways to take costs out, Leathers says. "Those customers that took a longer-term view will be rewarded during the upturn because we are going to go to great lengths to make sure their loyalty is well served and to show them that their vision was the correct one," he says. "We challenge ourselves every day to make sure we are taking care of those partners above and beyond anyone else."
This experience has made Werner question its business model, however, Leathers says. "We have traditionally been an asset-based truckload carrier, but that model has simply become too high-risk and too low-return to stay in as a predominant business. We are spending more than $100,000 a unit for a tractor-trailer, with a life span of around seven years, in a market where the definition of a partnership is often a bid cycle that lasts one year of less," he says. Going forward Werner will move more heavily into logistics, brokerage, intermodal and other services to balance its asset operations "because the truckload long-haul segment is clearly undervalued by the shipping community," he says.
Mark Rogers, Schneider's vice president for Van and Truckload, agrees there was a dichotomy between customers that were committed to a partnership and ready to work together to reduce costs and those that "looked for an opportunity to take advantage of the partnership." The latter arrangements "are not sustainable and will come back into balance as the economy turns around," he says.
Global and Regional
Another lesson that the recession brought home was the speed with which customers' businesses can change, says Tyler Ellison, president of Con-way Multimodal. "The pace of change at our customers increased dramatically as the economy worsened, from sourcing decisions to staff changes to leaner inventory policies to shorter lead-times - there were lots of changes that caused lots of turmoil," he says. "Staying close to customers and understanding how we could help them navigate these waters became more important than ever."
Similarly, this recession made clear how easily customers and shippers can move operations from one region to another, something that was not the case 10 years ago. "Keeping a presence and having capabilities in other global markets is a big advantage," Ellison says, noting that as a company Con-way remained fully committed to its operations in Mexico and Canada throughout the recession.
Focusing more on regional opportunities in the U.S. was another strategy that helped Con-way Truckload find new business during the recession. "We had a fledgling regional business when the recession began and we expanded that throughout the recession, growing from a very small regional fleet of 50 to 75 trucks to more than 325 trucks today," says Schmidt. "We are on a path to continue to expand that as business picks up."
Schmidt explains that regional trucking has benefited from a trend over the past few years, driven in part by the volatility of energy costs, to have vendors locate closer to manufacturing plants or retail outlets. This is a case where having assets was a blessing, since establishing a regional network is capital intensive, he says. "To provide regional services you have to have secure drop lots that you don't need in truckload. If you are going to be a national regional carrier, you would need upwards of 30 facilities. Because Multimodal is part of the Con-way family, it was able to leverage the terminal infrastructure already in place to support the LTL network of Con-way Freight.
The goal is to build on that regional network, which now serves 13 states, to become a national regional carrier over time, Schmidt says.
Schneider National also started adding regional hauls to its traditional line-haul and intermodal services, says Rogers. "We continue to look for ways to leverage the growth in regional business," he says. One tactic is to use regional freight to help fill empty miles in its dedicated operations, creating savings that can be passed on the customers, he says.
Dedicated carriage was another bright spot for Schneider during the recession. A lot of companies' private fleets came under pressure as corporations questioned the deployment of human and financial capital, says Van Alstine. "A lot of companies are deciding that capital should be focused on their core business and not put into a private fleet, so these companies are looking to outsource that function to a dedicated contract carrier. We are starting to see a tremendous amount of opportunity in this area." The good news is that this appears to be a structural change that will have long lasting benefits, he says.
Other recession-driven changes also are likely to be a part of the operating environment for some time to come -- perhaps permanently. Shippers that switched to intermodal or became willing to wait an extra day or two for delivery may see no need to change back, for example. "Prior to the recession if you talked to a customer about modal options that would result in a little longer transit time, the answer typically was 'no', but now we see customers really wanting the options laid out so they can choose the best balance between cost and service," says Ellison. "I don't think that will quickly change."
"We certainly have customers coming to us with greater frequency now to engage us on how to get their product to market more cost effectively," says Rogers. "In a number of cases, we have designed specific equipment for them that allows them to maximize cube or weight. I think a silver lining of this recession is that it has forced people to think differently and to engage with suppliers and customers differently."
Carriers also say they will not quickly reverse changes put in place during the recession. Van Alstine notes, for example, that the unemployment situation allowed Schneider to implement higher standards for drivers it hires. "I don't believe we will walk away from those standards," he says.
"There will be some lasting traction with respect to things that were done to save fuel, like idling and auxiliary power units. These are things where the math works but you don't always have time to look at them in a robust environment because you are so busy just trying to keep trailers full and moving," says Schmidt. "I think a lot of those things will be lasting and will make us a better industry going forward."
These executives generally expect truck capacity to draw even with demand in the second half of this year with significant improvement in 2011. But no one is breathing easy quite yet.
Railroads Predict Much Better Margins as Freight Volumes Increase
U.S. class I railroads saw significant drops in freight volumes during the economic downturn, but with less impact on margins than most other sectors. CSX, for example, experienced a 15-percent year-over-year drop in volume in 2009 and a decline in operating income of almost $500m, yet managed to increase its operating margin by 0.7 percent.
Oscar Munoz, executive vice president and chief financial officer of the railroad, attributed this performance to the carrier's disciplined pricing and focus on productivity. Speaking at the J.P. Morgan Aviation, Transportation and Defense Conference in early March, Munoz said CSX believes in pricing its services above inflation - a policy it will continue to follow in the future. "This is not leading edge or some new strategic vision, it is just good business," he said.
Another contributing factor that Munoz cited was CSX's ability to quickly bring costs in line with declining volumes. He noted that at the same J.P. Morgan conference in 2009, Munoz had said that CSX would be able to fully adjust its operations to declining volumes within two to three quarters. "We accomplished that, as promised, through a lot of difficult work," he said.
Freight volumes this year are up 3 percent at CSX through the first week of March. Munoz says CSX will be able to meet increasing demand in its carload and intermodal businesses without a commensurate increase in costs, thereby improving margins. "Our costs are driven by human beings operating expensive assets," Munoz said. "We have learned how to move more tons with fewer people, so cost increases will stay below volume increases."
Munoz also specifically noted a recent upturn in coal exports to China. If this trend continues, CSX will export an additional seven to 10 million tons of coal this year. "This is a good, profitable business for us," says Munoz.
Union Pacific executive vice president and CFO Rob Knight also stressed his railroad's pricing and productivity achievements at the J.P. Morgan conference. Knight said throughout the downturn UP stayed focused on its long-term strategy of driving higher returns and having an operating ratio in the low 70s by 2012. He noted that UP took 5.5 points off its OR in the past three years while improving all of its key operating metrics. When added to its safety and environmental benefits, this created a "value proposition" that enabled the railroad to raise its core prices by 4.5 percent in 2009. Knight said UP expects "a strong pricing environment" in 2010.
Volumes at UP were up 11 percent the first two months of 2010, Knight said. Continued growth is expected throughout the year if the economy holds up, he said, but costs will remain well controlled. He said that there is still a good deal of opportunity to increase train lengths with minimal cost increases and to bring back furloughed workers and idled equipment without the costs typically associated with ramping up for new business.
Both UP and CSX touted the benefits of UMAX, a new domestic interline container program created by UP and CSX Intermodal. Scheduled to launch March 29, UMAX will feature more than 600 service lanes supported by faster and more frequent train schedules. UMAX will replace the separate programs CSX Intermodal and Union Pacific offer customers today for CSXI-UP interline service. Eliminating these legacy contracts opens the opportunity for re-pricing as well, Knight said.
Con-way Truckload, www.con-way.com
Con-way Multimodal, www.con-way.com
Schneider National, www.schneider.com
C.H. Robinson, www.chrobinson.com
Werner Enterprises, www.werner.com
YRC Worldwide, www.yrc.com
IDC Manufacturing Insights, www.idc.com
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