In my last bog I looked at how the near-shoring movement and a host of other factors are contributing to an economic boom in Mexico.  I also discussed how the privatization of the Mexican rail industry has led to the improvement in Mexico’s rail network.  These enhancements combined with lower costs and faster customs clearance processes (as compared to truck) are expected to positively impact on cross-border intermodal growth.  In this blog, I will examine some specific activities that are under way that could propel significant growth in cross-border (e.g. Mexico – U.S.) rail traffic.

Mexico’s Rail History

Mexico's current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM's share in 2005 and changed the railroad's name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).

In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.  In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Grupo Mexico is currently merging Ferrosur with Ferromex.

Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas. 

It is hard to believe that the North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994, almost twenty years ago.  Like so many of us in the industry at the time, my colleagues and I rushed down to Laredo/Nuevo Laredo and other key Mexican points to learn the intricacies of the Mexican market and border clearance processes.  But a “calamitous” peso crash, the rise of Asia and its huge, cheap labour force, the prevalence of ocean shipping, low energy costs and a host of other events conspired to delay the anticipated growth in the Mexican freight market.

Ten years ago, wages in Mexico were six times higher than those paid in China.  A gallon of gasoline in America was $1.11 in 1994.  By March 2003, it hit a record $1.79 a gallon. 

Flash forward to 2013 and the picture is very different. The wage gap between Mexico and China had shrunk to 40 percent by 2011, according to the International Monetary Fund. Gasoline prices are averaging $3.63 a gallon for regular fuel, double the figure in 2003 and almost four times the cost in 1994. 

Of course, geography is a key factor.  Mexico not only sits across the U.S. border but it is a gateway to the Latin American markets that are buying Mexico’s autos, appliances and advanced electronics.  The shorter transit times on shipping between Mexico and the United States and Canada are a big advantage over ocean shipping from Asia.

Manufacturing activity in Mexico is booming.  While much of the world experienced slow growth or recession in 2012, Mexico had 6% GDP growth.  Manufacturers in Mexico have well established supply chains that ship finished product north to U.S. markets, while raw materials move south to service their production lines.

Trade using surface transportation between the United States and its North American Free Trade Agreement (NAFTA) partners, Canada and Mexico, was 6.6 percent higher in June 2012 than in June 2011, totaling $82.6 billion, unadjusted for inflation according to the Bureau of Transportation Statistics (BTS) of the U.S. Department of Transportation. Adjusted for inflation and exchange rates, the June 2012 total was $61.0 billion in 2004 dollars, up 11.0 percent from June 2011.

BTS, a part of the Research and Innovative Technology Administration, reported that the June 2012 value of U.S. surface transportation trade with Canada and Mexico rose 11.4 percent from June 2008, seven months into the recession, and 62.8 percent from June 2009, at the end of the recession. 

The value of U.S. surface transportation trade with Canada and Mexico in June increased by 79.0 percent compared to June 2002, a period of 10 years. Imports in June were up 69.7 percent since June 2002, while exports were up 90.8 percent.  Surface transportation includes freight movements by truck, rail, pipeline, mail, Foreign Trade Zones, and vessel. In June, 87.7 percent of U.S. trade by value with Canada and Mexico moved via land, 8.3 percent moved by vessel, and 4.0 percent moved by air.

In June, the value of railed imports between the United States and Canada rose 16.6 percent to $6 billion and value of railed exports soared 25.5 percent to $3 billion. The value of railed imports between the United States and Mexico climbed 16.1 percent to $3.3 billion and value of railed exports increased 7.7 percent to $2.3 billion.  For the same month, the value of trucked imports between the United States and Canada rose 2 percent to $12 billion and value of trucked exports jumped 6.4 percent to $18 billion. The value of trucked imports between the United States and Mexico climbed 8.7 percent to 15.6 billion and value of trucked exports increased 9.6 percent to $11.8 billion.

The value of U.S. surface transportation trade with Canada and Mexico decreased 1.4 percent in June 2012 from May 2012.  It should be noted that truck imports and exports between the United States, Canada and Mexico declined between May and June 2012, while rail imports and exports continue to be strong.  Month-to-month changes can be affected by seasonal variations and other factors.

In my 2012 year-end blog on Trends in Transportation, I identified a number of areas where I expected to see some changes in 2013.  One area I highlighted was the expectation that we would begin to see more Innovation in Transportation.   In my view, Freight Transportation has lagged other industry sectors in the Innovation space.  I also questioned the shelf life of the current transactional model of Freight Brokerage.    Many freight brokers still rely on faxes, phone calls and e mail to run their operations.  In this era of tablet computers, social media and smart phones, this industry would appear ripe for modernization.

When you look at the consumer travel agency business, an industry somewhat analogous to freight brokerage, one can see the transformative power of innovation and technology over the past ten to fifteen years.  It looks like some of these changes are finally coming to the freight brokerage industry. Here is a peak at two companies that are likely going to transform this sector of the freight business.

It is not a joke.  It is happening out there.  The fact that it is happening caused a tidal wave of comments on the LinkedIn “A Truckload, Trucking, Logistics, Supply Chain, 3PL, Distribution group” over the past week.  Here is a sample of what the group members had to say.

“I have asked for and gotten almost $4.00 per mile on loads from the Central Valley in California to Portland/Seattle. These are reefer loads, not dry, but that's a good rate...unless you know beforehand that IF you can find a load back out of that area you will be turned down for the load a lot of times if you want more than $0.89 per mile.  On that lane you’ve got to get your money going in...you won't get much out of there,” stated one trucker.

An Operations Manager at another trucker stated, “As someone who has been in this business a long time, I really don't see how $ 3.00 - $ 4.00 a mile rates would be considered greed. The cost associated with transportation - insurance , fuel , equipment, taxes, maintenance have all increased about 4- 5 times over what they were 25 years ago while the rates in most lanes have remained pretty much the same. Brokers are taking a bigger cut in most cases, not all.  Generally 8- 10%, used to be the norm”.

“I guess it depends on the load itself” stated a Transportation Planner at a Freight Agent. “Shorter miles equal higher rates. Some carriers are just plain greedy, but then some are working the negotiations, asking for higher rates knowing they will have to take less, but hoping to find a happy medium”.

A sales person/dispatcher at a logistics company provided these insights.  “See, these are longer miles between 950 miles to 1150 miles. . . I am all about paying a carrier a fair rate, offering more than the bigger brokers, but to pay $3-$4 per mile is outrageous . . .

Despite being the incumbent President, Barrack Obama and his re-election team were faced with a tall challenge in trying to secure enough votes to keep him in office.  After the Great Recession of the mid 2000s, a major stimulus effort and low interest rates were not able to revive the American economy.  Entering the election, President Obama faced an economy with 7.9 percent unemployment and 23 million Americans out of work.  He also faced a Republican candidate with a highly successful career in the private sector, something President Obama has not had. 

Governor Romney did not help himself by staking out some policy positions to meet certain extremist elements of his party and by making some widely publicized verbal gaffes.  Nevertheless, the economic headwinds faced by President Obama made this a tight race that could have gone either way.  President Obama was able to gain re-election by 4 million votes.  While some people will point to the gaffes and policy positions of the Republican Party, one of key reasons for Obama’s victory was the team of computer wizards who helped mastermind the victory.

“If you look at the numbers, we raised more money online this time than last time, had more donors, more volunteers, registered more people to vote online, and did all kinds of revolutionary stuff through Facebook and Twitter,” stated Teddy Goff, digital director for Obama for America in a recent article in Businessweek. Based on my understanding of the work they did, the Obama team was able to outperform the Romney team in three areas:

1. Data Mining

2. Marketing, particularly social media marketing

A well-developed sales pipeline is a key component of any well managed sales management system.  When properly utilized, the tool is an invaluable resource in measuring the number of quality leads in the system, the true number and dollar value of prospects versus suspects, the number of proposals submitted, the number of verbal commitments and the number and dollar value of signed deals. It is extremely useful in evaluating the effectiveness of individual sales reps and of the sales team as a whole.

As the utility of social media becomes well understood, skilled practitioners of sales management systems are beginning to take advantage of its value.  Social media can play a key role in every facet of sales pipeline management.

Lead Generation

Individuals and companies that are active social media participants are likely to generate leads, some anonymous, from individuals who visit your web site, participate in a LinkedIn group,  respond to a question on LinkedIn or who follow your tweets.  The key is to set a plan in motion to provide quality thought leadership on a consistent basis, to make useful white papers and other material available “free of charge” and to create a process of generating and identifying quality sales leads. 

Turning Suspects into Prospects

This week I had the opportunity to participate in a Logistics Management webinar that featured Adrian Gonzalez, Director, Logistics Viewpoints, as one of the 4 speakers.  Adrian spoke on the topic of Social Media in Supply Chain and Logistics.  This is what he had to say.

Social Media are tools for communicating and collaborating.  Citing data from an October 2011 Adelante survey, Adrian commented that a large block of respondents (e.g. over 40%) agreed with the statement that Social Media will transform supply chains (for the better) in ways that we cannot envision today.  Young professionals, the key early adopter segment, are using them today primarily for Business to Consumer branding and marketing.  In his view, we are at an infection point where the emphasis will shift to Business to Business external and internal communication and collaboration, at all levels within organizations.

The world of smartphones, tablets and social media are coalescing and from this integration, new features and applications are taking shape.  E mail communication, at least for your professionals, is being superseded by texting and social media communication.  Adrian argued that “public” social media tools will become integrated with “enterprise” social media tools leading to faster connectivity and enhanced business integration.

Don’t be afraid of them and don’t ignore them since we will all be using them sooner rather than later.  He related the current infatuation with social media to our interest in the internet in the 90’s.  Smartphone usage, E mail communication and internet access have become second nature in the intervening years. He also suggested that we should look beyond Facebook, LinkedIn and Twitter.  He highlighted You Tube, Instagram, Pinterest and Foursquare as other media to investigate.  New social media tools are constantly emerging.

He cautioned against focusing on the buzzwords (e.g. LinkedIn).  Adrian suggested focusing on what needs to be done and then employing the social media tools that are the best fit for each organization.  Over the past few years, we are witnessing the rise in popularity of Skype for business, web meetings, blogging, RSS feeds and other mechanisms that foster teamwork and instant communication.  As was the case with the internet in the 90’s, it is helpful for less experienced users to seek out mentors from the younger professionals on the team.  They are often the most knowledgeable and sophisticated users. 

Much has been written in recent years about the looming driver shortage in North America.  While there are still millions of people unemployed in Canada and the United States, only a limited number of people are willing to drive a truck for a living.  There are a range of issues that are creating this situation.  The driver lifestyle involves sitting in a rig for many hours a day and for certain assignments, being away from family for days or weeks on end.  This produces a set of challenges with respect to maintaining a healthy diet, performing regular exercise and achieving consistent sleep. 

Then there are the challenges of supporting a family at current compensation levels, the reductions in pay precipitated by the Great Recession and the new hours of service regulations that can restrict one’s income generating potential.  With annual driver turnover running at close to 90 percent, clearly quality freight transport drivers are being actively courted.  They are not hesitating to “jump ship” and provide their services to another organization if the “grass looks greener’” across the street.  The high turnover ratios suggest that many drivers are disillusioned after they make their selection and so the cycle of hiring and leaving keeps repeating itself. 

Most blogs and articles talk about how to recruit drivers.  Very few focus on helping drivers find the right trucking company to work for.  To address this question, I reached out to a panel of drivers with whom I have corresponded in the past.  The panel included Desiree Wood, Harry Rudolphs, Stephen Large and David Robson.  Listed below are a set of suggestions from the five of us. Hopefully these questions will help drivers make better employment decisions and reduce the costly turnover ratio.

There are two distinct groups of people to whom this blog is addressed.  The first group is those people who are considering a job as a professional truck driver.  Then there is the group of drivers who are currently seeking to change employers. 

A. People Considering Taking a Job as a Truck Driver

In last week’s blog, my panel of three expert drivers spoke out on the topic of driver shortages and compensation.  In this week’s blog, we will explore the topics of recruiting, training and student drivers.

Let’s talk about recruiting.  What are your thoughts?

“Just last week I read a recruiting ad that claimed that team drivers could make $100,000”, commented Desiree Wood.   ‘Could’ is the operative word I suppose but in reality the context of the ad was to mislead. The ad was for a lease program which depicted 2 people at a carrier known for extremely low pay to drivers but their recruiting ads tell a different story. The ad does not say what costs will be paid back to the carrier from the gross “could make” amount, if the lease payment is based on both people . . . (driving) . . . or other hidden charges. This is a carrier that should be training candidates to become qualified drivers but instead they are selling trucks to people who know very little about what the trucking industry is really all about.

Drivers are bombarded with less than accurate information and this lack of respect is a contributor to industry burnout among qualified candidates hoping to make truck driving a career.  There are many qualified men and women in the trucking industry already that remain at poor paying carriers until they burn out simply because they cannot trust carriers to deliver the pay or benefits they advertise. . .

It is stressful to be away from family support, work long unpaid hours in extreme weather conditions and have to share difficult living situations while having to adjust to odd sleep schedules.  When candidates are recruited into truck driving, frequently they are unaware of all of these factors, nor  (are they aware) . . . that they will be expected to drive 11 hours per day on top of the unpaid labor they have performed.  Truth in Logistics would help define qualified candidates but this common sense approach takes aim at the inner commission structures in the recruiting and student trucker industry.

I have been writing a blog on a variety of freight transportation issues for the past 5 years.  None has generated as much feedback as my two postings on the subject of driving a truck and driver shortages.  While my blogs can be read in multiple locations, the two recent ones on this topic have received over 2500 hits and 60 comments on the Truck News site alone, many from drivers. 

I have read all of the comments and they encouraged me to reach out to some folks in the field to do a “deeper dive” into the “driver shortage” issue.   As a result, I contacted three truck drivers and sent them a list of questions.  David Robson was the one who helped me write the article on a “Driver’s Perspective on the Current State of Trucking.”  The other two (e.g. Stephen Large, Desiree Wood) are prominent truckers who took the time to share their feedback on the blog.  Here are their thoughts.

One of the recurring themes that I kept hearing is that despite the common perception that we have a “driver shortage” in North America, this is not an accurate description of the current situation. So my first question to the three drivers was to obtain their thoughts on this question.  Do we or do we not have a driver shortage?  Here is what they said.

Dave stated, “I feel we have a driver retention problem that is created by a lack of extensive driver orientation and training from the hiring trucking companies. This leaves the newly hired drivers to learn the company and driver policies on their own. In their frustration they find it easier to quit and move on. I am sure that the compensation was acceptable when they agreed to work for the company.

Problem number two I feel is driver dispatch compatibility. Many dispatchers are not people oriented and therefore drivers cannot work with their dispatch and again find it easier to quit and move on.”

For the past week I have been reading with great interest the postings on the LinkedIn Sales Management Group.  As of the date of this blog posting, there have been over 40 responses to the question, “What advice would you give a new salesperson”?  The tips offered were so good that I thought I would share a “reader’s digest” version with the followers of this blog. 

As I read these suggestions on a daily basis, I see two sets of users for these tips.  First, new sales reps should study this list and make sure they take action on every item.  Second, sales managers should take this checklist and cross reference it with their current (and future reps) to ensure they maintain a winning team.  Here are my 21 favourite tips for the new rep.

1. Achieve mastery of the services that you sell.
2. Achieve mastery in sales skills.
3. Seek out the top performers on your sales team and learn from them as to how they dress, their work ethic and their communication skills.
4. Understand how your services compare with those of your competitors.  
5. Be a great listener so you understand the needs of your prospects.  There is a good reason why we have two ears and one mouth.  Focus on understanding the needs of your customers so you can solve their problems. 
6. Get to know your prospects before you turn them into customers.
7. People buy from people, specifically people they like and trust.
8. Prospect, prospect, prospect.
9. Learn as much as possible about your customers.  The more due diligence you do up front, the easier it will be to close the sale at the end.
10. Be persistent and consistent.  Success comes from a strong work ethic.
11. Be passionate about your company and its services.
12. Try to sell solutions rather than products or services.  Learn your company’s value proposition and where it fits best.  Sell the value of your solution, not price.
13. Learn early on to distinguish buyers from non-buyers (i.e. lack of mutual fit/interest/resources, etc.).  This will go a long way towards increasing your income and your employer’s income while reducing customer acquisition costs.
14. View yourself as a profit centre.  To be successful, time management is critical.  Spend your time, energy and resources on the most viable opportunities in your sales pipeline.
15. Be ethical in all of your business.  Remember, you are selling your (and your company’s) credibility and integrity.  If you lose your integrity, you have nothing to sell.
16. Invest in yourself.  Continually upgrade your product and business knowledge and your sales skills.
17. At the end of the day, when all of the other sales reps have left the office, make one more call to a new prospect.
18. Acquire a CRM tool and use it faithfully every day.
19. If you are having difficulty in one or more areas of your sales pipeline, this is telling you that you have a weakness in specific areas (e.g. prospecting, obtaining appointments, asking for the sale). Take action to turn these weaknesses into strengths.
20. While the sales job can seem very lonely at times, don’t forget sales is a team sport.  Work closely with your manager and the rest of your team (e.g. drivers, dispatchers) to achieve your goals.
21. Always ask for the sale.  If you don’t ask, you may not get. 

I am sure there are many more tips that can be added to the list.  What advice would you give to new freight transportation sales rep?  I would love to hear from you.

This year’s Surface Transportation Summit will take place on October 16, 2013 at the Mississauga Convention Centre.   Please block out this date in your calendar.  We have some great speakers lined up for this year’s event.

During my early days in the trucking industry, I spent a number of years directly or indirectly managing sales teams.  At the time, the sales process was largely focused on number of personal calls per day and on customer entertainment.  While service was and still is important, there was a heavy emphasis on face time with customers and prospects, through a combination of lunches, traffic club dinners, sports events and golf outings.  One company I worked for had a policy of five customer lunches per week and two entertainments a month.  Representatives were encouraged to be “out in the field” making their designated number of calls per day.

The world of transportation sales is going through drastic changes in 2013.  These changes are being driven by three key factors: economics, technology and customer requirements.  Let’s take a look at each of these changes to understand their impact on the sales process.

Economics

During the Great Recession, every trucking company was forced to carefully scrutinize the productivity of each sales person in order to justify their value to the company.    As part of this process, many companies began to realize that expensive car allowance programs, entertainment allowances and travel expenses, coupled with salaries, perks and bonuses made the value proposition of some street sales people quite unattractive. Poor producers were downsized.  In addition to layoffs, detailed cost analyses showed that inside selling, which keeps sales people off the road, can be as much as ten times cheaper than street sales personnel.  Industry estimates show that each contact made by an inside sales rep may cost $25 to $30 while a face to face sales call can cost $300 to $500. 

Technology

The economic forecasts for the second half of this year do not look too promising.  While there are a few positive signs in the United States (e.g. auto sales, new home construction), the overall trend line still remains slow or stagnating growth.

The Great Recession of a few years ago taught transportation company leaders the value in running a lean operation, to focus on the most profitable markets, to improve yield management and to hold back on making asset purchases.  A recent Harvard Business Review article (CEOs Need to Get Serious About Sales by Ram Trichur, Maria Valdivieso de Uster, and Jon Vander Ark, July 10, 2012), argues that effective sales management is still overlooked by many CEO’s including trucking company CEO’s.  Here are a few thoughts on how to increase the productivity of a freight sales team.

Direct the team to the most profitable lanes and markets

What can trucking company leaders do to energize their sales efforts in a stagnating economy?  First, they need to make sure their sales efforts are very focused and productive.  This starts with sharing the company’s vision and profitable routes with their sales team and ensuring that the team is directed to generating the type of business the company needs most.  An unfocused sales team is an unproductive sales team. 

Think “Network” rather than “Lanes”

For the third consecutive year, Dan Goodwill & Associates and BIG Media, publishers of Truck News, Canadian Transportation & Logistics and MotorTruck Fleet Executive, will be co-hosting a Freight Transportation Conference. In prior years, separate conferences were organized for shippers and carriers. The 2012 Surface Transportation Summit (www.surfacetransportationsummit.com, #Tsptnsummit) will bring both groups together to foster dialogue and networking.

The 2012 Summit will take place on Wednesday, October 17 at the Capitol Banquet Centre that is located at the corner of Dixie Road and Courtneypark Drive in Mississauga. It will focus on all forms of road and rail freight transportation. Prior conferences were held in the spring and summer months. The switch to a fall date was made to provide the attendees with a “year in review” perspective on the past year and a look ahead to the New Year.

Carlos Gomes, Senior Economist at Scotiabank, will again kick off the conference and provide his insights on where the economy in general and transportation in particular are headed as we approach the New Year.

Carlos will be followed by a joint presentation from Lee Palmer, President, Palmer Marketing and me on Social Media in Transportation. The two speakers will:

• Review the fundamentals
• Address the big four social media and outline how they fit into a company’s core business strategies
• Show industry examples where they have been applied properly...and poorly
• Review first steps, associated costs and key benefits in the areas of brand building, customer retention and recruiting.

Two weeks ago I wrote about two exciting young companies (PostBidShip and Buytruckload.com) that are applying Innovation and Technology to the automated freight brokerage/freight portal space (http://www.dantranscon.com/index.php/blog/entry/innovation-and-technology-come-to-the-freight-brokerage-industry).  Subsequent to that blog, I was made aware of two more interesting companies that have entered this space, QuoteMyTruckload.com and Freightopolis.  I contacted each of these companies to learn more about their operations. 

QuoteMyTruckload.com

QuoteMyTruckload.com (www.QuoteMyTruckload.com) is one of the portfolio of services offered by InMotion Global Inc., an Interstate Logistics Group Company based in Saint Petersburg, Florida.  The company began as freight broker.  QuoteMyTruckload.com is the truckload quoting and rating module available through their InMotion Global TMS® (www.TheFreeTMS.com) transportation management software solution that is targeted at large shippers moving heavy volumes of freight.  It utilizes the same patented truckload quoting technology.

What can I do to save money on freight?  The same question comes up with every shipper I meet.  This is a legitimate concern.  Freight rates are on the rise.

The economy is improving slowly and this is pushing up costs.  Motor carriers are experiencing cost increase pressures from higher fleet purchase prices, the shortage of qualified drivers, planned changes in Hours of Service, the impact of the U.S. CSA program (e.g. culling unsafe drivers) and the more disciplined approach being taken by many carriers to add to their fleets (based on solid customer demand) and to allocate their assets to high-paying, loyal shippers.  While this is a daunting list of cost increase pressures, there is much that enterprising shippers can do to mitigate cost increases or even reduce freight costs.  Here is my list.

1. Capture and benchmark your freight costs

In one of my recent blogs (http://www.dantranscon.com/index.php/blog/entry/to-save-money-on-freight-lets-focus-on-good-data-rather-than-big-data), I encouraged shippers to construct a freight activity data base.  This should include a detailed data template that contains origin/destination/shipper/carrier, freight revenue data.  In addition, shippers should assemble the current freight budget, actual expenditures and the variances.  This will be the starting point for just about any project that you work on.  Without quality data, you are not in a position to undertake too many freight projects effectively.  You can’t manage what you can’t measure.

2. Conduct a Transportation Audit

“Big Data” has become one of the more popular business expressions over the past couple of years.  This commonly refers to a collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications.  While this is a legitimate concern for some companies, possessing good freight data is a key issue for many others.

In our work with shippers and carriers, we find that having good quality data, data that can be used to make fact-based decisions that help companies improve their profitability is still a major issue, an issue far more important than big data.  In this blog I will address two issues.  First, what data does a shipper need to run an effective freight transportation operation?  Second, I will highlight how a business benefits from having “Good (freight transportation) Data.”

Good Freight Data - The Essentials

For a shipper to manage an effective freight operation, the following are the key data files required.

1. Minimum One Year of Detailed Shipping Data

To be useful, the file must capture the following fields:

An article in the February 11 issue of Bloomberg BusinessWeek caught my eye and got me thinking about another way of reducing freight costs.  Here is the idea.

Hardys became Britain’s best-selling Australian wine brand by selling wine for as little as $5 a bottle, despite the 37 percent surge in the home country’s currency since 2009.  To do that and earn a profit, Hardys changed their paradigm for shipping wine.  Accolade Wines, the producer of Hardys, came up with the idea of shipping the equivalent of 32,000 bottles of wine in a 24,000 liter plastic bag.  The company reduced shipping costs by $3 a case by moving the wine 10,000 miles to a bottling plant that is a two hour drive from London.  The bottling plant receives the shipping containers via truck each day.

Australia’s wine industry that generates the equivalent of $5.8 billion in annual sales, now ships more than half of its overseas shipments in bulk.  The wine makes the 40-day trip to Europe in plastic “bladders.”  Richard Lloyd, Accolade’s global logistics manufacturing director stated:  “We don’t ship glass around the world; we ship wine.”

The BusinessWeek article highlights that shipping in bottles can add 25 cents per bottle to the cost.  Shipping wine by the case fills a ship with containers of bottles.  A third of the volume is taken up with bottles and cartons.  While a 20-foot container can hold 9,000 liters of bottled wine, it can carry a 24,000-liter bladder at slightly higher cost.

While shipping freight in bulk is not new, it is not commonplace for certain commodities.  For low cost products, that typically move in bottles or cans (e.g. no name fruit juices or tomato sauce), “deferred packaging” may help reduce freight costs.

This is a very interesting year in the world of freight transportation.  The economy is improving but at a very slow pace.  Supply and demand for freight transportation services are pretty much in balance.  Trucking companies are all singing the same song.  Their number one problem throughout North America is finding qualified drivers.  Carriers are replacing equipment that comes to the end of its service life but are not making additions to their fleet for potential growth.  Adding capacity without the drivers to move the rigs and customers that commit to provide the freight is not a sound business approach.

Carriers are being very strategic in how they allocate their capacity to their customer base and to uncommitted prospects.  Improved asset management technology is allowing transport companies to manage their fleet more effectively and to pinpoint (and charge for) abuse.  Freight rates are on the rise.  This is confirmed by some of the better known published freight rate indices.

While the pendulum has not totally swung back in the carrier’s favour, it has certainly tilted in their direction.  Shippers are not having the same easy time reducing or controlling their freight rates as they did during the Great Recession.

While freight bids are still prevalent, there are less of them in 2012.  Some shippers are receiving a rude awakening.  Shippers that put their freight out for bid to the same core group of carriers as they have in the past, run the risk that the result of the exercise will be higher rather than lower rates.  For shippers that cannot find the capacity and rates they are seeking, they run the risk of an even nastier surprise if they put their business on the spot market.  Freight that may have moved for $1.30 a mile may be moving at $2.00 a mile on the spot market.

What can shippers do to mitigate freight rate increases in 2012?  For companies that have not put their business out for bid in the last couple of years, it always worth testing the market with a high quality RFP that is sent to a broad range of carriers and logistics companies. 

The subject of Shipper-Carrier Collaboration and Freight Bids came up in at least three tracks at this week’s Supply Chain Canada Annual Conference, presented by SCL and Canadian Industrial Transportation Association.  The subject was discussed at length during a panel discussion entitled, “Shipper-Trucker Relations” led by Lou Smyrlis, Editorial Director, Transportation Media, Business Information Group.  To address the sad state of relations, the panelists highlighted some of the issues raised at a recent meeting held between representatives of the Ontario Trucking Association and the CITA, one of Canada’s leading shipper advocacy groups. 

This discussion was of great interest to me and my company since we have been involved with freight RFPs (Request for Proposals) for over nine years, helping shippers design and execute their bids and helping carriers respond to some of the more complex RFPs.  Here is some of what I heard this week and a few ideas on how to fix several of the problems.  First here is a bit of background.

The Great Recession – the Trigger for the Freight Bid Mania

Prior to forming my consulting practice in 2004, I worked for carriers in the freight industry for many years.  Freight bids have been around for at least twenty years.  Before entering the consulting arena, I had seen and responded to my fair share of RFPs.  Freight bids became very prevalent during the Great Recession in the late 2000s.  As business volumes and revenues shrank, many shippers employed this tool to drive down their freight rates. 

One of the panelists on the Shipper-Carrier Relations track spoke about how overused and abused the tool became.  He highlighted the fact that some shippers conducted as many as three bids on the same freight in the same year to drive down rates.  Freight bids have now become an overworked and often times poorly used instrument to source modes and carriers.  One trucking company executive on the panel was very blunt in his views on freight bids.  He stated simply, “I hate them.”

American Shipper conducted their annual shipper survey earlier this year to determine Best Practices in Freight Transportation Procurement.  The magazine contacted 275 manufacturers and retailers in May of 2012.  The results were published on June 27, 2012. 

They reveal some interesting changes in shipper behavior.  In terms of percentage increase in freight spend, 38% of the respondents indicated that their spend increased by more than 5%.  This compares with 58% in 2011.  Thirty-four percent of the same experienced an increase of less than 5%.  This compares with 17% in the previous year.  Only 11% experienced a decrease in spend.  In 2011, the comparable figure was 16 percent.

The trends for contract freight were similar.  In 2012, 21% of the same sample experienced an increase of over 5% in contracted freight rates.  In 2011, the comparable figure was 40%, a significant decline.  Thirty-seven percent negotiated an increase of less than 5%.  This compares with a figure of 31% in 2011.  Twenty-four percent of the respondents experienced no increase in rates.  In 2011, the figure was 10%.  Clearly there has been a dampening of rate increases in 2012.

The survey respondents were asked to rank the importance of Price, Service and Risk in their freight rate negotiations.  Fifty-eight percent of respondents ranked Price as number one in 2012 as compared to 48% in 2011.  The comparable figures for Service were 42% in 2012 versus 49% in 2011.  No respondents ranked Risk as number one in 2012 as compared to 3% in 2011.

The survey analyzed the cost savings advantages of negotiating freight rates on a centralized basis versus on a decentralized (e.g. multi-plant, multi-divisional) basis.  Thirty percent of decentralized companies experienced an increase of 5% or more as compared to 15% of those companies that negotiate on a centralized basis.  Forty-two percent of the centralized respondents negotiated no increase as compared to 31% of the decentralized group.  Eighteen percent of the centralized group negotiated rate decreases as compared to 20% of the decentralized shippers. 

The two final presenters at last week’s FCPC (Food and Consumer Products of Canada) Supply Chain Symposium provided the attendees with some interesting insights into the minds of Canadian consumers and how to successfully bring new products and services to market.  Here is what they had to say.

Carman Allison, Director Consumer Insight, Nielsen entitled his presentation, The Cautious Consumer.  He began his talk by highlighting that Canada ranks number 11 in consumer confidence (while the US ranks number 20).  Mr. Allison noted that twenty percent of Canadians have no spare cash and essentially live paycheque to paycheque.  Forty-nine percent of Canadians believe that we are still living in a recession.  The Canadian debt to income ratio is now higher than the ratio in the United States.  The statistics shared by Mr. Allison point to a consumer that is both cautious and increasingly cost conscious. 

Mr. Allison then went on to share some statistics on Canadian purchasing behavior.  Canadians can now buy key staples such as milk from their local drug or convenience store.  As a result, we are making 43 fewer trips, on average, to the grocery store per year.  This is a drop of 19%.

In 1970, 38.7 percent of Canadians lived in 1-2 member households; in 2012, this has jumped to 62.7 percent.  In addition to slower family growth, Canadians are much more deal and price conscious.  Thirty-six percent of goods sold (48% of unit sales) are bought due to a price cut.  Discount retailers now represent 49.7 percent of sales and this is expected to surpass 50% in the next few years.  Ninety-five percent of consumers read flyers, 62% read each page and 77% read flyers on a weekly basis.

Mr. Allison outlined the migration from big box stores to smaller stores to buying online to virtual stores to smartphone purchases.  Thirty-seven percent of Canadians own smartphones and 24 percent are willing to make purchases on their smartphone.  The percentages skew higher for younger buyers.  The 4 PM e mail blast represents one of the creative uses of available technologies to spur sales.  As consumers contemplate their dinner menu, the e mail blast directs consumers to some potential purchases they can make at the highlighted grocery store on the way home.  Overall online sales have increased by 11 percent in the last year and now represent $1.2 billion in revenue.  The increase in the value of the Canadian dollar against the US dollar has also produced a 20 percent increase in cross-border traffic as compared to the prior year. 

The economic forecast for this year and for the balance of the decade is rather glum.  Many economists have projected a two percent growth in GDP will become the norm for the next several years.  This scenario is supported by the fact that 24 million Americans are out of work and millions more are underemployed or have given up looking for a job, corporations are reluctant to invest in their businesses until there is a more visible sign that a sustainable recovery is under way and the US government seems incapable of reaching far-ranging agreements on the financial management of the country.  Real gross domestic product -- the output of goods and services produced by labour and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012, certainly not a number that would instill confidence that America is turning the corner. Looking at the past several years, it is easy to support the thesis that we should expect to see more of the same in the future.

But America doesn’t seem to be buying into the low growth scenario.  Here is why.

• The stock market, a leading indicator of economic activity, has almost doubled since March 2009.  Investors poured $11 billion into U.S. equities in the first two weeks of 2013, the biggest gain since 2000.  The market is telling us that there are better days ahead.

• Over the next 5 to 7 years, America is expected to achieve energy independence and will no longer be dependent on foreign energy sources.

• A strong housing market gained momentum in November, 2012 and is expected to continue through 2013, especially with low mortgage rates, which will keep affordability high, according to the BBVA Compass. The Housing Market Index rose to 46 compared to 41 October, which is the highest level since 2006. The jump is a result of homebuilder’s confidence in the housing market.  New home sales and construction are expected to continue on a strong trend throughout the remainder of the year.

• A healthier economy and more model introductions should push U.S. auto sales above the 15 million mark this year, predicts the Polk research firm.  Auto sales should continue to lead the country's economic recovery, rising nearly 7 per cent over 2012 to 15.3 million new vehicle registrations.

• Another tech boom is under way with consumers migrating to tablets, smartphones and social media.  America is strong in these areas and Apple, a key player, has recently signaled that it plans to perform some if its manufacturing in the United States.

• The United States may be in the early stages of recapturing a significant piece of the manufacturing production that fled to Asia over the previous couple of decades.  This is being driven by three factors.  Wage rates in the U.S. are depressed, while labour costs in China are rising.   The surge in oil prices is making it more expensive to move goods across oceans and the shale gas boom in the U.S. has dramatically lowered the cost of powering a plant.   U.S. productivity rates are among the best in the world.  According to the Boston Consulting Group, the U.S. economy is poised to add between 2.5 million and 5 million jobs over the next decade as result of increased factory production (700,000 to 1.3 million actual factory workers and the rest from supporting services).

• U.S. employers added 157,000 jobs in January 2013.

Jeffrey Saut, the chief investment strategist at Raymond James, has suggested that if we look at the combined impact of all of these developments, we may be witnessing the early signs of a new long-term bull market.  Time will tell.  Low interest rates will not last forever.

One thing has been strangely missing during the first five weeks of 2013.  While President Obama has been pushing hard for immigration reform and new gun laws, two very important initiatives, he has said very little about any legislation aimed directly at economic growth.  Perhaps we will hear some of his plans during this week’s State of the Union report.  Certainly the President’s leadership in areas such as infrastructure development, education and training (retraining), debt reduction and a sound budget would go a long way towards powering America in this direction.  This was one of the key elements of his election campaign.  Now is the time for the President to step up and lead his country and the free world to a strong and sustained economic recovery.  Based on the trends above, he has the option of being a leader or a follower.  Let’s see which path he chooses to take.

For four years the U.S. has been in a slow motion economic recovery.  Unemployment remains chronically high with little sign of improvement.  Annual GDP growth is below 2 percent and is expected to remain at that level for some time.  This week, the U.S. Federal Reserve had to undertake its third quantitative easing initiative in the last few years, along with committing to holding interests low until 2015, to try to get the economy untracked.    

The U.S. election is less than two months away.  While the two major political parties have very different views on a range of social issues, there should be some common ground on the economy.  The fact is that there is a desperate need to rapidly increase economic growth and reduce unemployment.

While I am not a trained economist, it seems to me that there are a set of economic paths that America needs to embark on to right the ship.  It would certainly help if government and industry leaders had a shared vision of the paths that need to be taken.  Here are a few thoughts.

Both Presidential nominees talk in lofty terms about an American manufacturing renaissance.  Governor Romney has talked about creating 12 million new jobs over the next four years which would far exceed the 80,000 to 100,000 jobs per month that are currently being created.  It is almost impossible to conceive how this large number could be achieved with a projected growth rate of 1.5 to 2.0 percent GDP growth. 

While this writer and others have written about an upswing, this year, in manufacturing jobs in the United States, the fact is that manufacturing has been in decline in the U.S. economy for three decades.  Over the past 12 years, U.S. manufacturers have cut 31 percent of their workforce, or nearly 6 million workers.  This should not imply that the U.S. should give up on manufacturing.  Rather, it suggests that industry and government should focus on those sectors where the U.S. has the best chance of succeeding and leading in the world. 

Mercifully, the U.S. election is in its final days.  As a Canadian with friends, family, colleagues and clients in the United States, it has been distressing to watch the talk shows, debates and the steady bombardment of election ads on television. 

There is no doubt that Mitt Romney and Barrack Obama are two very intelligent, gifted people.  Their respective parties each have a vague plan to restore America to its rightful place as the leader of the free world.  Regrettably, neither party has provided a detailed substantive roadmap on how they would reduce the deficit and put Americans back to work.  The reasons for this are simple.  Every policy statement offered by one party would be parsed and ripped apart by the other party.  There is safety in being vague.  Even worse, the Republican plan, if you can really call it a plan, would likely increase the size of the U.S. deficit and be of most benefit to affluent Americans, those who are least in need of more financial perks.

Also troubling is the fact that the party leaders and pundits cannot acknowledge any value in their opponent’s program.  Each party demonizes the other with misstatements, half-truths and exaggerations that make the level of political discourse very negative and unpleasant.  America is very a polarized and divided country.  Almost every poll shows the two leaders in a virtual dead heat.  Millions of dollars are being spent in a handful of “swing” states and in a select group of counties where a small number of so-called undecided voters control the fate of the election.  After four and a half hours of debates, hundreds of hours of chatter on television and radio and millions of words in the social media, is there anyone truly “undecided” at this late stage? 

The election appears to be based on two polarized versions of the past four years.  If one believes that President Obama was faced with the worst financial crisis since the Great Depression and that he did everything possible to stimulate jobs, protect U.S. autoworkers, provide universal health care and keep America safe, you will vote for the President.  If you buy into the scenario that President Obama and the Democrats could have done a better job of stewarding the economy during this period, that employment would have been higher and gas prices lower under a Republican administration, that the social policies proposed by the Democrats are too radical, that universal health care is too rich for America and that it is time for a change, you will vote Republican.  The few undecided voters ultimately have to accept one of these distorted views of reality.  Neither one of these scenarios is an accurate reflection of the current state of America. 

Fortunately or unfortunately, I live in Canada and have to deal with our own very troubled political realities.  Sadly, we lost one of our best political leaders to illness and lost one of our major political parties to a series of inept leaders and policies.  The son of former Prime Minister Pierre Trudeau, a young and inexperienced man, may end up becoming its leader and face the very difficult task of resurrecting the fortunes of the Liberal party against a very crafty Stephen Harper, Canada’s current Prime Minister - -  a very tall order.   We have our own problems in Canada.   

During my 30 years in the transportation business, I have had the privilege of leading some great organizations.  Like everyone else, I have had my share of successes and disappointments.  During this period I have also had the opportunity to work with and study a variety of CEOs.  From experience and observation, I have identified a number of characteristics for those CEOs I would deem as top performers.  Here is my list.

     1. Passion for the Business

Top CEO’s have a passion for the business.  They are fully engaged in the operation and actively seek to improve their companies on an ongoing basis.

     2. Become personally engaged with the company’s top clients

The best CEOs get out from behind their desks to meet their clients and form strong bonds with them.  They take a keen interest in their clients’ businesses.  They also seek to establish a personal rapport with their clients that extends beyond the office.  One of the best examples of staying close to a client’s business was demonstrated to me by a trucking company CEO who, several times a year, would take a tractor-trailer on the road to pick up and deliver loads for the company’s key customers so he would have an insight into the freight and its specific loading and unloading requirements. 

The 2012 Surface Transportation Summit held in Toronto last week attracted over 200 shippers, carriers and industry vendors.  The speakers and panelists discussed a wide ranging array of topics but one of the recurring themes was the need for shipper-carrier collaboration.

The Great Recession placed tremendous downward pressure on freight costs and freight rates.  The industry is still in a recovery mode.  Carlos Gomes, the Senior Economist from Scotiabank, the leadoff speaker at the Summit, expressed the view that the economies of North America will be in a period of slow growth for some time to come.  

On the other hand, Maximizing Profitability and Reducing Freight Costs remain the two top priorities for shippers in the 2012 Transportation Buying Trends Survey, as presented at the Summit by Lou Smyrlis, Editorial Director of the Business Information Group. The carrier executives who spoke talked about the need for freight rates to increase to maintain the viability of their businesses.  How do you reconcile these two disparate positions?

A number of shippers and carriers talked about the importance of communication and collaboration.  This collaboration is taking several forms.

Brian Springer, the VP of Transportation of Loblaw Companies discussed the value of providing a company’s core carriers with freight forecasts.  His company provides 6 month, 6 week and 24 hour forecasts of load expectations, thereby allowing his core carriers to better meet the Loblaw capacity requirements.  This approach is particularly important since a number of carriers talked about the requirement to control investments in capital, specifically tractors and trailers, until there is a quicker pace of economic improvement.

For over two decades the University of Tennessee has been conducting its Masters in Logistics research study.  This year the study was undertaken in partnership with Con-way Inc., Ernst & Young, and Logistics Management.  The U.S. based participants accounted for an estimated $30.1 billion in domestic transportation expenditures and over $20.5 billion in international transportation.  Some 1,370 domestic and global logistics, transportation, and supply chain management professionals participated in the study.  A summary of the report appears in the current issue of Logistics Management and is the basis of this blog.

The Masters of Logistics, those companies with annual freight spend in excess of $3 billion, represented 27.8 percent of the study participants. Medium-sized firms, with between $500 million and $3 billion in annual revenue, were 20.6 percent of respondents. The majority of respondents (51.6 percent) were smaller firms with reported annual revenue less than $500 million.  The study participants came from a broad array of industries.

 The results identify the emergence of an idea advocated for over a decade, and one which is being put into place by the Masters of Logistics: Use logistics and transportation services to differentiate yourself in the marketplace. As the study suggests, being able to deliver differentiated service is not possible without a value-creating partnership between the shipper and its strategic carriers; in turn, this has created a unique balance of power between the two parties.

Overall transportation spending as a percent of sales increased from 2011 to 2012. The data showed that companies that spent more than 5 percent of sales on domestic transportation increased year-over-year, rising from 21.2 percent to 26.7 percent in 2012.  The key reason is the change in strategic direction for many companies. Following several years of intense cost cutting, particularly in transportation spending, the 2012 study results point towards companies shifting some of their focus to maximizing profitability and asset utilization. In the meantime, the percentage of respondents who reported that their primary objective is reducing costs has shrunk each of the past three years—findings that reveal that shippers again believe that you have to “spend money to make money”.

Being able to rapidly respond to changing customer requirements is becoming increasingly critical for both shippers and carriers. Today, more than ever, transportation plays a key role in helping companies attain that necessary level of responsiveness. The study indicates that some 71.6 percent of respondents are either capable or highly capable of adjusting transportation operations in response to changing conditions—and this ability to alter and adapt is greater for transportation than for logistics operations.  ‘Total Delivered Cost” is becoming the value creation metric and competitive differentiator among carriers.

In reviewing the 11^th annual shippers choice awards in the current issue of Canadian Transportation & Logistics, I noted with interest that of the hundreds of carriers rated in the survey, only 57 were able to surpass the Benchmark of Excellence.  The magazine presents a number of KPIs (Key Performance Indicators) and lists the scores of the top ranked carriers, by sector (e.g. LTL, truckload etc.), along with the Benchmark scores.  Unfortunately, too many trucking companies are viewed as commodities and don’t measure up.  Being less positively viewed by shippers can make it difficult to achieve satisfactory pricing levels and as a by-product, satisfactory operating ratios.  The data highlights the importance of customer engagement, of being superior at meeting shippers’ needs.

Many companies bring their leadership and management teams together on a quarterly or annual basis to craft/update their budgets, strategies and business plans for the coming year.  In a recent McKinsey Quarterly report, prepared by consultants Tom French, Laura LaBerge and Paul Magill of McKinsey & Company, the writers suggest that many companies are fragmented in their approach to customer interaction and engagement.  The consultants offer a six step plan for superior customer engagement.

1. Hold a Customer Engagement Summit

They suggest that the leadership teams in companies should hold a “customer engagement summit”.  They argue that senior managers, from all departments of the company, should look beyond the basic interactions that customers have with various departments.  The meeting should focus on developing strategies to motivate customers to invest in a continuing relationship with the company and its services.  In other words, companies should implement strategies that move shippers along the customer loyalty continuum.

      2. Focus on Three Factors

The writers outline three factors that should be addressed in formulating a customer engagement strategy.  First the company should construct a vision for how it wishes to build relationships with its customers.  Second, the company should craft an integrated and consistent strategy for interacting with customers across its various departments.  For a trucking company, the customer interactions with Sales, Customer Service, Dispatch and Claims should be in harmony.  Third there should be agreement on the components of the company’s customer engagement system that will be undertaken in-house or via its partners (e.g. beyond carriers, carrier partners, pick-up and delivery agents etc.).

The New Year will be an exciting one that will likely be shaped by the financial talks currently taking place in Washington.  Here are some of the key trends to watch for in the coming year.

1. The “Fiscal Cliff” Crisis may determine the level of the Economic Recovery in 2013

As the year comes to a close, America is facing a number of economic headwinds (e.g. high unemployment and underemployment, mismatch between job skills required/positions available) and tailwinds (e.g. possible rebound in the housing sector, potential revival of domestic manufacturing, boom in energy production, improving household balance sheets). Senior government leaders in Washington are trying to solve America’s so-called “fiscal cliff” that is casting a dark shadow over the economy. The resolution of this crisis may go down to the wire and will likely set the tone for the economic recovery, or lack thereof, in 2013.  Should America’s leadership come to a good understanding on tax increases and spending cuts, this will place the United States and probably Canada on a more solid path to an economic recovery, even if 2013 is not expected to be a year of robust growth. This will help shippers and carriers in all sectors of the economy.  A failure to reach an agreement, a weak agreement or an agreement to push the problem down the road, will put a damper on discretionary spending, consumer confidence and possibly shove North America and much of the world into recession.

2. America’s Energy Renaissance/ Fracking comes to the USA

America is going through an energy renaissance.  Induced hydraulic fracturing or hydrofracking, commonly known as fracking, is a technique used to release petroleum, natural gas (including shale gas, tight gas, and coal seam gas), or other substances for extraction.  Fracking is allowing America to produce increasing supplies of energy just as the Middle East, the world’s leading source for petroleum, has become increasingly volatile. 

The increase in job creation in Canada over the past two months and the decline in the U.S. unemployment rate to 7.9 percent (that was announced on Friday), paint a picture of a North American economy on the mend.  John Larkin, transportation sector analyst with Stifel, Nicolaus & Company believes that America is in a flat, slow growth mode which is likely to continue. The natural tendency to grow faster than the 1-2% levels seen in recent quarters coming out of recession is dampened by a variety of factors, including the seemingly never ending financial woes in Europe, more tension on the Middle East, a slowing Chinese economy, high unemployment and low levels of labor participation in the US, and worries over the looming "fiscal cliff" approaching at year's end.

He noted that while retail sales numbers in general have looked reasonably strong, when backing out sales of gasoline and indexing for population growth and inflation, retail sales in the U.S. are right now just at levels seen in 1998 - hardly bullish for freight. Retail sales are still down 8.6% today from their adjusted peak seen all the way back in 2006, even though the number is up substantially more than the bottom in Q4 2008.

Larkin also indicated that sales growth at 10 of the largest US retailers was just 1.6% in Q2 - which exactly mirrored inflation, meaning real growth was flat. Housing markets appear to have turned the corner, but remain far from healthy. Recent increases in prices, building permits and home starts are from a low base.

A recent Statistics Canada report showed that Canada’s jobless rate rose to 7.4 percent, a seven month high.  Maththieu Arseneau, senior economist at National Bank Financial in Montreal noted in an interview with the Globe & mail that the current pace of hiring will likely ease.  Mr. Arseneau highlighted a slowing construction industry, global pressures that are impacting manufacturing and a trimming of public sector budgets.  Two major Canadian retailers, Hudson’s  Bay Co. and Shoppers Drug Mart announced plans to cut 210 and 80 jobs respectively, to trim costs in response to competitive (e.g. entry of target into Canada) and regulatory changes. 

How is this all playing out with the transportation industry?

Pierre Berton, the late, famous Canadian author noted in his book, “The Last Spike,” that CP Rail has held a respected place in the country’s history.  He wrote that “no other private company, with the single exception of Hudson’s Bay Company, has had such an influence on the destinies of the nation.” For most of the past 15 years, CP Rail faced stiff competition from CN Rail as Paul Tellier and Hunter Harrison led the company’s move from a bloated government run enterprise to a highly profitable public company.  In fact CN’s operating ratio of 61.3 is not only the best among the major North American railroads, it is one of the best of any company in the transportation industry.

The fact that CP Rail lagged so far behind CN Rail and the other class 1 railways in North America led the activist investor Bill Ackman, of Pershing Square Capital, to launch his “palace revolt” proxy battle that resulted in the replacement of CP’s former President with Hunter Harrison, whom he brought out of retirement to drive the railway’s profit improvement.

As we pass through the last quarter of this year, Canada’s two largest railroads are heading down separate tracks.  With an operating ratio is the low 80’s, Mr. Harrison has embarked on a series of actions to reduce costs through improved asset utilization.  This is another way of saying that CP Rail is planning to move its equipment more quickly and efficiently, to become Canada’s second “precision” railroad.   It is seeking to accomplish this by undertaking a series of initiatives.  These include:

• Building trains at CP’s intermodal terminal in Vancouver with blocks of cars for long haul destinations. This reduces stops and streamlines connections.
• Increasing average train lengths to 7,000 to 12,000 feet
• Speeding up the fueling of trains
• Improving daily scheduling
• Investing $1.2 billion in 2012 and $1 billion in 2013 on key infrastructure projects
• Working with customers at both ends to improve coordination

The net result of these changes is that CP Rail now provides 4 day transit times between Vancouver and Chicago and Toronto.  These changes represent half of the transcontinental trains that CP launches daily across its network.  Mr. Harrison is not expecting an overnight drop in the company’s operating ratio.  He told Bloomberg News that he is targeting about 65 percent in the next four years.

Shippers appear to be taking notice of improved service on both major Canadian railways. 

On April 17, Food & Consumer Products of Canada (FCPC) held their annual Supply Chain Symposium.  It was an excellent event that attracted many of the top food and consumer products manufacturers in Canada.  I have attended a number of very good supply chain educational events over the years.  This one ranks up there with some of the best CSCMP annual conferences.

This was direct result of how Errol Cerit, Senior Director, Supply Chain & Industry Affairs and his team at FCPC delivered on their theme of “Thinking in New Boxes.”  The meeting began with a stimulating interactive session led by Alan Iny, Senior Global Specialist, The Boston Consulting Group.  Drawing from his upcoming book on this topic, Mr. Iny opened the day by identifying how we all call upon our paradigms, concepts and stereotypes to shape the boxes we use to classify the data that we receive.  This set the stage for the remainder of the day and for Mr. Iny’s closing session.

This was followed by a presentation from Peter McMahon, Chief Operating Officer of Loblaw Companies Limited.  Mr. McMahon highlighted how 14 million Canadians go through the company’s 1200 stores across Canada each week.  He shared with the audience some of the key market segments driving his business, some of the key forces affecting the retail food industry and then outlined the company’s supply chain transformation strategy to serve customers in the past, present and future.  It was very interesting story.

Mr. McMahon was followed by Professor Benoit Montreuil, Canada Research Chair in Enterprise Engineering at Laval University.  Mr. Montreuil spoke about creating a “Physical Internet,” a “paradigm breaking” way of creating a physical superhighway or infrastructure for freight transportation that would parallel the IT infrastructure developed for the Information Superhighway. 

Professor Montreuil presented a very effective case for the need to create a “Physical Internet.”  Logistics costs represent 5 to 15 percent of GDP.  Greenhouse gas emissions continue to rise.  The professor argued that sixty percent of the weight-volume for freight is comprised of air and packaging.  Twenty-five percent of freight travel is the movement of empty road equipment. 

Last weekend I walked into one of my favourite Men’s stores in a local mall, Yorkdale Shopping Centre in Toronto, to arrange for a pair of pants to be mended.  The retailer, Harry Rosen, asked me to stick around for a few minutes while they did the repair.  After looking at their display of Armani ties, I walked across the hall into the Hudson’s Bay store.  Like many men, I don’t shop for clothes too often and when I do, I go to a select group of stores, in a very focused way, to buy what I need.

After passing the cosmetics counters that have always been across the hall from Harry’s, I had quite a shock.  In fact, I would say that the HBC store was unrecognizable to me.  The previously rather bland retail environment was replaced with a dazzling array of designer fashions.  The men’s department that had always been on the main floor was nowhere to be found.  This caused me to reflect on the many changes taking place in the retail sector.

As I walked through the mall, I saw a number of well-known American retailers that have found their way to Canada.  The list now includes Victoria’s Secret (also just next to Harry’s), American Eagle (a few doors away), J Crew and William Sonoma.  Another one of my preferred men’s shops (Brooks Brothers) has also landed in downtown Toronto.  Canada has been discovered, not by Christopher Columbus, but by Target Stores and Nordstrom, that have announced their intentions to head north. 

Canadian retailers have been preparing for the invasion for some time.  Clearly, the HBC makeover is directed at blunting the attack from Nordstrom, Target and others.  Holt Renfrew, one of Canada’s leading luxury retailers, that is affiliated with Lord and Taylor in the United States, has announced its intention to open a chain of HR2 stores.  The stores will feature unique merchandise sourced from many of the same designers that supply Holt Renfrew, but at a lower price point.  While Holt Renfrew executives have denied the suggestion, the stores will likely resemble Barney’s New York’s less expensive Co-Op chain or Neiman-Marcus’s lower-priced Cusp stores. 

Not to be outdone, one of Canada’s major furniture retailers, Leon’s Furniture, bought The Brick this week to gain efficiencies and economies of scale and to more effectively respond to a slowing housing industry.  They also hope to compete more successfully against Target Stores.

The decision by Wal-Mart to conduct a pilot of a 60 foot high cube tractor-trailer in Ontario, Canada caught the transportation industry off guard.  The surprise is not so much that a newer and longer piece of trucking equipment is being trialed.  This was inevitable.  The surprise is that the initiative was driven by a large shipper and not by a Trucking Association or trucking company in Canada or the United States.    

The arguments in support of the trial are compelling and are the same arguments that were made when 53 foot trailers and every other innovation in transportation occurred.  A 60 foot tractor-trailer that offers 30 percent more cubic space promises to make the North American economy more efficient.  It places fewer trucks on the road, thereby reducing congestion and lessening the need to refurbish our existing highway infrastructure.  It reduces the impact of a driver shortage.  It would reduce fuel consumption and greenhouse gas emissions.  It permits drivers to accomplish more under HOS restrictions.  It would allow trucking companies to derive a better return on their investment.

The arguments against Wal-Mart’s pilot are the same as those made each time there is a proposed change of this nature.  The most frequently mentioned reservation is that this will make our roads less safe.  It will result in more highway fatalities.  The prototype trailer is not in compliance with existing laws in various jurisdictions.  There will be problems in backing up a tractor-trailer combo of this nature into many existing loading and unloading docks.  Longer high cube equipment will contain heavier payloads that will speed up the damage to our roads and highways.   It will require infrastructure changes to accommodate vehicles of this length.

While all of these comments deserve discussion, it must be pointed out that the transportation industry has dealt with all of these issues before.  Laws can be amended.  Loading areas can be reconfigured.  Bridge crossing can be modified.  Weight configurations can change.  It wasn’t that long ago that Ontario ran a trial on long combination vehicles (LCVs).  What makes a 60 foot tractor-trailer so different?

Perhaps the biggest issue is the impact that the widespread standardization of 60 foot equipment would have on the capital budgets of trucking companies and shippers who have their own fleets.  The industry has billions of dollars invested in 53 foot equipment.  With an economy that is less than robust, trying to “keep up with the Jones” by having to convert part of a fleet to 60 foot equipment is certainly not what the industry is looking for at this time.  This issue alone explains why longer tractor-trailer lengths have not been driven by the trucking industry.  A change of this nature would cost enormous amounts of money.  The cost alone creates a certain amount of inertia and resistance.

As the year 2012 draws to a close, it is time to reflect on the major transportation stories of the year.  Here are the ones that stood out to me. 

     1. CP Rail's Shareholder Revolt

CP Rail is a landmark Canadian company that has played an important role in the country’s history.  It made a unique kind of history in 2012 when Bill Ackman, head of US hedge fund Pershing Square Capitol Management, led a shareholder revolt that resulted in the ouster of CP Rail’s president and several board members.  While this was the major transportation story of the year, it resonated throughout the board rooms of North America as underperforming companies, in other industries, were served notice. Shareholder activism can be very powerful if a company’s leaders do not produce results that are in line with market expectations. 

The latest chapter in the CP Rail story is currently being written as its new CEO, Hunter Harrison, the former CEO of CN Rail, is taking aggressive action to improve asset utilization and improve transcontinental intermodal service.  As this blog was going to press, CP Rail announced that it plans to cut 4500 employees or roughly 28 percent of its workforce over the next three years.  Stay tuned for the next set of chapters in the history of this famous Canadian company.

     2. Wal-Mart’s 60 Foot Tractor-Trailer

One of the 2013 trends identified in my last blog was the requirement for transportation professionals to ramp up their efforts at Risk Management.  In recent years we have seen a range of weather related natural disasters.   Of course, disruptions to supply chains can come from other sources such as terrorism, wars, accidents, the failure of various operating systems such as telephone and computer systems, quality control problems and export restrictions.  To make matters worse, most of these disruptions are unpredictable in timing and scope.

Supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal.  Each shipper has to make an assessment of the potential risks to their supply chains.  Supply chain risk management can be defined as attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain.

Supply chain risk models can vary from the rudimentary to the sophisticated.  In the case of the latter, complex “what if” analyses can be performed.  These allow shippers to identify potential trouble spots and map out alternative supply chain strategies.  Historically, shippers have tended to focus on factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane.

Based on the escalation of various risks in recent years, there is a need to take risk management to another level.  Shippers need to perform a probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, manufacturing facilities, modes, carriers, origin points, ports, border crossings, distribution facilities and destination ports.

Looking ahead to 2013, there are some major (predictable) risks that could drive up supply chain and transportation costs.   These include the result of the ongoing debt discussions in the United States, the impact on fuel costs if there is more violence in the Middle East, a driver shortage if the economy rebounds faster than expected, the recession in Europe and other weather related problems.  In Canada there is a risk of a housing bubble which would have a major impact on its economy.  In addition, there are risks that cannot be predicted at this time.

Regina’s Global Transportation Hub (http://www.thegth.com/) was launched in February of 2011.  The 1700 acre property is owned and operated by the province of Saskatchewan.  Canada’s Federal Government has provided funds for the road network. 

According to Blair Wagar, its chief operating officer, it was developed to achieve several objectives:

1. 1.Try to improve transportation and logistics in Saskatchewan;
2. 2.Bring shippers and carriers together at one location;
3. 3.Help companies drive cost out of their supply chains.

Manufacturers and retailers spend millions of dollars a year on freight transportation.  Freight costs can represent between 1 and 10 percent of a company’s operating expenses.  Many companies treat freight costs as a necessary evil.  Once a year they engage in an annual ritual, the freight bid or RFP.  The current carriers are squeezed in their pricing; sometimes new carriers are brought into the mix if some incumbents haven’t performed.  Shippers walk away thinking they have dome their jobs and optimized the value of their freight costs.  They haven’t.

Every few years, shippers with a freight budget in excess of $1 million should conduct an independent audit of their freight programs.  Just as businesses audit their accounting practices, looking for opportunities for improvement, Transportation departments should do so as well.  You might be amazed with what you find.

There are four key components of well conducted Transportation Audit.

1. Face to face interviews with the key transportation professionals using a structured interview format
2. Administration of a written transportation technology and strategy questionnaire
3. Observation of a company’s shipping operations including the packaging of the freight, dock operations , loading/unloading,
4. Analysis of a company’s freight data

The following items are assessed in the audit:

1. Organization of Transportation within business unit – degree of centralization/decentralization
2. Linkage between inbound and outbound freight
3. Where transportation fits within the design of the company’s supply chain
4. Location of plants, DC’s, vendors and customers and how transportation links these components
5. Freight spend as a % of revenue and trend over time
6. Utilization/effectiveness of transportation technology
7. Freight transportation budget versus actuals
8. Spend management/ Off-plan spend (e.g. use of expedited freight transportation)
9. Packaging of freight
10. Loading/unloading of freight – load optimization and load factors
11. Dock operation
12. Use and management of private fleet
13. Mode and carrier selection process/vendor and customer required transit times
14. Analysis of Routing Guide by mode
15. Freight spend data analysis by mode
16. Compliance tracking (e.g. compliance with routing guide)
17. Freight rate benchmarking – is it done?
18. Timing/results of most recent freight bids by mode and results achieved
19. Carrier performance management (e.g. scorecards) – on time service, billing accuracy, claims ratios, customer satisfaction
20. Freight rate auditing process – pre and post-audit

The results of the audit provide a prioritized list of cost savings opportunities.  They highlight opportunities to strengthen the transportation organization.  The audit also provides a road map for improving processes and customer satisfaction.

The fourth quarter 2012 financial results for America’s leading truckload carriers tell a story of an industry going through transformation and change.  The most dramatic poster boy of this change can be seen at the largest carrier in the group, JB Hunt.  Basic point to point truckload carriage has fallen so far that it is almost irrelevant in its overall business results.

In Q4, Hunt generated about $1.33 billion in revenue (including fuel surcharges), but only about $112 million of that came from regular truckload carriage (not including fuel surcharge). That's just about 9% of revenue, down from 12% the previous year. Basic truckload's percentage of total profit at Hunt is even smaller, at just 4%.

But Hunt's strategy of focusing on intermodal and dedicated transportation seems to be working. Its intermodal business, which now accounts for 73% of total profits, saw revenue grow another 12.7% in Q4 and over 14% for the year.

Other carriers in the sector have taken notice.  Werner's trucking revenue declined .1% for the full year while its Value Added Services business, which includes dedicated and intermodal, rose 10%, as it has followed in the footsteps of JB Hunt.   Werner's Specialized Services unit, primarily Dedicated, ended the quarter with 3,295 trucks equal to 46% of its total fleet.

While the major truckload carriers reported growth in these two business sectors, growth in their core business was restrained by several key factors.  Werner reported that “there are several truckload capacity constraints including an older industry truck fleet, the higher cost of new trucks and trailers, significant safety regulatory changes and a challenging driver market.”

Trucking is a $37-billion industry in Canada. The U.S. trucking industry is about ten times the size of Canada’s trucking industry.  In 1998, almost half of the industry's registered trucks in Canada were heavy-duty vehicles weighing more than 15 000 kg (33 000 lbs.) in gross vehicle weight (GVW). They were used primarily to transport freight between urban centres across Canada and to transport goods between Canada and the U.S. and Mexico.

The same study showed that forty-one percent of the energy consumed to transport freight in Canada was used by heavy-duty trucks, and the commercial road transportation sector produces 19 percent of the total emissions in Canada. Carbon dioxide (CO₂) is the principal greenhouse gas (GHG) that contributes to the global problem of climate change. A fuel-efficient truck fleet lessens negative impacts on the environment, improves a company’s image and, most importantly, boosts a its bottom line. A November 2012 Carbon War Room report found that purchasing new or retrofitting existing trucks with fuel-saving technologies can cut fuel costs by 30 percent and result in savings of up to $167,000 per vehicle over 10 years.  The long-term cost benefits of adopting fuel-efficient fleets are clear. But adding up the cost of a new tractor-trailer, top-of-the-line battery, aerodynamic fairings, advanced cruise control and a fuel-efficient transmission brings the price tag to nearly $130,000 per truck — a hefty upfront cost and a tough sell for buyers.

This report also found that employing a full suite of fuel-saving technologies generates annual fuel savings of $26,400 per tractor-trailer. When you consider that the upgrades pay for themselves in fuel savings in just 18 months, this is a powerful incentive to obtain and utilize these technologies.

The Canadian and U.S. governments recognize the importance of energy efficiency and the need for resources and subsidies to make it happen.

Types of Incentives