Last Thursday night, I had the distinct pleasure of participating in a Shipper-Carrier Roundtable along with a number of old friends and colleagues.  The event was organized by CITT, sponsored by Shaw Tracking and moderated by Lou Smyrlis, editorial director of Business Information Group, publishers of Canadian Transportation & Logistics and MotorTruck Fleet Executive.

As I was driving home, I tried to reflect on some of the most important messages I heard from my fellow panelists that night.  There were two that stood out.

First there was a comment from Doug Munro, president of Maritime-Ontario Freightways, about the importance of delivering good service.  While this may seem so obvious that it is not worth mentioning, it was the passion with which Doug delivered this message that stood out for me.  Doug made reference to the airline industry and noted that there is no acceptable norm other than 100% arrival of its planes.  Nothing less can be tolerated.  While it is fine for a surface transportation freight carrier to report a 98 or 99% on time service ratio, these statistics acknowledge that the company is failing 1 or 2 times out of every hundred deliveries.

Doug mentioned that one of the keys to his company’s success is to provide excellent service.  He highlighted that Maritime-Ontario Freightways is able to gain market share either through the service failures of his competitors or poorly executed acquisitions. He emphasized how he and his management team which he highlighted was the best he ever had, were all focused on instilling this message in their employees.

This message repeats itself in almost every shipper project that my company gets involved in.  During a carrier procurement exercise, shippers focus as much on service as they do on price.  A carrier that submits competitive pricing, but has not been able deliver consistent service will often find itself replaced during a freight RFP process.

On several occasions I have commented in this blog about a looming truck capacity shortage.  A soft North American economy coupled with political uncertainty and concerns about Europe and China, are discouraging carriers from making investments in their fleets.  Truckers are seeking to maximize the utilization of their existing assets and improve yields, particularly with rising equipment costs, increasingly burdensome government regulations, and a shrinking pool of qualified drivers. However, the on demand truckload model creates uncertainty as truckers wait for shippers to book a load and/or to balance a lane.   

Shippers are becoming increasingly concerned about finding the capacity they need to move their freight.  They are also concerned that tight capacity will lead to rising freight costs.   Capacity shortages in various North American markets this year have caused shippers to seek out options to current transportation processes.

A “Mutually Beneficial Antidote” to Securing Capacity and Rate Stability

One solution to these problems is dedicated contract carriage—the practice whereby, as the name implies, a trucker dedicates equipment and drivers to serving an individual shipper, allowing that customer to lock in rates and capacity with that carrier for a multi-year period.  John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., calls dedicated trucking the "mutually beneficial antidote" for carriers that want to get paid for capacity and shippers that want to know it's available.

"Both shippers and carriers are increasingly realizing that dedicated trucking may be just the solution that meets both their needs," Larkin wrote in early October.  He stated that shippers who own and operate private fleets could "see 10-percent savings right off the bat" from switching to dedicated service. That's because specialized operators can usually manage fuel, insurance, maintenance, equipment utilization, and driver schedules more efficiently than a shipper that operates its own trucks can, Larkin notes.  What's more, companies that outsource their fleet needs can free up their balance sheet capacity and reinvest more of their cash into their core business, which is generally not transportation, Larkin says.

The traditional and social media remind us on almost a daily basis that we are seeing the first manifestations of a looming capacity problem.  There are already capacity shortfalls in certain geographic areas using specific modes of transport.  With 15 to 20 percent of truck capacity removed during the recession and reduced driver availability, this may set the stage for challenging times for shippers in the years ahead as they seek to find reliable means of moving their freight.

The good news is that there is much a logistics professional can do proactively to make sure they protect the integrity of their company’s supply chain.  Here are some suggestions.

1. Think Strategically about your Supply Chain, not just Tactically about Transportation

Whether it is sourcing raw materials or shipping to customers, many organizations have options.  There may be alternative sources of supply, either domestically or in other countries.  There may be a variety of methods in bringing goods to market.  This may include shipping to a warehouse or direct to customer, varying order cycle times, changing manufacturing parameters, shipping more volume on slower freight days,  increasing safety stock levels, switching modes and a host of other variables.   This can also include relocating a warehouse to a more carrier friendly location where head haul or back haul traffic is easier to find.

In other words, it is not just about finding more carriers to handle your current volumes under the existing supply chain paradigms.  Securing capacity may require a number of strategic changes to the design of current supply chains. 

Two weeks ago I looked at the economic realities we are currently facing.  Leading economists are predicting either a number of years of slow growth or a return to recession.  Last week I focused on some of the strategies carriers are employing to maintain profitability.  In this blog I will highlight some of the strategies shippers are engaging to optimize their freight spend. 

As we approach 2012, shippers are facing a soft economy but tight capacity.  After being burned with excess capacity during the 2008-2009 recession, many carriers either parked equipment or left the industry.  In the United States, there are estimates that of a 15 to 20 percent reduction in freight capacity, much of which has not returned.  Carriers have been prudent and deliberate in adding equipment to replace an aging fleet or for limited growth.  They have also become much more focused on yield management to maximize the returns on their assets.  Against this backdrop, shippers are seeking ways to provide good service to their clients while maintaining effective control of freight costs.   Here are a few of the strategies they are employing.

Manufacturers and retailers that were wary of intermodal service in the past are giving it a try.  The intermodal numbers have been one of the bright spots in the transportation data that is published.  While still a small percentage of overall freight activity, Intermodal numbers continue to increase.  For shippers with freight moving longer lengths of haul (e.g. over 750 miles), that ship to warehouses or can take advantage of weekend transit days, intermodal service can be a cost effective option. 

With truckload capacity tight in some areas, shippers are returning to the fundamentals of freight transportation to unlock savings.  This can include revisiting their packaging configurations and loading procedures.  Wal-Mart has been one of the leaders in challenging its vendors to revisit their packaging and shrink the size of their footprints so as to allow more freight on standard 53 foot trailers. 

Shipper collaboration, even among competitors, is a trend to watch.  The recent agreement between Hershey Corporation and Ferrero, two large confectionary goods manufacturers has made headlines.  The companies will share warehousing and distribution assets to reduce truck miles, greenhouse gases and energy use.  In essence, this arrangement will result in the two companies co-loading trailers that will lower the costs to bring their chocolates to market.  As reported in a previous blog, Schneider Logistics is one company that is trying to cater to this need by creating a dedicated shared services LTL model.

In last week’s blog, I tried to capture what appears to be the sentiment of a majority of economists.  Their prediction is for slow growth not just for 2012, but also for several years after that.  In the next two blogs, I will outline some of the approaches taken by shippers and carriers to bolster profits during the upcoming slow times.  The following are a number of the strategies that are playing out among North American carriers.

Maximize Yields from the Current Fleet