As we say good bye to the ravages of 2009, here is a list of some of the trends that will have an impact on shippers and carriers in 2010.

1. Modest Economic Growth

There are many signs that the economy is improving. The consensus view among economists is that we will see economic growth in 2010 but it may not feel too buyout. In an economy where consumers drive 70% of GDP growth, high unemployment, a weak housing market and tight credit will serve as strong headwinds.

2. The Jobless Recovery of 2010

With tepid growth, companies will remain cautious about hiring staff. As a result, there will be continuing pressure on worker productivity. The quoted unemployment figure of 10% in the United States and less than 9% in Canada mask the true level of unemployment. There are millions of people who have given up, who are working part time, who have started their own businesses or are underemployed. The true unemployment figure of 16 to 20% will continue to be a drag on the economy and freight volumes. Some experts are predicting a “jobless recovery” that could take four to five years to replace the jobs that were lost last year.

3. Freight Rate Increases are Coming to Town

As volumes increase and capacity shrinks due to the industry consolidation, freight rate increases will become prevalent as carriers seek to reverse the revenue erosion they have suffered in 2009.

4. Frugality Fatigue is Setting In

There are signs that consumers are getting tired of holding off buying a new Smartphone, HD TV, electronic book reader or netbook computers. Frugality fatigue will likely set in as consumers begin to wade into the water and buy items that they have been holding off purchasing during the recession.

5. The Push for Pull

Ultra efficient retailers are developing supply chains that manufacture “fast-fashion” apparel in small batches and have information systems in place to obtain real-time feedback on their popularity. These nimble supply chains only stock items that consumers want, thereby maintaining below average inventory levels. The concept turns “push” manufacturing on its head by trusting buyers will “pull” a product into the market.

6. Inventories Start Growing Again

Low sales volumes in 2009 resulted in uncomfortably high inventory to sales ratios. Many companies spent the year drawing down their inventories. As business picks up in 2010, this will drive manufacturing which in turn will result in inventory replenishment.

7. 10 + 2 and You

The new 10 + 2 Importer Rules take effect in January 2010. For any importers that have not initiated a compliance program, they run the risks of monetary penalties and shipment delays.

8. The Freight Industry Consolidates

There are some major carriers sitting on the bubble. The banks have been reluctant to push trucking companies into bankruptcy since there is such a limited market for freight terminals and other trucking company assets. Look for the banks to make a move on carriers that have no chance of paying back their debts as the economy improves. As the weaker players depart, this will serve to consolidate the industry.

9. Get Ready for CSA 2010

The United States Federal Motor Carrier Safety Administration (FMCSA) plans to fully implement a new safety initiative known as Comprehensive Safety Analysis 2010 or CSA 2010. The goal of the program is to achieve a greater reduction in large truck and bus crashes, injuries and fatalities, while maximizing the resources of FMCSA and its State partners and it is expected to be fully operational by the end of 2010. The implementation of CSA 2010 will result in three major changes. The motor vehicle record or driver abstract will be changed. Individual drivers are going to be audited and each will be given a personal safety rating. An updated safety rating for each driver and trucking company will be issued every 30 days.

The personal safety rating will determine whether or not the driver is considered eligible to continue driving, requires some sort of “intervention,” or is deemed “unfit” to continue operating a commercial vehicle. Similarly motor carriers will face increased scrutiny under CSA 2010 and will face harsh fines, corrective action plans and even risk having their entire fleets placed out of service due to violations.

10. The Miniaturization of Freight Continues

This movement has been under way for years as MP3 players and mini computers replace the large stereo systems and desktop computers of the past. This movement continues to grow. Electronic book readers are the latest pieces of technology to gain traction. Over time, more and more people will begin reading newspapers, magazines and books on their electronic book reader. This will hurt the pulp and paper industry, the book publishing and newspaper industries and the transportation industry that carries the truckloads of newsprint and books today. Similarly the Smart Car and the Tata represent two examples of how the automotive industry is undergoing miniaturization.

11. The LTL Industry Reshuffle

The current state of the LTL industry in North America needs to be transformed and would be transformed with the possible bankruptcy filing of YRC. This would serve to move their 18 to 20% market share over to the remaining players. It would reduce the level of rate cutting. The good news for shippers is that additional freight density would improve the health of the remaining LTL providers. The bad news is that LTL freight rates would go up, in some cases significantly.

12. Smart Shippers Will Lock In Capacity

In 2009 shippers took advantage of their pricing leverage to secure freight rate reductions. As time evolves, supply will come into line with demand. Shippers will need to lock up capacity by signing multi-year contracts with the strong survivors to protect the integrity of their supply chains.

13. Intermodal Length of Haul is Decreasing

Schneider National, Pacer and J.B. Hunt will compete in 2010 to increase market share in the intermediate distance markets of 750 to 1000 miles. Schneider has paired with CSX while Hunt has inked a deal with Norfolk Southern. For Hunt this strategy will be a continuation of their 2009 strategy that allowed them to increase eastern network loads by 38% in April. Schneider’s efforts are focused on the Chicago-Florida, Chicago-Northeast, Florida-Northeast and St. Louis-Northeast routes. The lower fuel consumption levels using intermodal transport help shippers achieve sustainability objectives.

14. Wal-Mart’s Packaging Initiative

In addition to the miniaturization movement, Wal-Mart has been the leader in the green revolution. This initiative to reduce cube utilization through packaging changes goes hand in hand with their push to improve fuel efficiency. This will continue to be a major trend that will gain followers from other industries and companies.

15. China, India and Brazil

This is where the action is. The growth in these economies will likely outpace the growth in North America. Canada needs to diversify its economy away from its overdependence on the United States. It needs to harness and leverage the expertise of its large immigrant population. As an example, the Indian economy is expected to grow by 6 to 7 percent in 2009, significantly more than Canada. With more than 1 million Canadians tracing their family origin to India, and with skills in the high tech industry, there is immense scope for Canadian companies in India. India’s middle class of 300 million is roughly the size of the United States. Smart Canadian companies will move forward with their market diversification strategies.

16. Lean Manufacturing

This trend that has been around for years will continue to gain prominence. The elimination of waste and non-value added capabilities (for which a consumer will not pay) has proven to be a particularly effective way of reducing costs.

17. Smartway

Despite the limited outcomes of the recent Energy Conservation Summit, fuel conservation is here to stay. With limited supplies of fossil fuels and energy demand increasing, particularly in the developing nations, the drive for energy efficiency will continue in 2010. Hybrid vehicles are also an element of the energy efficient movement.

18. Oil Prices Only Have One Way to Go

The emerging markets and the Middle East are consuming 20 million barrels of oil a day. They are projected to consume 42 million barrels a day in 20 years. The reserves are not going up and the alternatives are going to take time to develop. As economic activity increases in 2010, the price of oil only has one way to go.

19. It is Hard to Fix It If You Cannot See It

Cash will likely still be king in 2010. Inventory management tools provide shippers with real-time data to see exactly where their products are in their supply chain, how much they have in stock and how much product their suppliers can provide. While these visibility tools cost money, they can provide shippers with the data they need to take excess costs out of their distribution networks.

20. Transloading will be revisited as a Strategy in 2010

Transloading in its most basic form is the transferring of cargo from 40-foot marine containers into domestic 48- or 53-foot containers or trailers to reduce inland transportation costs. The economic downturn along with significant reductions in warehouse rental rates and higher fuel costs are causing shippers to revisit the economics of transloading to see if it will now work. The stability of intermodal service and the additional cubic capacity of 53 foot equipment may make this a viable strategy for some shippers in 2010.

Thank you for supporting this blog in 2009. I wish all of you a healthy, happy and prosperous 2010.

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The eManifest program is the third phase of the Advance Commercial Information (ACI) program. This program is designed to facilitate the movement of goods across the U.S. – Canada border by facilitating the pre-arrival shipment information process. ACT Phases 1 and 2 established and implemented the requirements for air and marine transportation. Phase 3, eManifest, expands the original program to include cargo, conveyance, secondary and importer admissibility data for all modes of transport including highway and rail by 2014.

For over the road shipping, the eManifest is a declaration by the carrier that tells Customs who the driver is, the truck he is driving, the trailer he is pulling and the cargo that is in the trailer. It is sent to Customs electronically prior to the arrival of the truck at the border.

This major Government of Canada initiative is all about risk management. By using an automated risk assessment system to screen all commercial shipment information in advance of the goods arriving in Canada, eManifest will allow for:

• The improved detection of shipments that pose a high or unknown risk prior to their arrival in Canada
• Low risk shipments to have facilitated entry into Canada

According to Debbie Smyth of the Canada Border Services Agency (CBSA), users will have a 12 month implementation window to adopt eManifest, followed by a six month period of informed compliance. The CBSA will encourage users to adopt eManifest early. At the recent Driving for Profit Seminar in Hamilton, Debbie highlighted the benefits of being an early adopter. They include:

• More opportunities to access CBSA support
• More opportunities and time to fine-tune processes and correct problems

Highway carriers can begin eManifest transmissions in the Spring 2010 while rail carriers will follow in the Fall 2010. It is important to note that there can be penalties for incorrect transmissions. If this process is not done, a carrier could be subject to a penalty from Customs for up to $5000.00.

In her presentation, Debbie identified those data elements that are required in advance and those items that are either exemptions (e.g. emergency response vehicles) or exceptions (e.g. mail and low value courier shipments). Highway carriers will be required to submit conveyance, cargo, secondary and importer admissibility data one hour prior to the arrival at the border for the CBSA to risk assess and determine if the goods are admissible into Canada.

To facilitate the process, CBSA is developing a web portal that is “user friendly,” free of charge, secure and widely accessible. An automated notification system will confirm receipt of information, or detail detected errors that must be amended before arrival at the border.

Shipments identified as being high risk or unknown risk in terms of national security or public safety will be examined at the first point of arrival (FPOA). If required advance information has been determined by the CBSA for admissibility purposes and is determined to be low risk, importers and customs brokers may request release at either the FPOA or inland. If importer admissibility data has not been submitted prior to arrival, the shipment will be risk assessed. If the carrier and driver are members of trusted trader programs (CSA/FAST, bonded PIP, bonded C-TPAT and CDRP), the shipment can move to a CBSA-approved warehouse.

The key issue for shippers and carriers is the expense and time of trucks sitting at the border waiting for clearance. The main reason for trucks being held at the border would be a result of improper customs documentation, no eManifest filed or the eManifest filed improperly. According to Linda Thoms of LMT Border Assistance, “improper documentation originates with the shipper. Customs requires certain information in order to release the goods. (i. e. importer, exporter, # of pieces, country of origin, value etc.) If any information is missing on the documents, the broker cannot process the entry and the driver is held up at Customs until the problem is resolved. If the eManifest is filed improperly, this could hold up the shipment as well. The customs broker can hold up the processing of the paperwork for any of these different reasons. If the Customs Broker encounters problems with paperwork, it usually sits in a pile until the driver calls. They rarely contact the Customer to get the problem resolved; they leave it up to the trucking company or dispatchers to get the problem corrected.”

Linda indicated that this is where her company can help. Drivers can fax their documents to her. She reviews the documents to ensure that they have all the information required for the Customs Brokers. She forwards them to the Broker and follows up (to obtain their entry number) before the driver reaches the border. She will also file the eManifests to US Customs. “When the truck is ready to cross the border, I contact the driver, give him his entry number and tell him he is ready to go.”

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Back in 2001, Jim Collins wrote one of the most popular business books of all time, Good to Great - - why some companies make the leap and others don’t. Mr. Collins has written a new book that is sure to be another top seller entitled “How The Mighty Fall and Why Some Companies Never Give In.”

Since this is such a difficult time for so many trucking companies, and companies in other industries, I thought it would be interesting to look at some of themes that are highlighted in the book and relate them to examples that I have witnessed in the trucking industry. In the book, Mr. Collins outlines the “Five Stages of Decline.” One of the important messages is that a company “can be well into Stage 3 decline and still look and feel great, yet be on the cusp of a huge fall. Decline can sneak up on you and - - seemingly all of a sudden - - you can be in big trouble.”

However, “with a road map to decline in hand . . . (trucking companies) . . . heading . . . downhill might be able to apply the brakes early and reverse course.” Some companies in his study came “back even stronger - - after having crashed into the depths of Stage 4”. . . . Mr. Collins’ research indicates “that organizational decline is largely self-inflicted, and recovery largely within our own control. So long as you never fall all the way to Stage 5, you can rebuild.”

Very briefly here are the 5 Stages of Decline.

Stage 1: Hubris Born of Success

In stage 1, Mr. Collins asserts that some companies become arrogant and lose sight of the underlying factors that created success in the first place. Since luck and timing can often play a role in success, some companies tend to overestimate their own merit and capabilities and succumb to hubris. He expresses the view that strong leaders maintain their fear of failure and their discipline, even as their companies achieve success.

Stage 2: Undisciplined Pursuit of More

Hubris leads to an undisciplined pursuit of more - - more scale, more growth, more of whatever those in powers see as “success.” This has been quite evident in the trucking industry. There have been numerous examples of LTL service expansion in areas where the carrier had limited freight density. Both LTL and truckload carriers have been guilty of growth through aggressive pricing while drifting away from the pricing discipline that was a key to profits and growth through expansion into services and markets (e.g. flatbed, reefer) for which the company has no core competence.

Overreaching, making discontinuous leaps into areas that are inconsistent with core values is undisciplined. Addiction to scale is undisciplined. Leaping into new areas without one’s core competence is neglected in undisciplined.

Stage 3: Denial of Risk and Failure

In Stage 3, leaders begin receiving warning signs but discount them as “temporary,” “cyclic,” or “not that bad.” They discount the negative news while blaming external sources for their setbacks. “When those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4.”

Stage 4: Grasping for Salvation

The consequences of drifting from Stages 1 through 3 are a sharp decline that is visible to all. Declining margins, customer erosion, employee defections can all be signs of a company in turmoil. Leaders who find themselves in these situations have two fundamental choices. They can lurch for a quick salvation or they can go back to the disciplined approach that brought about greatness in the first place. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise.

Stage 5: Capitulation to Irrelevance or Death

In Stage 5, the accumulated setbacks and misguided false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. Mr. Collins argues that good leaders keep the faith and focus on a cause larger than survival and larger than themselves. They maintain the determination and discipline to take those actions, no matter how “excruciating”, to preserve the viability of the enterprise.

It is all about Leadership

The book looks at leadership and team behaviour on the way down and on the way up. In essence the message to business leaders is to remain humble, disciplined and fact-based. Leaders should challenge their team members to come forward with ideas and to engage in a constructive debate on the key drivers of the company. Every member of the team should accept some responsibility for poor results rather than engage in extensive finger-pointing. Clearly there are some valuable lessons in this very timely book that can help business leaders keep their companies on top and prevent them descending into a downward spiral.

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The length of haul on full truckload shipments within the United States has been shifting downwards for years. The trend became particularly clear to me during some freight bids with which I was involved last year. During the course of these bids, a number of the major US national truckload carriers outlined their companies’ regional truckload strategies and were very clear about their objective to build their regional businesses.

The move from national (e.g. greater than 500 miles) to regional truckload shipping (e.g. less than 500 miles) was precipitated by a number of factors. The freight recession that began in 2006 has resulted in fewer long haul truckload shipments. As fuel costs began to increase, it became very punishing financially to incur out of route miles to chase backhaul freight, particularly when these miles were not all producing revenue. In addition, the intermodal option became more attractive on longer distances, when you consider line haul and fuel costs. As fuel costs were escalating, supply chain managers sought to shorten their supply chain to reduce miles, inventory costs and freight costs.

In 2009, the sharp downturn in shipping volumes is giving this movement added momentum. The national truckload carriers are reshaping their business strategies to address the current market realities. These carriers are not abandoning the national markets but revising their long haul strategies. As an example, Werner, in its current earnings report, notes that it “is deemphasizing the low asset return, solo driver solution” while seeking “to grow several other customer focused solutions for this market, such as using team drivers, engineered networks of relay trucks, third-party brokerage carriers, power only with trucks provided by third-party carriers and intermodal.”
Schneider National has also been rolling out its regional truckload business plan. On the heels of what the company said was the successful launch of a regional service in the West last January, Schneider said it would offer regional service in the South-Central United States. Schneider first launched its regional service to western US customers in January, providing service to a seven-state area: Arizona, California, Colorado, Nevada, Oregon, Utah and Washington. The new South-Central regional service will add nine states to that list: Texas, Oklahoma, Kansas, Missouri, Arkansas, Louisiana, Tennessee, Mississippi and Alabama.

Regional terminals will be located in Dallas, Houston and Memphis and will serve as hubs for customer service representatives and drivers who are dedicated solely to this region of the country. Regional drivers develop regular driving routes, allowing them more time at home and consistent workloads. Heartland Express, another medium distance carrier opened its 10th regional operation in Dallas.

What can we expect in the future? More of the same. Keith McCoy, director of marketing for Prime Inc., a refrigerated truckload carrier, expects retailers to continue to shorten their supply chains by forcing manufacturers to move their distribution centres closer to reduce carrying costs. Higher interest rates and rising fuel costs will likely be major factors in the future. Prime has opened four “mini” centres to address these shifts and has plans to do more.

The shrinking length of haul is apparent from the trucking company results reported in the first quarter. Werner’s average length of haul dropped 13.5% to 469 miles while USA truck reported an 11.2% reduction to 651 miles.
In Canada, the market dynamics are somewhat different. Certain industry sectors (e.g. automotive, pulp and paper) are very challenged at this time, with a quick recovery not in sight. The severe downturn in the US economy has resulted in significant declines in cross-border truckload movements. As a result, Canadian carriers are seeking out Canadian markets that have growth and profit potential. As an example, XTL, a central Canada based carrier that historically derived over 50% of revenues from cross-border freight, outlined at a recent workshop that it is now expanding its truckload business west to Alberta and British Columbia.

Clearly carriers on both sides of the border are realigning their strategies to match their capacity to where they perceive the demand to be. As capacity continues to exit the market, it is critical for truckload carriers to apply these precious assets to the geographic areas and lengths of haul that represent the best opportunities for profits.

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The current freight recession is taking its toll as many high quality logistics professionals are losing their jobs. It is rare when a week goes by and I do not receive a phone call or e mail from an old friend or colleague advising me that they are looking for employment. In some cases, I am contacted by people with whom I have not spoken for an extended period of time. The expectation from the caller is that even if there has been no communication for years and the relationship was not close, you will, in this time of need, provide them with leads on job opportunities.

A few weeks ago, I had the pleasure of seeing one of Canada’s premiere networking experts, Allison Graham, CEO of Elevate Seminars + Strategic Development, give a presentation on this topic. I was so impressed with her presentation that I purchased her book, From Business Cards to Business Relationships, Building the Ultimate Network. Allison is an intriguing person since it was only a few years ago that she was a receptionist in an eye care clinic. This highly motivated individual dedicated herself to the task of learning about networking and becoming a coach to professionals seeking to improve their networking skills. She has come a long way and has established herself as a leading authority on this topic.

One of the most important lessons one learns from Allison is that “whatever you want to accomplish can be done provided you surround yourself with the right people.” Networking is not something you turn off and on. It is not just something you do when your employment is terminated. It is “the gathering of acquaintances or contacts – the building up or maintaining of informal relationships, especially with people whose friendship could bring advantages such as job or business opportunities.” Networking is something every professional must do week in and week out. Successful networking takes “perspective, preparation and practice.” It also takes time.

In her book, she outlines the essential steps to effective networking. Allison first outlines the importance of creating a “personal brand.” She addresses a number of key elements (e.g. handshake, eye contact, mingling formula etc.) that are fundamental to creating one’s brand. Of particular importance is her focus on how to create “mini bonds,” which in Allison’s view involves the creation of genuine relationships and building a rapport with people about whom there is a genuine caring.

Allison outlines some excellent techniques for establishing these “mini bonds.” One of the key points she makes is that “the intensity of a relationship is not determined by the quantity of information shared between two people, but rather, by the quality and depth of information that is shared. The more intimate the dialogue, the deeper the bond.”

The book also addresses the topic of developing a Networking Strategy. Allison makes these telling points. “The truth behind the ultimate network is that regardless of how professional and polished your image and how well you know the fundamentals, if you aren’t meeting new people and building relationships, you’re not going to grow your network. Talking about networking and actually networking are two different things. It is amazing how people will say they want to build their network, but then a month later they still haven’t made an effort to get to know even one new contact.

Bottom line. If you want to expand your network, then you have to network. Networking takes work. . . . It takes six months or as many as six to eight casual contacts with others before you hit their radar screen and they start to ‘get” who you are. Expect it to take about 12 to 18 months of consistent and persistent effort to solidify the foundation of your ultimate network.

Of course, networking is not only helpful as a tool to have a robust Rolodex that you can access in time of difficulty. Effective networking can be critical to broadening one’s base of sales prospects or potential marketing partners, or for a host of other purposes.

To learn more about creating an effective networking strategy, buy the book. It is a quick and very good read. It can help transportation and logistics professionals create their “ultimate network” and build successful careers.

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While all segments of the transportation industry are being hit hard by the current recession, the LTL sector is feeling the full force of the economic downturn. To pick up, consolidate, line haul, deconsolidate and deliver less than truckload shipments throughout a geographic area requires an asset heavy business model. LTL carriers require terminal networks to cross-dock, load and unload shipments to build cost effective loads. They require local pickup and delivery units and line haul vehicles to go from city to city. In this blog we will look at some of the developments currently unfolding in this industry.

Freight Volumes Declining Faster that Truck Capacity

As the Obama administration actively moves forward with an economic stimulus package to revive the ailing U.S. economy, the freight transportation market is still feeling the pain. The Institute for Supply Management reported its twelfth consecutive month of manufacturing contraction in the month of January. Based on the most recent truck tonnage index release from the American Trucking Associations (ATA), its advanced seasonally-adjusted For Hire Truck Tonnage Index sank 11.1 percent in December, representing the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in a labor strike. The ATA added that December’s tally marks the third largest single monthly drop since the ATA began collecting tonnage data in 1973.

According to John Larkin, Managing Director, Stifel Nicolaus, demand for LTL services is falling faster than the supply. The pattern of deteriorating LTL freight volumes has been ongoing for the past 3 quarters. LTL carriers have not been able to adjust capacity downwards to keep pace with the falling demand.

Same Number of Pickups, Smaller Size Shipments

From discussions with various LTL truckers, the phenomenon of lower weight LTL shipments appears to be happening across North America. As demand and confidence wane, shipment sizes are diminishing. This poses a challenge to LTL carriers since they cannot reduce driver wages or fuel consumption proportionately to the drop in shipment sizes or number of shipments.

More Direct to Destination Loadings

As LTL carriers seek to reduce costs and speed up transit times, they have been loading more trailers direct to destination rather than through their breakbulk networks. This process has been ongoing for several years and will likely receive a boost from the weak economy.

Capacity Consolidation

YRC is in the midst of consolidating its Yellow and Roadway LTL divisions. They are planning on removing up to 200 terminals by the end of the first quarter. YRC’s freight is being actively solicited by its competitors as they offer shippers a “safe haven” from a potential bankruptcy or chapter 11 filing.

Other trucking companies have announced terminal reductions of a smaller magnitude. These reductions along with the Jevic and Alvan failures in 2008 have removed some additional LTL capacity. The estimate is that there has been an approximately 13 percent reduction in capacity due to terminal closures and carrier failures.

ABF, long one of the best performing long haul carriers has hired a consultant to help them seek out potential acquisition candidates. For those companies with strong balance sheets, this is a time to add density at an attractive price.

Pricing Competitiveness

To generate volumes for their freight networks, carriers are actively competing on price. The LTL spot market is very price competitive. As another sign of the times, Averitt Express has just announced that they will not take a GRI (general rate increase) in 2009. Coming off this announcement, Old Dominion, that competes in many of the same markets as Averitt, has indicated that they are seeking a 5.3% rate increase. It will be interesting to see if they can sustain this increase in such a price competitive market.

More Time Definite Freight

USF Holland, a subsidiary of YRC Worldwide, on Jan. 21 launched a four-tiered plan for service.
With Guaranteed Window Delivery, customers can request time-specific service:

-- Single-Hour - For deliveries within a one-hour time window on a specific day
-- Multi-Hour - For deliveries on a specific day but within a longer period
-- Single-Day - For deliveries on a specific day
-- Multi-Day - For deliveries that must be made within a multiple-day window

Shipments using the new services arrive within the specified time period, neither too early nor too late, and receive priority handling and visibility. All four levels are backed with the Holland standard money-back guarantee.

FedEx Freight is increasing the pressure to perform in the LTL market by adding a higher level of service designed to boost market share. The new service, FedEx Freight A.M., provides a money-back guaranteed delivery by 10:30 a.m. for a flat rate of $75. The service is targeted at shippers requiring last minute changes to delivery schedules for a particular shipment or as part of a planned strategy to reach a market or customer earlier in the day.

"Similar guarantees in the market are based on a percentage of revenue, but we tested the market and found that customers want it kept simple," said FedEx Freight President and CEO Douglas G. Duncan. "A flat rate means no guess work is involved. It requires simply a notation on the bill of lading or an on-line request - no phone calls are necessary. "As companies further compress supply chains and carefully manage inventory and cash flows, this level of service is more important than ever," he said. Clearly come LTL carriers are looking at these time definite shipments, that travel on existing schedules, to generate additional revenues during these difficult times.

A Challenging Year Ahead

In the first quarter of 2009 there is too much LTL capacity chasing a shrinking volume of freight. Terminal closures and carrier consolidations are inevitable as the capacity adjusts to meet demand. It will be a challenging year ahead.

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In the last blog, the focus was on creating a sound and comprehensive business plan that can guide a company through the difficult times. While following the steps listed may seem logical and straightforward, the question is, why are so many companies unsuccessful in implementing their business plans and why do so many companies fail?

To answer this question, I have drawn some insights from two recent books. One is entitled “Stall Points,” written by Mathew S. Olson and Derek Van Bever for the Corporate Executive Board. This book focuses on the research these two gentlemen conducted into why many Fortune 500 companies have stalled in their business growth. The other is “Billion Dollar Lessons” from Paul B. Carroll and Chunka Mui. In their book, they look at the major causes for failure at the 750 companies that they studied. I have blended some of their thoughts with my own experiences in the transportation business over the past 27 years. Here are some of the lessons learned.

There appear to be two general patterns as to why various business strategies fail. The first pattern involves the process of creating the strategy; the second has to do with the strategy itself. Messrs. Olson and Van Bever argue that “revenue growth rather than any other metric is the primary driver of long term company growth. This is not to say that revenue growth without profits is desirable but to suggest that high growth through margin management is not sustainable.” Their research indicates that most large companies stall. “It is very difficult to recover from a stall.”

“Group Think” can lead to Faulty Strategies

One strategy inhibitor that has been observed in a number of transportation companies, both large and small, is the phenomenon of “group think.” Olson and Van Bever state that many companies become the “victims of group think ... Behind each revenue stall we studied, we found that the shared assumptions of the senior executive team about their strategic position were dangerously incorrect. During these companies’ growth runs, their assumptions about competitors, consumers, and sources of advantage had been dependable and useful, but somehow, across the years preceding their stalls, they had weakened, gone unquestioned, and no longer formed the basis of effective strategy.”

Smaller trucking companies are particularly vulnerable to this phenomenon since they often have a less diverse core group of executives who may have been together for some time. This may limit the scope of their experience and the realm of ideas and opportunities for growth. The other danger with “group think” in small trucking companies is that nobody wants to tell the owner or President that they are going down a dead end street.

Flawed Strategies Can Produce "Stalls" in Business Momentum

Based on extensive research, Olson and Van Bever have captured, in statistical form, the reasons why many Fortune 500 Companies have stalled and the percent of stalls attributed to various reasons. One encouraging finding is that an economic downturn is a minor reason for most stalls. Most large companies are able to transition successfully through economic storms. However the bigger issue at this time is probably whether companies are adopting the right strategies to make it through what looks like a protracted recession. The severe downturn is likely to have a serious impact on certain sectors of the market including LTL carriers and truckload carriers in segments such as automotive parts and pulp and paper, two industries where business volumes have deteriorated to levels not seen since the 60’s.

In their book, Olson and Van Bever highlight a number of reasons why (large) businesses stall. I have listed below, those reasons that have had a particular impact on the transportation industry

False Assumptions behind Premium Position Captivity

Some trucking companies have long held positions as the premium brand in their industry. This comes from a track record of quality service that allows them to charge a premium price. With so much pressure on shippers to cut costs, carriers need to be vigilant in monitoring the willingness of customers to “trade away” to a lower priced service, the ability of lower cost competitors to match the premium carrier’s service or the assumption that the carrier should give up on the low end of the market.

Premature Core Abandonment

This can be defined as the failure to fully exploit growth opportunities that exist in the company’s core business. This can be manifested in a truckload carrier venturing into the LTL business or a reefer carrier entering the flat bed business. Certainly many carriers are hungry for revenue as their core market contracts. The danger is assuming the core market is saturated and searching for growth in an area that is not a strength for the firm.

Failed Acquisition

The most frequent problem underlying these failures is a “misconceived economic model underlying a serial pattern of acquisitions ... The story behind the combination ... failed to capture the underlying realities of the businesses to which it was applied.” Messrs Carroll and Mui use the label the “illusions of synergy.”

Key Customer Dependency

For small trucking companies, there is a danger of pinning your hopes on one or a small group of customers. These create a level of dependence that is dangerous, if one or more of these customers falter or are taken away by a competitor.

Talent Bench Shortfall

Olson and Van Bever define this as a “lack of adequate leaders and staff with the skills and capabilities required for strategy execution.” The authors highlight that the problem is not just a shortage of talent “but the absence of required skills or competencies in key pockets of the firm and, most visibly, at the executive level.” The danger for trucking company executives, particularly those that have been successful in a specific segment of the industry, is to think that they can achieve similar success in another area of the business without the necessary resources, knowledge and skills.

Enhancing Opportunities for Success

Both books conclude with some prescriptions for avoiding failure. Some of the “lessons learned” include creating a culture where open dialogue and debate are encouraged, ensuring that satisfactory due diligence and effective vetting processes are in place, building consensus around the sources of weakness in the company’s core strategy and confronting operational challenges that have previously been avoided. The two books, while having some overlap, are well written and contain thoughtful material on this important topic. For trucking company executives looking to lead their companies through turbulent times, they are well advised to consider some of these important business lessons.

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There is an old saying that if you fail to plan, then you are planning to fail. The starting point for any trucking company executive in trying to lead his company through turbulent times is the creation and successful execution of a sound business plan. In this blog I will address the 7 elements that need to be in place to achieve great results.

Here they are:

1. Customers
It is customers that ultimately pay our salaries so they must be at the starting point of every business plan. During these difficult times, it is essential to engage customers and remain close to them. They are experiencing similar pressures brought on by the challenging economy. To meet their evolving needs, it is important to understand how their world is changing and how a carrier’s value proposition may need to adapted to current realities. Are customers planning on consolidating shipments on certain days of the week or shifting freight from road to intermodal or focusing more on regional rather than long haul markets? Staying close to customers allows carriers to maintain their business and add business from competitors that no longer have a viable business proposition.

It is also essential to have accurate contribution margins by account and business segment and have them reflected in the business plan. During these times, there is a tendency to add freight at any rate, regardless of the contribution and to jump in and out of businesses without proper analysis.

It is also important to find ways of adding value whether it is providing service in lanes that are not part of the carrier’s current coverage map, or by providing cross-docking or warehousing. This is the time to look at non-capital intensive means of building the business. This can include using agent terminals, contracting line haul transportation to others or providing freight brokerage services, both as a new source of revenue and as a means of meeting the needs of customers that cannot be fulfilled through a carrier’s asset based businesses.

This is the time to fire up sales through a relentless focus on pipeline management. This is not the time to rush out and cut rates indiscriminately since this may turn low margin freight in losing freight and erode the profitability of the business.

2. Employees
It is hard to open a newspaper or turn on a television set without hearing about job cuts. These are going on throughout North America. They key question is who are the employees who should fill the lifeboat if the ship capsized. While some staff reductions may (or may not be necessary) based on projected business volumes, the objective is to retain the best employees, not necessarily the employees with the longest seniority. While employee loyalty is commendable, contributing to a company’s bottom line is more commendable. Rather than across the board cuts, it may make better business sense to bolster the strong segments and make deeper cuts in the weak ones.

This is the time to be creative when it comes to employee retention. Job sharing, cutting back on number of days worked and asking employees to take unpaid vacations are all methods of adjusting staff levels to the available work. The key is to retain the productive employees who contribute to the business plan. Now is the time to replace non-productive employees with the good performers.

3. Capacity
Every trucking company has some capacity constraints. It is essential to look at those variables that impact directly on a company’s ability to generate revenue. They include an assessment of the size, type and age of the fleet, the driver pool (and access to additional driving resources), operating authorities (including the need to service all the locations applicable to these authorities), insurance and a company’s ability to handle overflow. The key is to make a careful assessment of the maximum contribution that can be achieved though the optimization of capacity. It is also the time to carefully assess which vehicles should remain in service and which vehicles should be parked.

4. Costs
There is a need to look at all fixed, variable and overhead costs and to calculate some key ratios.
Total Operating Costs + Overhead / total KM/Yr = Cost per KM
Revenue = Rate per KM X Number of KM
Profit = Revenue – (Expenses + Overhead)

The focus must be on maximizing revenue generating kilometres while minimizing non-revenue producers.
Which costs can be combined, eliminated, outsourced, or converted from fixed or semi-fixed to variable? Realistic budgets must be set and spending on all non-essential items must be controlled. There needs to be a focus on purchases with a quick ROI. Cost concessions should be sought by combining and leveraging outsourced activities with vendors. Cash flow must be managed very diligently. This requires a very intense collections process and a skilful prioritization of payables requirements and timelines.

5. Measurement
Dashboards are helpful in managing each segment of the business. This is where it is important to focus on the critical few KPI’s that mean the most to the business. The short list probably includes employee productivity, sales performance, contribution management, capacity utilization and cash flow management.

6. Accountability
Everyone has to step up in order to achieve results. Every member of the team must have KPI’s that are monitored continuously. Non-performance must be dealt with swiftly and effectively or other members of the team will lose motivation.

7. Results
The first six steps mean nothing if the objectives are not achieved. If a company is not hitting its targets, there is a need to understand the obstacles and faulty assumptions. All excuses must be challenged. The idea is not to placate the “whiners.” It is essential to deal with the real performance issues.

On the other hand, if there are flaws in the assumptions underlying the plan, the plan must be recalibrated to achieve results. If the targets are not being hit, after the plan is recalibrated, then the people issues must be dealt with quickly.

We are not living in a static world. A company’s competitors are out there planning their own initiatives. They are targeting the same good customers and employees. That makes it so much more important that the core strategies be revised and recalibrated (if and when appropriate), to ensure the Business Plan is viable. Addressing these seven items in a systematic way can help trucking company leaders guide their companies through the turbulent times.

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During my daily meetings and discussions with carriers and shippers, the conversation invariably returns to the state of the economy and how to weather the storm. Everyone is asking the same questions. How long will the recession last? How much worse will it get? What should I do to survive and lead my company through these very difficult times?

The media have also jumped on the bandwagon. A number of articles and books are beginning to appear on this topic. “Managing through a Crisis” was last week’s cover story in Business Week. The highly regarded consultant, Ram Charan, has recently weighed in with “Leadership in the Era of Economic Uncertainty.’ One book that addresses this topic particularly well is “Judgement” by Noel M. Tichy and Warren G. Bennis, a 2007 best seller that contains a good section on crisis management.

In the next few blogs I would like to offer some thoughts on this topic for consideration. I have lived through a number of recessions and crises in my working career. I have had an opportunity to observe what has worked and what has not. Here are a few thoughts.

In their book, Tichy and Bennis outline three approaches that a leader can take in a crisis. These are identified as:
1. The “Ostrich”
2. The “Bull in The China Shop”
3. The “Fox”

The “Ostrich” is in denial. He believes that the recession or crisis will pass and that if he and his company “hunker down,” they will survive. He adopts a “business as usual” approach, hoping that the strategies of the past will suffice in the present and future. By taking this posture, these companies often act too late and their efforts are often ineffective.

The “Bull in the China Shop” panics. He takes drastic action without fully thinking through the consequences of his initiatives. This may include “firing” the wrong customers or terminating the wrong employees or closing the wrong terminals. Frequently these decisions come back to haunt the company. How often have you seen a trucking company de-market an account (e.g. large rate increase, stop serving the customer) and then have second thoughts about what they have done?

The “Fox” “keeps his cool” and thinks through the situation. Based on a well thought out and deliberate plan, the leader takes calculated steps to cut non-essential costs and add profitable business. The fox also recruits quality employees and customers from a rival and/or possibly makes a strategic acquisition, strengthening the company in the short and long term.

Companies that are successful in surviving and prospering during a crisis employ a number of strategies.

They engage their Boards, Mentors and Customers
The service requirements of trucking companies often change in a crisis from what is expected in more “normal” times because the needs of their customers change. Good companies listen carefully and stay close to their customers. They adjust their business strategies and operating processes to meet the changing needs of their customers.

They also listen to their boards and mentors. They consider what has or has not worked in the past. They utilize the wisdom of their boards and mentors to test out new business strategies.

They engage their Employees and Create a Fact-Based Plan
Successful companies take a fact based look at their resources and capacities, their people and the state of their finances and craft a solid plan. The plan is developed by the leadership team and executed by the leadership team with the support of the entire team.

They Act Decisively
Cost cutting is done in a well planned decisive way. Rather than handing out a set of pink slips every Friday afternoon, the cuts are identified and done quickly and methodically. This reduces the “water cooler” discussions and allows the company to move forward confidently with its business.

They Communicate
Through town hall meetings, lunch room meetings and one on one discussions, their employees are kept informed. Moreover, they are actively engaged to be part of the solution. This is extremely critical since this is an unsettling time. Some reassurance from the company leaders can go a long way towards maintaining morale and productivity.

They Capitalize on Opportunities
During a crisis, some companies stumble. Some key employees and customers get “nervous” and become vulnerable to competitive overtures. This is the time for bold action that enhances your company’s bottom line and future growth. Some of these opportunities may never surface again.

It’s not about the economy; it’s About You and the Leadership you provide
These are the most difficult times many of us have faced in our working careers. “Keeping your cool” and executing a well designed plan can help you lead your company through the turbulent times.

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Let’s examine the trends that are likely to shape the world of freight transportation in 2009. Here are some events to watch.

1. Investing in Infrastructure to create Jobs, Jobs, Jobs
President- Obama and Prime Minister Harper are working on their economic stimulus programs to give their respective economies a lift. While there has been lots of talk about investing in infrastructure in recent years, we will finally see a significant injection of funds into road and bridge construction and repair in 2009. This development will create as a by product, over time, much needed jobs in the transportation industry as supplies are transported to jobsites across North America.

2. Cash will be King and Queen
Tight credit means that companies with strong balance sheets are in the best (defensive) position to weather the economic storm. They will also allow these companies to go on the offensive and be more opportunistic than others by taking business from weaker foes or making “tuck in” or strategic acquisitions.

3. Back to Basics
Shippers and carriers will be focused on what they do best. Non-core assets will be divested. Non-core functions should be outsourced to those that can perform them more cost effectively. It will be all about taking costs out of the supply chain or transportation company in 2009. To save money on freight, the best approach is to use the lowest cost modes, truckload instead of LTL or intermodal instead of truckload whenever possible.

4. Crisis Management Teams will take Center Stage in Many Companies
Many shippers will be forming crisis management teams, composed of logistics, sales, manufacturing and customer service to identify vulnerable lanes where the loss of a core carrier could mean service disruptions and failures to key clients.

5. “The Paradox of Thrift”
Many consumers across North America are feeling the pinch brought on by job losses, job loss anxieties, declining home values, declining stock/bond portfolios, declining 401K’s and RRSP’s. They are feeling poorer because of the significant declines in their net worth. This fear is having a profound effect on holiday shopping. Fearful consumers save more and spend less. Less money flows into the economy, contributing to the slide into recession. This causes further reductions in incomes and less spending, providing momentum to the severity of the recession. The current consumer negativity will continue into 2009.

6. Shipper Consolidation
Recent press reports have focused on the closure of certain shifts and the extension of holiday shutdowns at various automotive plants, the closure of specific (e.g. Office Depot) retail outlets and the chapter 11 filings of various large companies (e.g. Circuit City). It is clear that a number of retailers have gone to deep discounting (e.g. 25%, 50%, 70%) across some or all of their product lines to stimulate sales during the latter months of 2008. Business volume declines in the first quarter of 2009 will hasten the closure of more poor performing retail outlets and manufacturing plants. Watch for some big name shippers to exit the market during the course of the first quarter of 2009.

7. Transport Company Consolidation
Freight capacity contracted by a reported five percent in 2008. The major casualties were DHL’s exit from the U.S. domestic small parcel market and the closure of a number of small trucking companies and a few mid sized firms (e.g. Jevic, Alvan). Watch for the speed of consolidation activity to hasten in 2009 as companies find it too difficult to adjust their costs to the declining freight volumes. Watch for some big name players to falter. Look for some companies to withdraw from certain markets and/or restructure to focus their efforts in those areas where they are best able to compete. The LTL sector is particularly vulnerable with their extensive (and expensive) terminal networks as volumes and shipping weights decline.

8. Expect the Unexpected
With some publicly traded truck stocks down 50 to 90 percent in value, watch for some companies to make bold acquisition moves.

9. Finding a Treatment for “Affluenza”
The Canadian Broadcasting Corporation (CBC) recently coined this term to refer to the many consumers who are trying to make do with less, trying to place limits on their spending during this holiday season. In other words, they are trying to treat the “affluenza” that has swept across North America over the past few decades. The result is a movement to more discount shopping and more controlled spending. As consumers try to stretch their purchasing dollars, watch for shippers to try to stretch their freight dollars. This will make for a difficult freight rate negotiation environment in 2009.

10. “Capacitization” will prevent service disruptions
As carriers falter or cut back on service to weather the financial storm, shippers will be faced with the critical task of maintaining the viability of their supply chains. To offset these vulnerabilities, shippers will be “over-capacitizing” their freight networks. They will be seeking redundant carriers on specific lanes to ensure their supply chains operate in an uninterrupted mode. They will also seeking to diversify their carrier portfolios to reduce risks across all modes and lanes. Logistics managers will need to focus on monitoring their carrier scorecards for unusual delays, changes in lead times, requests for quicker payment intervals or other telltale signs that a carrier in distress.

11. Paying a Premium for Capacity
Smart shippers are realizing that as the recession comes to an end, there will be much less truck and rail capacity. To lock up capacity in the future, forward thinking shippers will be paying a premium for truck and rail capacity. While this may not coincide with current market conditions, the departure of some name brand carriers in the first quarter will cause a rethinking of freight rate negotiating strategies.

12. Shipper – Shipper, Shipper - Customer and Shipper – Carrier Collaboration
This is a trend that has been evolving over the past decade. In 2009 it will progress to a new level. To reduce vulnerability, secure capacity and control freight costs, shippers will more actively seek partners with whom to pool their freight. This may precipitate the development of more industry associations and closer working relationships with carriers and freight management companies that can help pool freight in specific geographic areas or create round trips that shippers cannot create on their own. It may also result in more vertical integration or at least closer financial arrangements between the various supply chain partners. Carrier partners will likely be evaluated on the basis of the shipper collaboration proposals they can bring to the table.

13. Logistics and Finance Team Up
Despite the efforts of the Federal Reserve to inject liquidity into the U.S. financial system, credit remains tight. Funds for new warehouses, new factories, new product launches and new personnel will come under increased scrutiny in 2009. The credit crisis is causing every company that uses borrowed funds for project financing, bridge loans or working capital to revisit their plans and processes to determine if alternate arrangements can be made. This will result in changes to supply chains and staff cuts. It will place more pressure on supply chain professionals to cost justify every initiative and drive any unnecessary costs out of the system. This will bring the financial and logistics folks closer together than ever before.

14. Freight Rate Benchmarking will rise to Prominence
In an era of challenging financial conditions, it is critical for shippers to be paying at or below market freight rates unless there is a demonstrable value in delivering a premium service at a premium price. Freight rate benchmarking is a service that is widely available but in limited use in the United States, and is in minimal use in Canada. It is a service that is right for the times. It allows a shipper to obtain market rates 24/7 on any lane in North America, thereby ensuring that they keep their costs to a minimum.

15. Six Key Indicators to Watch
Here are six key indicators to watch. These KPI’s will tell us if we are moving out of the recession. They are:
The stock market indices - These forward leading indicators told us we were heading into a severe recession and they will tell us when we are coming out of it.
The jobless percent - When the jobless numbers start to decline, this will tell us that there are more people with money to spend.
Consumer confidence - Fearful consumers do not spend money. An upturn in consumer confidence will signal an upturn in spending. Confident consumers will start buying homes and cars.
Auto sales growth – This industry is very important to the economies of Canada and the United States. We need to see evidence that consumers are buying cars again.
New home construction - The sub prime mortgage mess led us into this recession. This KPI will signal that consumers are again buying homes and suggest that the economy is on the upswing.
GDP - This indicator tells us that business is expanding.

16. Slow and Unsteady
The first quarter of 2009 will be brutal. As the economy continues to contract, job losses will continue to mount. The economic stimulus combined with low interest rates will begin to spur some activity upswing in business activity. However, the increase in freight activity over the balance of 2009 will be modest at best. It will get worse before it gets better but it will get better.

17. Expedited Freight Takes a Hit
Expedited freight will take a hit in 2009 as knowledgeable shippers realize that there are big cost savings in moving freight via standard ground or intermodal services.

18. An upswing in “Off shoring”
Many companies began to rethink their supply chains as the U.S. dollar declined and fuel prices skyrocketed. We now face an ocean shipping capacity surplus with declining fuel costs, falling commodity prices, sinking freight costs and a rising American dollar. While economic activity has moderated, the economics of off shoring have greatly improved in recent months.

19. Non-asset based logistics companies are in a strong position
Non-asset based companies have the most flexibility. They can mix and match modes and carriers to provide capacity and competitive costs. This should be another good year for well managed non-asset based 3PL’s and transportation management companies.

20. Green is Good and getting Better
The Green movement will continue to evolve as companies search for ways to become more environmentally friendly while improving their bottom lines. The ocean carriers use the term “slow-steaming” when they reduce vessel speeds to lower fuel consumption. Shippers should take advantage of these reduced fuel costs in their freight rate negotiations.

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Currently many Canadians and Americans are worried about job security and the declining values of their homes and investments. The governments of the United States and Canada are crafting their economic stimulus packages to survive the economic downturn. The rationale for these packages is that only governments have the resources to inject billions of dollars into the economy and create jobs on a large scale. The theory goes that these newly employed or reemployed people will begin purchasing goods and services. In so doing, they will inject some much needed cash and confidence into the economy and encourage the rest of the population to spend money.

For many transportation companies, their survival in 2009 may rely on how well they match their business plans to the opportunities created by the injection of government funds. Here is why.

The Decline in Jobs in Manufacturing

Over the past 10 years, the number of manufacturing jobs in the United States has declined from 17 million in 1997 to 13 million today. Big gains in productivity allow fewer workers to do more with less. In addition, U.S. Imports have risen from 9% of GDP to 19%. One of the big unanswered questions is whether President Elect Obama’s stimulus package will create jobs in the United States or in China, Mexico or India. The answer to this question has huge implications for the economy and for the transportation industry.

The financial crisis was caused, in part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothing and gasoline. As long as the United States is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.

A “Network Shift” has Lengthened Supply Chains

As a result of the movement of manufacturing jobs offshore, this has resulted in a “network shift,” as outlined in a recent article in American Shipper by the Mega Global Forecasting Team. Supply chains have been redesigned to address the global repositioning that has taken in the sourcing of products. Before Network Shift, goods were manufactured, for example, in the U.S. Midwest and moved via truck to warehouses and distributors in the northeast, where they were stored awaiting separate shipment to retail locations. After network shift, the goods were manufactured in China and shipped to a Southern California container port where they were drayed to a deconsolidation facility. There the freight was reconfigured, loaded on a 53 foot intermodal container and shipped to the mid west. From there it was reconfigured and shipped to a retail location. Canada has followed a similar pattern. Some manufacturing work previously performed in Ontario and Quebec is now being done in China. The manufactured products are shipped via the port of Vancouver where they are placed on intermodal units and transported to Central Canada..

These developments have resulted in longer lengths of haul and higher safety stocks to buffer unexpected disruptions. They have also resulted in port issues and concerns about the shrinking pool of long haul drivers. Up until a few months ago, the high cost of fuel, long lead times and the low American dollar were causing many companies to rethink their supply chains and consider “near-shoring” (manufacturing in North America) as an option.

The Economic Stimulus Package / Keeping Jobs in North America

Now, as unemployment rises and the economy weakens, the U.S. and Canadian governments must carefully consider how to keep jobs in North America to ensure the recovery is sustainable. If the jobs “leak” overseas, this will continue the decline in U.S. and Canadian based manufacturing jobs and maintain the trend of longer supply chains and longer lengths of haul. If President Elect Obama is successful in keeping jobs in America, this will shorten supply chains and encourage more regional transportation.

One of the keys to success for transport companies in North America will be making the right calls on what the Mega Global folks called “spatial strategies,” identifying and concentrating on markets where they have a competitive advantage. Longer lengths of haul make it increasingly difficult for any player to be best in class along the entire supply chain from shipper to consignee. They make it more difficult to be a “one stop shop,” trying to be all things to all people. The successful companies, in their view, will pursue effective “spatial strategies,” that respond to a changing demand picture by selecting the industries, the right geographic markets and the right types of freight so they can achieve scale economics and sustain competitive advantage against existing competitors and new entrants. To be successful, carriers must focus on market segments where they are in the best position to maximize profitability.

The Winners and Losers from Obamanomics

The winners will be those industries where the economic stimulus will create jobs and support the key objectives outlined by the President-elect in his election campaign. They would appear to be:

Energy

The entire U.S. energy system needs an overhaul to reduce America’s dependence on foreign oil and to begin the transition to a low-carbon-emission economy to curb rapidly accelerating climate change. This could include mass-market battery-powered cars (hybrid or plug-in)that achieve at least 100 mpg of gasoline on new fleets by the year 2015, an efficient power grid that can carry renewable energy - - solar from the Mojave Desert and wind from the Great Plains - - to population centres across the United States. There is also the need for investments in the utility industry that can reduce 80% of emissions per kilowatt on newly built power plants by 2016, either through non-carbon sources (wind, solar, nuclear) or by capturing and disposing of the carbon dioxide.

But not all energy sources will be winners. Obama campaigned against “dirty fuels” so this may impact the investment in coal until there is a clean coal technology. The decline in the price of crude oil has made the Alberta tar sands projects less financially viable in the short and medium term and has resulted in some pullback in investment. The tar sands projects are apparently based on crude oil of US$85 to $100 a barrel, not $43 a barrel. All of these developments will have an impact on truck and rail freight flows.

Infrastructure

This is another opportunity for the Obama team to invest in America and create jobs. There appears to be a consensus that the U.S. transportation and infrastructure system, once a marvel of the modern world, has been stretched beyond its capacity and has fallen into disrepair. One-third of the major roads in the U.S. are reported to be in poor or mediocre condition, and a quarter of the bridges are structurally deficient or functionally obsolete. By 2020, every major U.S. container port is projected to at least double the volume of cargo it was designed to handle. Inland waterways and railroads also need capital.

Janet Kovinosky, director of transportation and infrastructure at the U.S. Chamber of Commerce, believes that a multimodal and intermodal vision must increase capacity, reduce congestion and improve the efficient, safe, sustainable movement of goods and people throughout the country and world. Investments in infrastructure also include communication networks and power grids. There are roads and bridges in need of repair in many parts of Canada and the United States. Rebuilding this infrastructure will generate business for the transportation companies that are best positioned to capitalize on these opportunities.

Automotive Industry

Currently this is a hot topic in America with the three large U.S. and Canadian based auto manufacturers, GM, Ford and Chrysler all seeking government assistance. Since this industry employs so many people, directly and indirectly, it is inconceivable that America will let this industry go down. This issue has been magnified by the huge job losses already reported. Many of the auto industry jobs are in very politically important states such as Ohio and Michigan that supported the President elect. In Canada, most of the jobs are in Ontario, the largest province in the country.

One would expect to see some sort of compromise worked out such that jobs will be maintained and increased to support the manufacture of fuel efficient, hybrid, electric and small cars. The development of mass transit systems, buses and rail systems would also create jobs and reduce traffic congestion. Some of this manufacturing could be done by firms in the automotive industry. For many years, the movement of auto parts to assembly plants has been a critical component of the revenues of many transport companies. In addition to the movement of assembly parts, there are movements of after-market products. Maintaining and increasing the auto industry jobs are critically important to the transportation industry.

In summary, these are three industries where there will likely be money, jobs and freight in 2009. For transport companies it means following the money trail to the states and provinces awarded economic stimulus funds. The key for transport companies will be to create winning “spatial strategies” in those markets and for those businesses where they can achieve competitive advantage.

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Last week I had the pleasure of participating in a shipper – carrier roundtable sponsored by Motortruck Fleet Executive magazine and Shaw Tracking. Lou Smyrlis, the moderator, raised the subject of industry consolidation with the group that was assembled. The consensus seemed to be that industry consolidation will continue in 2009 as it has in 2008, albeit under a new set of constraints imposed by the current economic downturn.

Bob Costello, Chief Economist of the American Trucking Associations, mentioned in a speech this week at the Canadian Institute Trade and Transport Conference that October freight volumes were unusually weak and reflect the downturn in the North America economy. This is worrisome since October is usually the best month of the year for freight activity. This does not auger well for those transport companies that have been in a survival mode during the “freight recession” of the past couple of years.

Is this the time to buy or sell a freight transportation company? There are several events that are having a direct bearing on the industry at this time. These include the credit crisis that has adversely affected the purchasing of houses and automobiles. Weakening economic fundamentals are causing unemployment levels to rise. In addition, the downturn in the value of housing and the stock markets are causing many middle class folks to feel insecure and fearful and less willing to spend money. The combination of all of these forces is driving down the demand for manufactured goods and retail volumes, the lifelines of freight transportation.

While these forces are at play, shippers are extending payment terms and carriers are facing tougher times borrowing money. Small trucking companies with a limited supply of customers and limited sales resources are particularly vulnerable. The end result is that this is an extraordinarily difficult time to run a transportation company.

We have more struggling transportation companies than ever before and they are cheaper to buy than they have been in many years. Mergers and acquisitions will continue, particularly for those companies with lots of cash on their balance sheets. However, buyers will be more deliberate in their approach. As we are seeing in the stock market, some sellers are simply capitulating and saying that this is the time to get out.

It should be pointed out that a number of studies have shown that over sixty percent of mergers and acquisitions fail. Despite the best of intentions, failure can be a result of several factors. In some cases, inadequate due diligence is done. Some of the assumptions made leading up to the purchase are incorrect. In other cases, no non-compete is signed with the owners. They may leave and form a new entity that competes “head on” with the acquired company. In addition to the owners, some other key people may leave and take some of the business with them.

For a number of mergers, the expected synergies and cost savings don’t materialize and/or the revenue stream does not meet expectations. In certain situations, the merger comes unglued due to poorly planned integration efforts, in sales and/or operations, or due to a culture clash between the employees of the two businesses. Customer affecting service changes, the departure of trusted customer service, dispatch or sales personnel (to a competitor) may drive customers to another transportation company. Many times the old owners find it difficult to function within the new owner’s environment or lose motivation due to the big payday they received.

What can you do to increase the odds of success?

The shipper- carrier roundtable participants suggested that the high failure rate will not stop the freight carrier consolidation movement. The current economic difficulties will likely spur an increase in desperate sellers and interested buyers. Critical success factors include:

• An assessment of the growth that can be achieved organically versus through acquisition, within a prescribed period
• A careful assessment of the synergies that are at play and the integration hurdles that may be faced
• Having a clear focus on whether the proposed acquisition is the right strategic fit
• Performing a thorough due diligence that looks at revenue growth, cost reductions, cultural fit, ROI, risk factors, retention of key employees
• An understanding of the expected competitor behaviour
• Effective management of human resources and customers
• Excellent post implementation follow up
• A thorough assessment of the financial risks and rewards

As has been proven time and time again, even the best due diligence cannot anticipate all of the challenges that lie ahead. Often the post acquisition reality is very different from the picture painted during the period leading up to the purchase. On the other hand, a successful acquisition can fill a void in a company’s service and/or geographic coverage and boost financial results. Therefore the best advice is buyer beware!

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The current credit crisis is placing increased pressure on shippers and carriers to offset shrinking volumes and cash flows. Published statistics indicate that both manufacturing production and retail sales sank in September to their lowest level in years. This is resulting in production cuts and layoffs.

Carriers are facing challenges from shippers on a number for fronts.

• Smaller shipments and less volume
• Slower payment of freight invoices
• Increasing numbers of shipper bankruptcies that result in non-payment of their overdue accounts
• Shippers holding up payment or claiming they need to offset (contra) their payables for alleged damage or poor service

In addition, truckers are finding that their access to credit is being more restricted by financial institutions and suppliers. Banks are trying to do a more effective job of prioritizing their loan portfolios. This may make the flow of money to certain truckers more problematic than in previous times. Whether it is short term payments for fuel and payroll or more significant funds for new capital equipment or an acquisition, credit liquidity is being more carefully scrutinized.

What can carriers do to help themselves during these difficult times?

Large carriers with lots of cash on their balance sheets are in the best position to weather the storm. For carriers with less cash, there are a number of possible initiatives that may be helpful. They include:

 Sale of non-core businesses or excess equipment (where possible)
 Trimming capacity
 Merging operations and removing redundancy
 Reducing fixed costs, including salaried employees, and utilizing more outside agency personnel on an as required basis
 Performing more careful due diligence of prospective shippers
 Shying away from one shot or large short term spurts in freight, particularly from shippers that are unknown
 Demanding payment on delivery from specific slow-paying shippers
 Hiring collection agencies to recover unpaid bills that are 30 days and over
 Speeding up the process of sending out invoices
 Charging for round trip mileage in situations where backhaul freight is very difficult to secure
 Updating their fuel surcharge tables more frequently
 Offering incentives to shippers for “quick pay”

Some carriers are turning to more desperate measures such as factoring their receivables. Factoring fees typically run from 5 to 10% and are based on the credit worthiness of the client. While factoring can help some companies, it can also push others into a “downward spiral.” With margins so lean in trucking, giving away some precious points in margin may jeopardize the trucker’s long term survival.

This is also a time for marketing initiatives. Offering new services, which are an extension of, or an improvement on existing services, is another way to offset the financial challenges. Generating new and profitable revenue sources can be very helpful in taking advantage of a company’s existing infrastructure and resources. This is also an opportunity to secure market share from weaker carriers that are terminating good people, exiting profitable markets and/or “cheating” on service. The anxiety level of strong sales performers working for your competitors is often heightened by rumours and substandard operating performance. This can make these individuals more open to overtures from stronger, better financed companies. Those companies that are able to maintain strong cost control, good financial management and aggressive marketing activities will be the ones in the best position to ride out the current financial crisis.

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The current economic crisis has been described by esteemed investor Warren Buffet as an economic “Pearl Harbour.” The cost of the bailout ($700 billion), the earmark spending ($100 billion) included in the bailout bill along with the nationalizing of Fannie Mae and Freddie Mac and the insurer A.I.G. and the financial support provided to the forced mergers of some giant U.S. financial companies has run up a tab estimated at $1.8 trillion. This sum of money is larger than the combined economies of Canada and Spain. This is clearly the worst financial crisis since the Great Depression.

In this blog, I will examine the potential impacts of the financial crisis on the U.S. economy as a whole and on the trucking industry. The effects of the U.S. economic downturn are becoming quite apparent.

• Increasing Job Losses - September was the worst month for job losses in a number of years and there are projections that U.S. unemployment could grow from 6.1 to 10 percent.

• Increasing home foreclosures – Significant numbers of Americans, particularly those who acquired so-called sub-prime mortgages are finding that their debts exceed their equity in their homes and are walking away from them.

• Tightening Credit – Stung by load defaults, lenders are raising interest rates, down payment requirements and credit worthiness requirements to minimize bad debt exposure.

• Declining Home Sales and Home Building – As home prices fall and with economic uncertainty, home sales are declining and house prices are declining.

• Declining Consumer Confidence – As stock markets decline, job losses increase and home values decrease, consumers feel less wealthy and less confident.

Tighter credit makes it more difficult to buy a car. Falling home prices will make it more difficult to borrow money against the equity on your home. Less confident consumers will be less likely to renovate their homes and buy luxury items such as flat screen TV’s and numerous other goods. The impacts of the expected U.S. slowdown will be felt around the world. As the wealthiest nation on earth, declining U.S. consumption will hurt the economies of many other nations.

How bad will things get? The current issue of Business Week contains some interesting data. During the Great Depression of 1929-1934, 10,000 commercial banks disappeared. Since August 2007, 14 banks and 3 major investment houses went out of business. Take home pay income shrank 25% by 1933. In the U.S. the decline is 5% since May. The output of U.S factories and mines declined by 54% between 1929 and 1932. Industrial production has shrunk by only 2% since January 2008. Of course, the Great Depression data was complied over a longer time horizon. On the other hand, it is unlikely that U.S. will experience economic declines of the magnitude of the Great Depression in the coming years.

There is no way to tell how well this bail-out package will work. There is no doubt that we are heading into a difficult period and it will take time to work our way out of what many experts believe is a certain recession. The new U.S. President along with the House and Senate will have a major challenge on their hands. Many aspects of the U.S. financial situation and U.S. culture will require an overhaul. There will need to be more regulation of financial institutions, better oversight of financial activities, an improvement in executive pay for performance metrics and procedures, tighter lending requirements and a mindset change on the part of many consumers that you can enjoy the “American Dream,” a home and cars in the suburbs, if you can afford to pay for them or have the income stream that will allow you to obtain credit. That is a tall order and it will take time.

What are implications for the trucking industry? These have already been two of the most difficult years that many long time observers, including me, have seen. A positive effect of the trucking company bankruptcies and parked trucks has been that supply and demand appeared to coming into balance. ATA shipping volumes appeared to be firming up.

This will almost certainly change. Tighter credit, higher unemployment and lower consumer confidence will certainly shrink demand. Tighter credit will restrict capital investment in new truck fleets. One can also expect to see slower payment from shippers. For those companies hanging on “by their fingernails” and hoping for an economic turnaround, recent events will almost certainly mean another twelve months of difficult times.

Some companies are already reading the economic “tea leaves” and taking drastic action. The decision by YRC to merge the operations of Roadway and Yellow after insisting for years on the importance of maintaining their individual brand identities is clearly an acknowledgement of the tough times ahead. I would expect to see more bankruptcies and a speed-up in merger activity. In some sectors of the freight market there are simply too many companies chasing too little freight. With declining demand, this will continue to place shippers in the driver's seat on rate negotiations. This should enocourage carriers to remain lean and focus on improving their value propositions. Some further carrier rationalization would seem inevitable and probably desirable to keep freight rates at profitable levels.

Looking ahead, America is still a strong country with an excellent workforce and a great entrepreneurial spirit. The country will soon be under new political leadership. While the enormous bail-out package will impose limitations on spending, new leadership should create a more positive environment than has existed over the past number of years. As noted above, this financial crisis pales in comparison to the Great Depression. The speed with which the bailout package was designed and passed into legislation already reflects the determination and resilience of the American people. If the bailout money is used wisely and consumers and businesses are given the right tax breaks and incentives, this should help quickly move America back on the road to recovery.

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I started my career in the transportation industry over 25 years ago with TNT Overland Express (now TST Overland Express, a division of Transforce), a company that has continued to be leading regional LTL service provider. The evolution of the LTL segment of the industry has always been of considerable interest to me. It has been quite fascinating to watch how this segment of the industry is being transformed.

LTL service continues to be an important component of the supply chain of many manufacturers and distributors. Unlike truckload shipping, where loads frequently originate at a single location and are carried to a single destination, LTL carriers collect freight from multiple shippers and consolidate that freight for a line haul move to a terminal or hub where the freight can be further sorted and consolidated for additional line hauls or deconsolidated for delivery to multiple consignees. For companies requiring shipments of between 100 and 15,000 pounds, LTL shipping meets a vital need. In this blog I will examine some of the drivers for change and then look at how the carriers are responding.

• Speed to Market

Shippers are looking for service consistency, shorter transit times and error free deliveries within tight time windows, all at a competitive price. For many markets, second day, next day and even same day service are becoming the norm. Carriers have been retooling their networks to improve throughput, increasing their direct to destination loads with fewer “touch" points. The national LTL carriers are playing “catch up” with some of the regional LTL carriers in the shorter haul markets.

• Rise in the Cost of Diesel Fuel

The dramatic increase in the cost of diesel fuel has had an impact on all facets of the transportation industry including LTL shipping. Fuel surcharges continue to escalate in line with the rising cost of fuel. Most carriers stated in their most recent earnings reports that despite higher revenue due to fuel surcharges, the added inflow failed to keep up with rapidly rising diesel fuel and other costs. While most shippers are understanding of the need for fuel surcharges, many are “pushing back” on the level of fuel surcharges being charged.

• Economic Downturn in the United States

The decline in the U.S. economy (coupled with the rising cost of fuel) has been particularly painful to carriers that have focused on certain segments of the industry (e.g. automotive – closure of Alvan and Al’s Cartage) or employed certain business models (e.g. irregular route LTL service – closure of Jevic). While many carriers are holding on, their earnings reports reflect the difficult times being experienced in this industry. One positive development appears to be the focus on improving LTL carrier costing models. Better costing coupled with pricing discipline will likely help some carriers “ride out the storm.”
For some shippers the downturn has resulted in increased LTL traffic since it takes too long to build a full load for certain clients. In other situations, shippers hold their freight to build full truckloads or large partial truckload shipments to take advantage of the economies of shipping these sizes of shipments.

• Leaner inventories

Current trends in supply chain management require carriers to focus more on short haul markets. According to The Council of Supply Chain Management Professionals latest “State of Logistics Report,” wholesale inventory volume surpassed retail inventories for the first time in December 2007 and continued in 2008. If this trend continues, it could lead to greater demand for regional LTL service.

• Growth in the Shipping of General Commodities

According to the American Trucking Association, general commodities, most of which are finished goods delivered over the last mile in the supply chain to destination by LTLs, have grown faster than bulk commodities over the past 20 years.

• Shipper Demands for Broader Geographic Coverage

The regional LTL carriers have been working for years on expanding their geographic footprints. Some Superregionals have for the most part reached national carrier status. Certain regional carriers have pursued other options such as partnering with regional carriers in other geographic areas and forming strategic alliances (e.g. Reliant Network).

• The entry of UPS and Fedex into the LTL Shipping Arena

The entry of UPS and Fedex into the LTL arena has brought several changes. These companies have strong technology which they developed for their small package operations. They also bring a global perspective and reach to an industry that was very American or North American focused. In addition, they bring their strong brand identities. The entry of these financially strong, sophisticated companies into the LTL sector has rasied the competitive bar in their areas of expertise.

• Increased utilization of Transportation Intermediaries

Historically LTL service was provided by scheduled LTL carriers and partial truckload carriers. More recently, many shippers have been procuring LTL services from freight management companies and third party logistics companies. These companies are able to conduct RFPs on behalf of their clients, mix and match LTL carriers to meet their precise shipping requirements and then apply their strong freight management tools.

While each of these developments is significant, taken as a whole they are changing the face of LTL shipping in North America.

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With the recent bankruptcy filings of Al’s Cartage of Kitchener, Ontario and Alvan Motor Freight of Kalamazoo, Michigan, two more well established family run regional LTL trucking firms appear to have been claimed by the high cost of fuel and the current freight recession. Al’s Cartage was an 80 year old southwestern Ontario LTL carrier while Alvan had been around for 67 years and had terminals in Michigan, Ohio, Indiana and Illinois.

What is interesting is that the demise of each company appears to be tied in part, directly to a business decision to focus on the automotive industry. A traditional LTL and container carrier, Al’s Cartage made a huge mistake by going after auto parts work a few years ago, admitted the company’s President, Norm Frohlich in an interview with Todaystrucking.com. It wasn't long before Al's was "squeezed out" of the cutthroat sector. "It cost us a lot more than it was worth," he stated. Al's tried to revert back to its old lanes, but to little avail. "We were pretty well back to where we started, but we just couldn't get the volume back up fast enough. The expenses were there, but the volume wasn't."

Alvan President and CEO President and CEO James Van Zoeren indicated that the 87 day strike at American Axle, one of Alvan's top customers, was deadly. "The American Axle strike is absolutely killing us because of the trickle-down effect with the closure of General Motors plants and how that impacts our customers who are first- and second-tier auto-parts suppliers," Van Zoeren said.

However, it was clear that there were a number of other forces at work that contributed to the closure of these two companies. "Alvan was quickly becoming a dinosaur. Our ability to compete with much larger carriers than ourselves was becoming compromised. Our costs were higher and we were struggling to keep up on a technological basis," said Van Zoeren. The general state of the economy in the U.S. Midwestern states was also not helpful.

Overcapacity in the trucking industry has also resulted in increased competition, intense pricing pressure and margin erosion. In addition, the financial crisis in America is resulting in reduced liquidity and more limited credit options for trucking companies. For Canadians, the slumping U.S. economy and the high Canadian dollar are limiting exports making it even more difficult for cross-border carriers to find export loads to the U.S.

There appear to be several lessons to be learned from the departure of these two companies.

1. It is important to maintain a diversified customer base to minimize the impact of a downturn in a particular sector of the economy. It can be very risky to bet the farm (or trucking company) on one specific industry no matter how large and attractive it may appear to be.

2. As a small to medium sized regional LTL carrier, it is important to have a strong niche where the company is able to differentiate itself and achieve some economies of scale.

3. If the company cannot achieve critical mass and establish a core competence in a specific industry vertical or geographic area, it may be best to form a strategic alliance or merge with a stronger player before the wolves are at the door.

Clearly there was much more at play than the current freight recession when you peel away a few layers of the onion and look at what contributed to the departure of these two well known industry names.

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With the recent bankruptcy filings of Al’s Cartage of Kitchener, Ontario and Alvan Motor Freight of Kalamazoo, Michigan, two more well established family run regional LTL trucking firms appear to have been claimed by the high cost of fuel and the current freight recession. Al’s Cartage was an 80 year old southwestern Ontario LTL carrier while Alvan had been around for 67 years and had terminals in Michigan, Ohio, Indiana and Illinois.

What is interesting is that the demise of each company appears to be tied in part, directly to a business decision to focus on the automotive industry. A traditional LTL and container carrier, Al’s Cartage made a huge mistake by going after auto parts work a few years ago, admitted the company’s President, Norm Frohlich in a press release. It wasn't long before Al's was "squeezed out" of the cutthroat sector. "It cost us a lot more than it was worth," he stated. Al's tried to revert back to its old lanes, but to little avail. "We were pretty well back to where we started, but we just couldn't get the volume back up fast enough. The expenses were there, but the volume wasn't."

Alvan President and CEO President and CEO James Van Zoeren indicated that the 87 day strike at American Axle, one of Alvan's top customers, was deadly. "The American Axle strike is absolutely killing us because of the trickle-down effect with the closure of General Motors plants and how that impacts our customers who are first- and second-tier auto-parts suppliers," Van Zoeren said.

However, it was clear that there were a number of other forces at work that contributed to the closure of these two companies. "Alvan was quickly becoming a dinosaur. Our ability to compete with much larger carriers than ourselves was becoming compromised. Our costs were higher and we were struggling to keep up on a technological basis," said Van Zoeren. The general state of the economy in the U.S. Midwestern states was also not helpful.

Overcapacity in the trucking industry has also resulted in increased competition, intense pricing pressure and margin erosion. In addition, the financial crisis in America is resulting in reduced liquidity and more limited credit options for trucking companies. For Canadians, the slumping U.S. economy and the high Canadian dollar are limiting exports making it even more difficult for cross-border carriers to find export loads to the U.S.

There appear to be several lessons to be learned from the departure of these two companies.

1. It is important to maintain a diversified customer base to minimize the impact of a downturn in a particular sector of the economy. It can be very risky to bet the farm (or trucking company) on one specific industry no matter how large and attractive it may appear to be.

2. As a small to medium sized regional LTL carrier, it is important to have a strong niche where the company is able to differentiate itself and achieve some economies of scale.

3. If the company cannot achieve critical mass and establish a core competence in a specific industry vertical or geographic area, it may be best to form a strategic alliance or merge with a stronger player before the wolves are at the door.

Clearly there was much more at play than the current freight recession when you peel away a few layers of the onion and look at what contributed to the departure of these two well known industry names.

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Jevic Transportation was founded in 1981, a year after trucking deregulation in the United States. Its closure on May 20, 2008 came as a shock to the trucking industry, representing the largest failure of an LTL carrier since the departure of Consolidated Freightways in 2003. The Jevic demise can be viewed as another in the long series of trucking company failures in the very competitive northeastern United States freight market. Its failure was preceded by A-P-A Transport in 2002 and USF Red Star in 2004.

A closer examination of Jevic and its operations tells an important story, a story that should be discussed in the boardrooms of trucking companies throughout North America. Jevic had a unique and innovative business model. It was established by Harry J. Muhlschlegel as a carrier providing direct dock to door LTL transportation. It rejected the hub-and-spoke breakbulk way of handling LTL freight. Focusing on large (5000 to 30000 pound) LTL shipments, the idea was to cut order cycle times by as much as three days. The company grew rapidly as a niche player serving shippers seeking superior transit times on shipments that fell within certain weight breaks.

The paradigm of the business at that time was sound. The trucking company could reduce costs by eliminating break bulk terminals and the associated handling costs of unloading and then reloading freight onto specific schedules. The shipper enjoyed the benefit of superior transit times. Jevic grew its business to $350 million in revenue and employed 1500 people.

In recent years, Jevic began to have difficulties as it went through changes in ownership, going from the YRC Group to being part of SCS Transportation to being sold to private equity group Sun Capital Partners in 2006. Why did a concept that seemed so clever and innovative at the time fail?

The most significant change has been in the cost of fuel. The business model was based on a totally different fuel cost / labor cost paradigm. The business was based on a “cheap fuel” foundation. It made economic sense to run essentially an irregular route LTL carrier, making pickups and deliveries over a much broader geographic area than the more traditional LTL players since the costs of driving additional miles were offset by the reductions in terminal and labor costs. This business paradigm has completely changed in recent years.

With fuel becoming the largest operating expense in most trucking companies, the foundation of the business exploded. In addition to the large and irregular routes driven by Jevic drivers, they were forced to buy fuel at gasoline stations at market prices, which made matters even worse. As business deteriorated, Jevic reportedly deviated from their business model by taking shipments less than 5000 pounds.

While this series of events were unfolding a Jevic, its LTL competitors were bypassing some of their own breakbulk terminals and running more schedules direct to destination, reducing their transit times. With their competitors operating in more fuel efficient, condensed pick and delivery areas and being able to purchase fuel more cheaply, the underpinnings of Jevic’s business model collapsed as did the company.

Here are some of the lessons learned. Every trucking company needs to reevaluate its business model. With fuel being such a significant cost, the energy efficiency of a trucking company should fall under the leadership of a VP of Energy Conservation. This individual must be charged with looking at the company’s operations from a fuel conservation point of view.

Every lane must be evaluated in terms of contribution, freight density and energy consumption. Can the company continue to operate in some areas if its freight costs and fuel surcharges do not cover its operating costs? Can Sales secure additional profitable revenues in those lanes to make them compensatory or should the company look at focusing on other regions and corridors of traffic or other businesses (e.g. logistics warehousing etc.)?

Does the company have the KPI’s and management tools to monitor its energy utilization and conservation activities? Does it have the right types of trucks on very lane? Does it have data on miles per gallon on every truck, every day? Does it have a solid speed limiting program? Does it have accurate data on empty miles? Is it ensuring that its freight costs and fuel surcharges cover full operating miles rather than just loaded miles?

The American Trucking Association reported that there were 935 trucking company failures in the first quarter of 2008, a 142.9 increase over last year. Many more will disappear before the economy improves. To survive and prosper during this difficult period, trucking companies need to reassess their operating paradigms and learn the lessons from the trucking companies that fly too close to the sun.

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