3PLs Caught in Middle of Shipper-Carrier Struggle as Cost Reductions Drive Fierce Competition

By Daniel P. Bearth, Senior Features Writer

This story appears in the Feb. 2 print edition of Transport Topics.

After surviving a record run-up in fuel prices during 2008, shippers and carriers now face an even bigger supply chain challenge: coping with a sharp downturn in freight volume as businesses cut back on production in response to lower sales.

Survival is the name of the game as third-party logistics providers seek to balance shippers’ desire for service and cost savings with carriers’ need for adequate revenue to stay in business, experts said.

“There is so much pressure to keep costs in check,” said Rick Jordon, vice president of AlixPartners, a transportation consulting firm that works with shippers and carriers. “Unfortunately for carriers, there’s a lot of [freight hauling] capacity out there.”

The increased competition means shippers can obtain lower transport rates by soliciting bids from new carriers or consolidating freight with existing carriers.

On the flip side, the loss of freight for carriers disrupts freight networks, making it more difficult to use equipment efficiently.

“It’s a fine balancing act,” said Matthew Menner, vice president of sales and marketing for Transplace Inc., a transportation management and supply chain consulting firm in Frisco, Texas. “Shippers expect us to help them aggressively manage costs while achieving customer-service targets. Unquestionably, the shipper is now in control.”

The effect of market conditions on freight rates can be seen in results of a survey of transportation buyers by Purchasing Magazine.

In August, 89% of buyers surveyed by Purchasing, a publication for procurement and supply chain management, reported price increases. By December, more than half of buyers (58%) reported a decline in prices.

Since November, the cost of transporting a container from China to the United States has fallen from slightly more than $2,000 to less than $1,500, and in the past six months, rates from China to Europe have fallen at least 70%, said Steven Horton, principal of Horton Global Strategies, a firm in Atlanta that advises shippers on ocean transportation issues.

“As recently as July and August, exporters could not find containers for outbound loads. And there was no space for inbound loads either,” Horton said. “It’s an example of how unpredictable the market is.”

Horton and other industry sources said some freight hauling capacity has been taken out of the market, but not enough to stay ahead of the drop in demand.

“Desperation is seeping into the market,” said Dan Goodwill, a logistics consultant in Toronto. “Freight rates have fallen off a cliff.”

Goodwill said he advises shipping clients to negotiate hard, but fair.

“One shipper asked carriers to bid on freight three times in a year. That’s ridiculous,” Goodwill said. “I don’t see reputable shippers throwing carriers overboard.”

His advice for carriers is to be honest with shippers. “Don’t over-commit capacity. Give customers dependable, reliable service. If that falters, you’re asking shippers to look elsewhere.”

The loss of freight affects carriers in different ways, depending on the type of service provided. Parcel and less-than-truckload carriers, for example, pick up and distribute goods over fixed routes. For them, a loss of freight means less revenue to cover fixed expenses. Freight density is a key to LTL profits.

Truckload carriers, in contrast, operate circuitous or dedicated routes and try to minimize the number of miles traveled without a load. With fewer loads available, competition for freight becomes fierce. Rates tend to fall and empty miles tend to increase. For these carriers, equipment utilization is critical to profitability.

“Freight networks are extremely dynamic,” said Joe White, chief executive of CostDown Consulting in Grayson, Ga. “Carriers need to continually analyze their traffic to identify unprofitable lanes. This is particularly important when volumes decline.”

To guard against the loss of business because of rate cutting by competitors, White said it is important that carriers do “whatever it takes” to remain cost competitive.

“A carrier’s cost structure is the shipper’s cost structure,” he said. “Remaining cost competitive re-quires making hard decisions about staffing, establishing and monitoring performance goals for all employees and providing training to terminal management personnel to ensure they have the ability to make cost-effective decisions while managing the day-to-day operations.”

Most contracts between shippers and carriers contain informal volume commitments than can be changed by either side, although not without consequences.

A shipper that switches freight frequently from one carrier to another to get a low rate could find it more difficult to find carriers during times of tight capacity, Transplace’s Menner said.

Carriers also can opt out of service commitments by simply refusing to accept certain loads. A high number of rejected loads, however, can trigger penalties and lead shippers to divert freight to other carriers, Menner said.

Bill Pollard, vice president of transportation and customer service for Del Monte Foods Corp., said he tries to “pre-empt” capacity issues by rewarding incumbent carriers with additional business.

“We try to make sure we’re using trucks efficiently, and we’re not wasting precious capacity,” Pollard said.

Before using a new carrier, Pollard said, the company runs a credit check to see how well that carrier is paying its bills. A similar review of existing carriers is done during each quarter, resulting in some changes, mostly among carriers with limited volume serving Del Monte.

Del Monte uses 60 to 65 carriers to move the bulk of about 2,500 truckloads a week from 20 shipping points in the United States and Canada.

Two years ago, Rock-Tenn Co., a producer of packaging material based in Norcross, Ga., created a corporate freight group to coordinate transport moves among more than 90 plant sites.

The move paid off, as the company was able to negotiate better rates with a smaller number of carriers in exchange for higher volume.

“Our goal is to get market-competitive rates with carriers that want to be partners with us,” said Ben Cubitt, vice president of supply chain.

While happy with available capacity now, Cubitt said he is concerned about the ability of carriers to provide service in the future, when demand for freight hauling recovers.

A number of large truckload carriers, such as J.B. Hunt Transport Services and Werner Enterprises, have cut back on the number of tractors in their over-the-road fleets and increased their use of freight brokerage to find loads or to find other carriers for freight they are unable or unwilling to haul.

“Carriers for some time have been reducing capacity,” said Adrian Gonzalez, director, logistics executive council, with ARC Advisory Group in Boston. “They are getting rid of trucks and not investing in [new] trucks. They are concentrating on dedicated and intermodal service to minimize exposure to one-way freight.”

The average size for large truckload carriers in the United States has decreased 3.3% since peak levels in late 2006, and small truckload carriers have cut their fleets by 13.5% since peaking in early 2005, said John Larkin, a trucking industry analyst with Stifel, Nicolaus & Co. in Baltimore.

“If you assume that each of these sectors makes up about half of the market, truckload fleets are about 8% smaller than they were at their peak levels — with about 3% of that coming out in 2008 alone,” Larkin said.

Larkin based his analysis on data compiled by American Trucking Associations.

That lost capacity is unlikely to return quickly when freight volume improves, many analysts said, because of a rise in bankruptcies and a jump in sales of used trucks overseas.

David Bovet, a partner at supply chain consulting firm Norbridge Inc., Concord, Mass., said the new business outlook will likely lead to a variety of changes in the way goods are sourced, where they are made and how they are transported.

“The bloom is off the rose of the pure China [manufacturing] strategy,” Bovet said during a Jan. 9 teleconference sponsored by Stifel, Nicolaus & Co.

Bovet said he expects companies to boost production in Mexico and to move goods through regional distribution centers to minimize the number of miles needed to deliver products to customers.

“It’s essential to shorten the last mile,” Bovet said.

As a result, he said, the typical U.S. distribution network will likely go from having an average of five distribution points to eight.

The economic downturn is also an opportunity for shippers and carriers to work together, said Dean Wise, another Norbridge principal.

“There’s a lot of evidence,” Wise said, “that companies that take the right moves in recession are leaders of tomorrow.”