Shippers Seek to Cut Costs as Revenue Growth Stalls

By Jonathan S. Reiskin, Associate News Editor

This story appears in the Nov. 10 print edition of Transport Topics.

Prodded by soaring fuel prices and the contracting economy, shippers have spent most of 2008 trying to pare transportation spending to meet demands by company executives looking for antidotes to stagnant revenue growth.

No one interviewed offered an obvious fix. Instead, companies are searching for “1% here and 1% there” as they cobble together  approaches that work. Some are consolidating freight, others choosing less expensive modes or revamping their warehouse strategies.

“Fuel prices went ballistic early in the year. It’s not just they went up, but that they went up so fast. Then, midsummer, they slowed down, but the August peak that should have started with back-to-school shipping wasn’t much of a bump,” said Denis Reilly, president of transportation services for Ozburn-Hessey Logistics, Brentwood, Tenn.

“Since the first quarter, companies have been trying to control costs, and now it’s especially so since they won’t be seeing much revenue growth, so they really have to cut costs,” said Reilly, whose company is a third-party logistics provider offering transportation management and warehousing services.

Altering a company’s logistics practices is sometimes just a small part of a larger restructuring effort. Accuride Corp., a maker of car and truck parts, announced a major overhaul of its operations in September, and said that as part of it, “we will be consolidating some warehouse space that we have in order to reduce freight and product handling costs and improve our ability to offer full mixed-product truckloads to aftermarket customers.”

For others, it is a larger effort. U.S. Gypsum Co., Chicago, has been fighting the economy longer than most companies because it makes building supplies and is at the center of an industry that boomed spectacularly before collapsing ferociously.

The rate of new housing starts fell by more than 50% from 2006 to 2008. Craig Boroughf, USGC’s director of transportation, said he runs a $100 million freight budget that pays for 140,000 shipments a year. By changing the company’s operations, he saved 7%.

“We’ve consolidated our manufacturing locations to optimize our North American network,” Boroughf said. That led to trimming USGC’s roster of flatbed and other trucking companies to fewer than 80 carriers from about 95 carriers in 2005. The carriers cut did not haul a large proportion of freight; the change concentrates the available freight among the carriers the manufacturer does use most.

“We made a stronger commitment where we could, and eliminated one-off carriers,” Boroughf said.

USGC prefers to be a major shipper for any given carrier it uses and likes long-term, regular relationships, compared with brokered freight. Boroughf said some of Gypsum’s carrier al-liances go back to before World War II.

Other changes shippers mentioned most frequently were shifting mode of transport and adjusting warehouse locations. For trucking, that means turning less-than-truckload movements into truckloads and moving longhaul truckload to intermodal. When LTL is a necessity, make the shipments heavier, they said.

Transportation manager Rahquell Purcell of Procter & Gamble and managers from other companies, spoke at a Schneider National shippers’ conference in September, telling the truckload carrier and some of its railroad partners the shippers would love to have more truck-rail options.

FedEx Corp. and UPS Inc. each said in quarterly earnings reports this year that domestic parcel shippers are moving from next-day air to deferred air, and from deferred air to truck-based shipping.

In looking at freight forwarding, Charles Cocci, a UPS vice president, said air volumes are going to ocean when possible, but that it is also offering an air-ocean hybrid. Rather than traveling all-ocean from China to California, Cocci said, UPS will ship Shanghai to Korea by air, and then to California on a ship.

He also said former airfreight shipments from Singapore to Bangkok, Thailand, now go on truck because highway networks have become good enough to support trucking.

Ozburn-Hessey’s Reilly said shippers are reevaluating warehousing choices urgently.

“We’re definitely doing more studies on network design. It was one or two a month in 2007 and now it’s eight-to-10 a month for warehousing and distribution center location,” Reilly said.

“Because of fuel costs there is more demand for our multiclient warehouses where you can take smaller amounts of space in different parts of the country,” he said. “It’s a campus strategy for warehouse location.”

Ten years ago real estate was relatively expensive and transportation fuel was cheap, so just-in-time delivery was the strategy of the day, Reilly added. “All of that is getting revisited. People keep tweaking everything in their supply chains. They’re trying to save 1% here and 1% there.”