Superficially, the less-than-truckload business looks much the same as it always has. Trucks back up to shippers' or receivers' docks each day and load or unload goods. But look deeper and what you'll see is an industry that has undergone radical change—all because its customers, the nation's shippers, have changed.
It's been a long time since it was enough for a trucker merely to move goods from Poughkeepsie to Kalamazoo. Bob Davidson, president and CEO of ABF Freight System, says, "Our customers would laugh at us if we held ourselves out as being able to deliver from point A to point B in X days with one plain vanilla service. They demand a broad array of logistics functions."
Indeed, in an era when lean inventories and short cycle times are driving much of the logistics decision making, LTL carriers have no choice but to offer much more than just fast and reliable over-the-road transport. They have to offer clear visibility into their networks. They have to be flexible. And they have to have a service mix that extends beyond the highways and shipping docks.
Doug Duncan, president and chief executive officer of FedEx Freight, argues that the transportation industry overall is being shaped by the pressures brought to bear on the industry's customers. "It's all about how people manage supply chains and attack logistics costs," he contends.
Historically, at least, that's been true. As distribution became more regional in nature and the demand for overnight service exploded, the regional LTL carriers that specialized in that type of service thrived. As customers demanded inventory visibility, carriers developed the tools to provide it. As shippers consolidated their freight volume with fewer carriers in return for better service, carriers responded with improvements in core services while extending their reach into once unfamiliar areas. So it's no surprise, then, that as businesses grapple with the seemingly contradictory demands to increase their international sourcing while maintaining lean inventories and slashing cycle times, LTL carriers have tried to develop ways to help their customers—and expand their own businesses as well.
Need for speed
What will it take to compete in this new marketplace? Sophisticated technology and the ability to respond quickly to changing requirements, says Bill Zollars, chairman, president and CEO of Yellow-Roadway Corp. "Companies are … looking for [carriers] that can help with supply issues, not for the lowest rates," he says. And that means carriers should expect to make major investments in the months ahead to meet shippers' demands for broad capabilities.
This thinking explains in part the rationale behind Yellow Corp.'s acquisition of Roadway Corp. to create Yellow-Roadway Corp. That deal, completed late last year, brought two of the biggest national LTL carriers—Yellow Transportation and Roadway Express—under one corporate roof. "This offers us the opportunity to change the competitive landscape in the transportation industry," Zollars says. "It puts us in a position just behind UPS and FedEx in market reach. We can do a lot more investing and make service improvements across a $6 billion base."
Duncan, who oversaw his own mega-merger a few years ago when Viking Freight and American Freightways were combined to create FedEx Freight, agrees that shippers are demanding much more from their carriers than ever before. In Duncan's view, economics are driving the trend. Manufacturers today are operating on thin margins, he says. Durable-goods manufacturers, for example, have seen the prices they're able to charge decline steadily since 1996, he says. "They have no pricing power in the marketplace."
Although manufacturing productivity has improved markedly, he says, the gains haven't been enough to offset rising costs. That has led to a focus on the supply chain. "In the last four or five years, logistics professionals have been taking inventories out and speeding operations up. Whenever they've done that, the demands on the carriers have increased. Speed and reliability have taken on an extraordinary measure [of importance]."
Not surprisingly, the mounting pressure to reduce inventory and speed up deliveries has altered some shippers' relationships with their carriers. "What we're seeing more and more is a lower tolerance for failure, even in the unexpected," Davidson says. "You can't just notify your customer when something has gone wrong; you also have to tell it how you're going to make things right."
Their desire for leverage is also leading more shippers to consolidate their business with fewer carriers—typically carriers that have broader capabilities. David Congdon, president and COO of Old Dominion Freight Line Inc., a successful regional carrier that operates in 38 states, says, "More and more, shippers are looking at reducing the number of carriers they use. They're looking to work with fewer carriers that can do more for them."
Gerald Detter, president and CEO of Con-Way Transportation Services, says his company has invested considerable time and money to develop additional offerings that meet customers' demands for speed, efficiency, and broader services from LTL carriers. "The Con-Way organization has evolved, with regional, long-haul and international services, because of customer demand," he reports. "We want [customers] to think of Con- Way as an enterprise, not as the back of a truck."
As shippers turn up the pressure, many carriers have responded by implementing strict performance standards. "We've changed the entire way we do business," says Duncan. FedEx Freight used to look at ontime shipment percentages as a measure of its success, he says. "That doesn't work today. Most nights we handle 60,000 shipments. If 99 percent of our deliveries are on time, that means I have 600 unhappy customers. We track every failure every night and trace it back to the root causes."
Spreading the risk
The demand for quick response over the last decade has also led to the regionalization of distribution, which has spurred growth among regional LTL carriers in particular.
"The way [shippers] choose to manage strategically is to place inventory in two, three or four places so they can fulfill orders the next day by truck," says Duncan. "They're getting better at choosing those facilities. Next-day service is what they want. The only reason they accept second-day service is that they can't find anyone to deliver their freight the next day."
Then there's the trend toward what Ted Scherck, president of the market research firm The Colography Group, calls "continental distribution." "If you operate with an extended supply chain and lean inventories, you put yourself at substantial risk of interruptions," he argues. Those might range from bad weather on the high seas to labor disputes like the one that shut down West Coast ports in 2002 to strains on freight capacity. "You name it, we've seen it," Scherck says. "Shippers have come to realize that global supply chains and lean inventory policies make them vulnerable to disruptions."
As a result, he says, some shippers are adjusting their distribution networks, placing critical imported goods in a limited number of strategically located DCs within U.S. borders. That allows the shipper to choose the mode—air, road or rail—that best fits the company's needs and reduces the risk substantially. That's where truckers come in. "If you're a North American carrier that supports continental distribution, you stand to benefit in a big way if your customers are abandoning the global model in favor of a surface distribution model," Scherck says.
No problem's too tough
Indeed, the continental distribution trend is already benefiting some LTL carriers. Scherck contends that because shippers and receivers have become conditioned to expect short transit times, businesses are trying to locate their continental distribution centers within 1,000 miles of most of their customers. Within that range, they can make deliveries in two days at the outside.
But he adds that this growth is not necessarily coming at the long-haul carriers' expense. "There are some goods that have to be manufactured in a single location and aren't suitable for high-end transportation," he says. He cites building materials such as doors and windows as an example."You're not going to move those by air," he says, "and you're not going to manufacture them in Malaysia."
Zollars has a slightly different take on the situation. "Today, we're seeing global networks become more important," he says. "That goes back to the idea that customers want companies with broad capabilities. They need companies with global networks."
Duncan believes truckers have no choice but to add services that cater to their customers' increasingly global operations. For example, he says, FedEx Freight is currently testing a program under which it's deconsolidating shipments in ocean containers from Asia for local distribution.
ABF Freight System is also expanding its scope in ways that would have been unthinkable just a few years ago. "We have a project going with a company that wants us to buy their product in the Pacific Rim, move it across the ocean to our warehouse in the United States and then, as they need product, pick the product and sell it back to them," says Davidson. "That's an example of our willingness to look at any logistics product," he adds.
For its part, Con-Way has set up what it calls a "solutions desk" under the auspices of Con-Way Air, the carrier's airfreight forwarding arm."The philosophy in the Con-Way companies is that we never say no," Detter says. "Whatever the issue, we'll relay it to the solutions desk and we'll find a solution. The customer may not be happy with the price, but we will come up with a solution."
The price of progress
And what about price? All of the investments LTL carriers have made carry a substantial cost. In the last few years, they've sunk money into technology, equipment, networks and more with no guarantee that they'd recoup those expenses. Indeed, hampered by stiff competition, carriers have been spectacularly unsuccessful in raising their rates in the last few years.
That may be changing. Although the competition has yet to abate, rates may finally be heading up. "Shippers have to recognize that the days of excess capacity are over," says Scherck. "Capacity is tightening. If we get the kind of bump in manufacturing that everyone says is coming, shippers will find themselves locked in a tight struggle for capacity, and trucking companies are expecting a return."
In fact, this may already be happening. Detter reports that the average weight per shipment in the Con-Way network increased significantly in November and December—up almost 40 pounds per shipment over prior months. If that's a true indication of what's happening in the market, it's likely that LTL rates will soon head up and stay up.
Meanwhile, a look at their balance sheets has only stiffened trucking executives' resolve to resist rate erosion. Carriers have been hit with double-digit increases in insurance costs. Labor costs for drivers have inched up. And carriers are finding that it's costing them more to run new trucks equipped with engines that meet the stringent emissions standards imposed last year than it did to run older models.
And when it comes to operating costs, truckers say there's nothing left to cut. "We're a very efficient industry," Detter says. "We use technology efficiently; we use our assets efficiently.We've cut out all the fat."
If nothing else, Detter adds, carriers will be forced to raise rates simply to ensure there's someone available to drive the trucks. "We need livable wages and benefits to attract people to a relatively unattractive industry," he says. "That's not going to go away."