Large accounts are a less-than-truckload (LTL) carrier's bread and butter, and with about 55 percent of its $3.4 billion in annual revenue coming from big users, Con-way Freight is no exception.
But for the Ann Arbor, Mich.-based carrier, pricing those accounts had come to resemble the application of peanut butter. Historically, rates have been slathered evenly across a large piece of bread, with little thought as to whether the pricing on any given lane made sense for the shipper or the carrier.
To change the spread, Con-way Freight in late 2012 launched what it coined its "360" program to introduce lane-based pricing to its top 360 accounts that bring in more than half of its business. Framed as a network optimization initiative, "360" was designed to bring together both the shipper and the carrier to analyze the unique dynamics of each lane and use the results to price Con-way's services on that lane. The rates would be loaded into a shipper's transportation management system (TMS), and the technology would determine where Con-way stood in relation to its rivals.
As Con-way sees it, the approach gives shippers deeper insight into their rate structure with the carrier and provides the carrier with greater clarity on how profitable—or unprofitable—a customer's freight is on a particular lane and if that business is worth shedding.
An ancillary, though critical, benefit from the program, in Con-way's eyes, comes from transforming a traditionally transactional relationship into a strategic exercise. The program does this by encouraging collaboration between the parties and making the shipper—which is allocating time and resources to undertake the effort—put skin in the game.
Stephen L. Bruffett, executive vice president and chief financial officer of Con-way Inc., Con-way Freight's parent, said last month that the LTL unit will "revisit" the program with its top 360 accounts during 2014 while also extending it to its mid-size customer tier. Con-way has said the program will impact about $900 million in revenue from the mid-tier segment.
"It's the same thing we've been doing. We're just applying it to a larger piece of our customer base," Bruffett told an annual transportation and logistics conference held by investment firm Stifel, Nicolaus & Co.
Lane-based pricing is a familiar and often-effective concept in the truckload world because it is relatively easy to price loads moving point-to-point without intermediate stops. It is a trickier exercise for LTL because of the added complexity of breakbulk terminals that make load balances in general more difficult to calibrate.
William Wynne, Con-way Freight's vice president of marketing, acknowledged that the program takes Con-way Freight out of its comfort zone. "What we feel we are doing is fairly unique," he said.
Bruffett told the Stifel conference that the program has been successful and is gaining momentum. Yet data points to quantify its success have been hard to come by, at least for those outside the company.
Con-way executives shed little light on the program's status during the company's mid-February conference call with analysts to discuss fourth-quarter and full-year 2013 results. W. Gregory Lehmkuhl, Con-way Freight's president, may have come the closest to spilling the beans by saying that "we anticipate our revenue management activities to roughly offset all of our investment costs" and that the revenue increases along with efficiency gains "should provide our year-over-year profit improvement."
WEAK FOURTH QUARTER
Con-way can use all the help it can get. In mid-January, it took the unusual and unwelcome step of warning the investment community ahead of time that fourth-quarter results would come in well below prior estimates. The company blamed the shortfall on higher-than-expected expenses at Con-way Freight for cargo claims and employee benefits, bad weather in December, and a hit at its Menlo Worldwide Logistics global logistics and supply chain management unit due to losses at two new warehousing accounts and a write-off of bad debt following a bankruptcy filing by a third customer. Con-way would not identify any of the customers.
For the year, revenues fell to $5.4 billion from $5.5 billion, due in part to the fourth-quarter revenue drop at the logistics unit. Operating income in 2013 fell year-over-year by $20 million to $208.9 million, due to a $6 million income drop at Menlo, the company said. Con-way Freight posted a 10-percent year-over-year gain in fourth-quarter operating income, well below the 50-percent increase it had telegraphed to analysts.
"These results were not indicative of the overall progress made in 2013 to position our company for long-term success, notably at Con-way Freight and Menlo Logistics," Douglas W. Stotlar, Con-way's president and CEO, said when the results were released in early February.
Throughout 2013, Con-way's revenue per hundredweight—a key metric of its pricing power and yield management efforts— declined in each quarter relative to the same period in 2012. In addition, Con-way Freight's fourth-quarter tonnage rose by 1 percent year-over-year, below that of rivals Old Dominion Freight Line Inc., ABF Freight Systems Inc., and Saia Corp.
Benjamin J. Hartford, transportation analyst at Robert W. Baird & Co., an investment firm, said in a mid-January research note that after two years of internal initiatives, there has been little progress made in improving Con-way Freight's margins. Hartford added that management has done a poor job of communicating its expectations to the investment community.
Still, the analyst is bullish on the company's outlook, saying that the fourth-quarter weakness should not affect full-year 2014 results and that he expects an improving profit picture this year at the LTL unit.