People can be fairly predictable at the best of times, and certainly in tough times. As a service provider, I can almost guarantee I’ll get two types of requests from customers when the economy enters a period of downturn; first, “we want lower rates” and second, “we want better service at those lower rates”. Fair enough, both of those scenarios are understandable and can be negotiated and resolved (even if it results in a negative resolution with companies changing suppliers).
But then what? Where do you go for continued savings or improvements once you’ve renegotiated with suppliers?
To begin with, an understating of “where” savings can be found is essential. It’s common to look outside first, at external suppliers, since “savings” appear immediately when suppliers reduce their rates. However, “better service at lower rates” may be more of an oxymoron than a successful negotiating strategy. Let’s face it, when was the last time you bought a bottle of wine (at a lower price) that advertised “better taste with half the grapes”, or an automobile that claimed “better performance with half the quality”. In other words, it might work, but there is probably a better chance it won’t, or of it does, it might only work for a short period of time, or until the supplier can replace you with a more profitable customer.
The downside of this strategy of course is the potential for administrative (and service) disruptions and, eventually, even higher rates if new suppliers have to be sourced. Which is why every good cost reduction/service improvement strategy should include both external and internal sources.
In other words, don’t forget to look at your organization’s internal practices as a source of potential savings. There are many internal processes that can yield savings or service improvements, including the use of consolidations. From a transportation perspective, the principle of “consolidating” is relatively simple: combining orders so you can ship in bigger lot sizes, thereby lowering unit costs at the higher weight level.
The same principle can be leveraged with suppliers. In the case of inbound collect shipments for example, requesting that suppliers ship inbound orders once, or twice, per week rather than daily, will increase load weights (and reduce unit costs). Additional savings can be obtained by having inbound carriers pick up and consolidate orders from suppliers in close proximity to one another.
Consolidations on the customer side of your operation can be more difficult. Take the example of a customer who places orders with your firm every day before a noon cutoff, in order to receive next day delivery. Oftentimes a company will resist asking customers if they will entertain changes in shipping policy for fear it will impact negatively on their sales. Nonetheless, its an opportunity worth exploring and some customers may well be willing to receive your orders fewer times per week without impacting their business operations (i.e. even though your customer orders daily, the orders may be to replenish safety stock; or having fewer orders to receive may enable your customer to better schedule receiving personnel, etc).
There are many ways to reduce operating costs. Renegotiating supplier prices is one method, but reexamining internal processes, such as the use of consolidations, can also be effective and should not be overlooked.

CT&L’s Daily News for October 2nd reported July trade numbers published by the Bureau of Transportation Statistics (BTS) of the US Department of Transportation, and it wasn’t all good news. The BTS report reflected the gloomy state of trade between the NAFTA partners this year, now decreasing for seven consecutive months.

According to the BTS, the reported value of Canada/US surface transportation trade for July fell just over 33% compared to a year earlier. One interesting note to the report however included mention that the state of Illinois replaced Michigan as Canada’s leading US trade partner that month. Which prompted me to wonder what we bought more of from Illinois than Michigan in July.

A quick review of the Canadian government’s international trade site revealed that Michigan’s leading exports to Canada in 2007 (the most recent data reported) were, not surprisingly, motor vehicle parts, automobiles and trucks. Michigan is, after all, the heartland of American automobile production. In 2007 in fact, 66% of Michigan’s total exports were transportation related products, followed by metals and energy products respectively.

So how did Illinois knock Michigan from the top spot? Was it a surge in Canadians’ appetite for Illinois corn, soybeans or ostriches? That’s right...ostriches! According to the Illinois Department of Agriculture there actually is a specialty market for ostriches in Illinois. I thought I was onto something here. Perhaps I would be the first to discover a burgeoning trade in ostrich feathers for the Canadian entertainment industry, or the wildlife safari business (can you ride an ostrich I wonder?) or (at worst) a growing underground market for ostrich burgers (even I have trouble with that one).

Presumably it was nothing so exotic, or (arguably) tasty. The automotive industry once again featured prominently in 2007 with Illinois exports to Canada of automobiles and motor vehicle parts, followed closely by machinery and metal products. Given the state of our North American economy I am somewhat heartened to think that our automobile industry may still be the backbone of Canada/US trade, whether from Michigan or Illinois.

(But I can’t help but wonder when the BTS will find out about those ostriches!)

There has been a growing awareness in recent years of a difference in perception between C-level executives (CEO’s, CFO’s, COO’s) and O-level managers (Operations-level managers including Transportation, Purchasing, Logistics, Inventory, Materials Management, etc.) when it comes to the role of supply chain management. These differences in perception within the same organization may seem paradoxical, but they also illustrate a potentially troublesome scenario for transportation managers.
Julia Kuzeljevich, Features Editor for Canadian Transportation & Logistics magazine, touched on this subject in her excellent cover story “Not Too Close For Comfort” in the May issue of CT&L. The cover story addressed changing global sourcing strategies identified in the 15th Annual 3PL Provider CEO Perspective study. One of the many important trends identified by participants in this study was the increasing number of organizations adopting near-sourcing strategies, relocating their operations away from Asia and closer to home (reportedly 20% of European CEO’s and over 30% of CEO’s in the Asia-Pacific area) in response to increasing fuel costs, currency fluctuations and time-to-market concerns.
These changes in direction also serve to highlight the differences in perception between C-level executives and O-level managers. For example, transportation managers traditionally balance cost and service concerns, although with the advent of global sourcing practices increasing freight costs are a reality, focusing more attention on service concerns as a result. Faced with longer transit times, potential delays and multiple border crossings, it’s understandable that transportation managers would strive to develop long term carrier partnerships based on consistent, reliable service patterns.
In many cases, cost concerns may take second place to delivery performance as transportation managers respond to requirements for sales-driven customer service objectives, balanced by financial concerns for minimal inventory levels. Optimally, these carrier relationships tend to be founded on repetitive (or forecasted increases in) shipping volumes.
The 3PL Perspective study however identified concerns among C-level executives that extended chains also raise vulnerability issues, resulting in a desire for more agile supply chains, providing flexibility to relocate operations to other countries as market conditions dictate. These differences in perception can result in competing interests between transportation managers focused on supply chain costs and attempting to develop long-term supplier relationships based on stable, repetitive shipping volumes, and C-level executives more concerned with quarterly results and total landed costs, requiring flexible supply chains that can have adverse effects on rate levels and may result in shorter-term carrier relationships.
For transportation managers faced with this dilemma, two requirements should become abundantly clear:
1. The need for O-level managers to have senior management representation so they can have access to information that might indicate pending market changes.
2. Provision for flexibility when developing strategic supply chain plans, including the potential need for contingency carriers in the event near sourcing becomes reality.
Another consideration in this decision-making process is the impact on inventory, both from the perspective of investment costs and carrying costs. Near sourcing may result in shorter lead times, which in turn can have a significant impact on inventory levels.
Employees look at inventory in different ways: C-level executives view inventory in terms of its impact on working capital, while O-level managers view inventory as a buffer against erroneous forecasting and potential customer complaints. In fact, inventory overlaps both of these areas and needs to be reviewed as early as possible when organizations consider changes in strategic direction.
Understanding this difference in perception is critical for O-level managers to be successful, particularly with regard to how their performance will be measured by the executive suite.

Several times a year I have an opportunity to travel across Canada, working with transportation and procurement managers on logistics issues. This activity is without question one of the most enjoyable aspects of my profession, but it also serves as a reminder of the need to put the current framework of border-security regulations in perspective.
The security programs in effect today (and those still to come) can be complex and confusing for many importers and exporters. While awareness of these initiatives is high in the transportation service sector, the same cannot be said for the shipping community. Surprisingly, many companies are still unaware of the various programs available to the trade community. And many of those who are aware have unfortunately shied away from participating, fearful they will incur unforeseen costs or onerous administrative requirements.
The new security programs are an extension of the Smart Border Declaration signed by the Canadian and US governments in 2001. That declaration signaled the intent of both countries to address the need for improved security in four key areas at our borders: the secure flow of people, the secure flow of products, infrastructure investment and improved information sharing. Both Canada and the US have made tremendous progress in all four areas since 2001 so the question remains, why aren’t more companies aware of, or participating in, these programs?
The lack of general awareness can be explained by the fact that these topics are not regularly featured on television, radio or generic Internet news sites. They are a regular feature however in trade magazines, so logistics employees do have an opportunity to obtain information from these sources. So why aren’t logistics and supply chain professionals pushing their employers harder to participate? Perception seems largely to blame, not knowing what’s really involved and concern their organizations will be identified as non-participants (i.e. security risks) if they attempt the process then decide not to follow through.
I addressed this issue in a recent presentation to a group of procurement managers, using the Nexus program as an analogy. Nexus enables pre-approved individuals to cross the Canadian/US border quickly in designated “fast lanes”, avoiding long lineups and delays. The process of being pre-approved involves a criminal background check to ensure the traveller is “low-risk”. In other words, Customs officials can be reasonably confident that Nexus participants will not abuse the program by trying to smuggle goods into the country in an attempt to avoid paying duties and taxes. The value of speedy border crossing and infrequent inspections is that commodity valued so highly by so many…Time! You only have to be stuck on a border-crossing bridge once on a long weekend to fully appreciate the value of a program like Nexus. I joined the program for that very reason and feel strongly that the benefits outweigh the (perceived) tradeoffs.
In drawing a parallel between Nexus and commercial goods programs like Canada’s CSA (Customs Self-Assessment), PIP (Partners in Protection) and the American C-TPAT (Customs-Trade Partnership Against Terrorism) program, audience comments and questions quickly illustrated the differences in perception. One of the first responses to my analogy was “Nexus is for people, so it doesn’t apply”. But that’s exactly why it does apply. Recall two of the four key areas mentioned above, secure flow of people and secure flow of goods. Nexus has been very effective in identifying low-risk travellers and rewarding them with the ability to cross the border without delay or (frequent) inspection. This risk-management approach enables Customs to focus its resources on non-Nexus travellers. By volunteering my security-worthy status to Customs as a Nexus traveller I receive certain benefits that I value as important. For commercial goods shipments, the Nexus concept is mirrored in programs like CSA, PIP and C-TPAT. These cargo security programs afford importers and exporters the same potential benefits.
The second, and perhaps more strenuous, objection to my use of Nexus as an analogy involved the individual’s requirement to undergo a criminal background check, the perception that now “they” will know everything about me. Of course that’s the “big brother” syndrome and in fairness it occurs to all of us at one time or another. But under closer scrutiny, what have I divulged that wasn’t known already? My passport status, tax records, birth record and criminal background status are already known to some government agency. By applying for Nexus I have simply consolidated that existing information for another government agency to my benefit.
I would argue the same is true for companies. Your organization’s information with respect to business registration/incorporation, business type, industry category, taxes, goods imported and exported already exists in one government agency or another; by joining the new cargo security programs are companies simply not consolidating existing information for Customs to their benefit?
A third perception is that companies will incur significant costs by joining these programs. All of these programs are voluntary and free to join; granted, there may be IT costs related to transmitting required data elements to Customs under the CSA program. On the other hand, CSA enables importers to reduce the number of transactional transmissions by aligning financial records with Customs requirements. Another misconception surrounding PIP and C-TPAT membership is that participants will be asked to build a fence around their buildings or property. This is not necessarily true. If you manufacture or distribute common (low risk) goods it is unlikely Customs will require you to fence your property. If, on the other hand, you manufacture radioactive isotopes this may be a requirement, although if your company is in that business you hopefully have a fenced property (or equivalent level of security) already.
A certain synergy exists between all of these risk management programs, greater rewards in exchange for demonstrated higher levels of security. Perhaps the real reason more companies aren’t affording themselves the chance to receive these tangible benefits is simply a question of perception.

2008 was a banner year for Canada in terms of trade agreements and trade negotiations. At the start of the year, we had four existing free trade agreements (FTA) with: the USA and Mexico (NAFTA, implemented in 1994), Chile (implemented in 1997), Israel (implemented in 1997) and Costa Rica (implemented in 2002). Those agreements cover a time span of fourteen years from 1994 to 2008; that’s an average of one FTA every three and a half years.
By comparison, Canada almost matched that entire fourteen-year output this year by signing three new FTAs, with Colombia, Peru and the EFTA (European Free Trade Association – Iceland, Liechtenstein, Norway and Switzerland, a trading bloc of four countries that do not belong to the European Union), bringing our total to seven by year-end.
Negotiations for a FTA with Jordan were also concluded this year, and ongoing negotiations for agreements are still pending with South Korea, Panama, Dominican Republic, Singapore, CARICOM (Caribbean Community comprised of Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago), CA4 (Central America Four comprised of El Salvador, Guatemala, Honduras and Nicaragua), and the FTAA (Free Trade Area of the Americas, comprised of Antigua and Barbuda, Argentina, Bahamas, Barbados, Belize, Brazil, Canada, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Panama, Paraquay, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, United States and Uruguay).
That’s a lot of countries which means, despite the fact that not all discussions are active (FTAA discussions are currently stalled), and there is some member overlap between agreements, Canada has the potential to enact a significant number of additional agreements in the next few years. (This information and additional detail on Canada’s international trade agreements can be found on the Foreign Affairs and International Trade Canada web site.)
Canada’s free trade agreements have always been a subject of interest to me, both because of the potential impact on transportation demand patterns and the fact that changing freight patterns demonstrate the need for effective supply chain management practices.
What I found more interesting however was the underlying geography of these agreements, particularly in light of the current east-west trade flows that seem so prevalent between North America and Asia.
Canada and China for example have been discussing a Foreign Investment Promotion and Protection Agreement (FIPA) since 2004; not surprising since Foreign Affairs and International Trade Canada reports that Canadian foreign direct investment in China in 2006 exceeded CA$ 1.5 billion, and China’s foreign direct investment in Canada exceeded CA$ 1.2 billion the same year. Not huge numbers in comparison with some of China’s larger trading partners perhaps but certainly a foundation for future growth.
Although somewhat foreshadowed by the growing Canada-China relationship, Canada has been steadily pursuing trade relationships with our neighbours to the south through these new trade agreements. This makes a lot of sense when you consider the potential impact on transportation transit times enabled by the land bridge between Canada and South America.
The full impact of our potential trading relationship with Central America and South America only becomes evident however when you look at the individual agreements and their corresponding member locations on a map.
NAFTA gives Canadian traders access through the United States to Mexico, while the pending CA4 agreement extends the route south through Guatemala, El Salvador, and Nicaragua, to our existing FTA partner Costa Rica, then on to Panama (FTA status pending) and Colombia, where Canada finalized a FTA this year. From Colombia, the land bridge extends into Peru (where Canada also finalized a FTA this year) with further access to markets in Chile, where Canada has had a FTA since 1997. In other words, the vision of a North-South America trading bloc supported by free trade agreements is now within sight.
Should we be excited by this prospect? Some would say yes if our experience with NAFTA is any indication. Particularly since The Treasury Board of Canada Secretariat reports that Canada’s annual trade in merchandise and services with its NAFTA partners has nearly doubled since 1994. And once fully enacted, Canada’s existing and pending trade agreements in Central America and South America will expand the current NAFTA population market base by more than 25%, from approximately 445 million potential consumers to more than 560 million.
However, while trade agreements demonstrate a desire by member states to promote trade, oftentimes the required infrastructure and administrative support systems to support those agreements are not in place until much later. One of the most glaring examples of this problem is the inability of Mexico’s trucking industry to adequately address road safety concerns to the satisfaction of the US government, with the result that the transportation provisions of NAFTA (i.e. allowing cross-border access by Mexican and US transport companies) have yet to be fully enacted.
Despite the fact that these agreements are (almost) all in place, it will be a long road (both literally and figuratively) to any meaningful impact on trade. There will be many obstacles to overcome, both quantitatively (manufacturing, labour and freight costs) and qualitatively (quality concerns, packaging, labeling, government regulations, etc.), as we have seen in past trading relationships (both north-south and east-west). But the potential is certainly intriguing and one that bears watching in the years ahead.
Who knows, it might even be the catalyst that leads to the eventual enactment of transportation provisions under NAFTA.

The dramatic increase in fuel costs this year is a constant reminder of the importance of cost management for transportation managers. Negotiating is still the favourite tool for many, but periodic negotiations may not adequately address the impact of cost-creep. For example, carrier rate agreements may be negotiated for a set period of time but rising fuel surcharges, ancillary charges and unforeseen costs can further impact total costs.

When people ask me how they can reduce transportation costs they usually qualify that question by saying they have already done some form of negotiating and can’t understand why their total costs continue to increase. That’s a common problem and it underscores the importance of monitoring costs on a regular basis. The best way to do that is to implement some form of regular cost evaluation program with visibility into the various cost elements.

A report on total costs does little more than confirm whether or not you’re meeting budget expectations. But in order to control costs adequately you have to know what they are, so what’s “in” the report can be just as important. If you’re not doing it already, now is the time to start meeting with your company’s IT group to identify the potential for meaningful cost reporting. Since fuel surcharges are the most visible element of transportation expenses for senior management, that’s a good place to start. Find out if its possible to break out fuel surcharges from your overall transportation expense.

Segmenting transportation expenses can reveal some interesting data since fuel surcharges can vary by a host of factors, including carrier, mode, shipment size and destination. Having the ability to identify actual freight expenses vs. fuel surcharges can be helpful during discussions with carriers about cost control, not just rate negotiations. And let’s not forget that every discussion with carriers about fuel surcharges need not be adversarial. Carriers are affected by rising fuel costs too and are very aware of the impact this situation is having on carrier-shipper relationships. It’s not unusual for carriers to have better reporting capabilities than their customers in terms of the customer’s shipping patterns – use that relationship to your advantage by asking your carriers for reports on your shipping volume. Carriers can be a great source of information and will undoubtedly see it as an opportunity to provide a value-add component to your relationship.

Greater visibility into cost elements can also be helpful in reviewing “how” your company ships its products. If you start with the premise that you can’t do much about rising fuel costs, think about other areas in your company’s operation that may have been overlooked. For example, are there opportunities to improving the weight to cube ratio by revising product packaging? Has your company considered revising its shipping terms of sale (FOB/Incoterms)? Are you making the most of consolidation opportunities? Have you asked carriers to advise of any backhaul opportunities that might be appropriate in your shipping lanes? If your company extended its supply chain by importing from low-cost labour countries, review your total landed costs in the past year compared to the costs of relocating sources of supply closer to home. Sadly, an often-overlooked source of information can be your customer; developing a survey incorporating customers’ needs for cost control information can enlist their cooperation in developing ways to better handle shipping requirements (i.e. frequency, order size, return goods shipments, etc.)

Now for some good news - that’s just for starters. There may be other opportunities for reducing costs (or improving service) by examining warehousing services, cargo insurance policies, forecasting methods, the impact of new security regulations on transit times and customs/trade compliance issues. And the really good news? Improvements in many of these areas will have cumulative net-dollar value since the savings carry forward.

I started this blog suggesting that transportation managers meet with their IT departments but there are a lot of other internal stakeholders that transportation managers should also be communicating with, including production, sales, purchasing, inventory and warehouse management. Open and frequent communication with these groups helps to ensure that everyone in the organization is aware of the challenges faced by transportation managers in order to protect the company’s competitive position in their marketplace.