Lou Smyrlis

Your relationship with your main motor carriers will only be as good as the time they spend understanding your needs and the time you spend understanding theirs. I’m often asked to outline the major trends that are both driving the success and fueling the fears of motor carriers.

I put it down to three main trends: Accountability, Complexity and Cost. Over the next few blogs I would like to closely examine all three.

Let’s look at accountability first. To do that, we must take an important step further back in the supply chain and look at you, the shipper. I think corporate Canada is starting to see transportation in a new light. Thirty years ago, heck, even 10 years ago, companies focused their attention on product development, marketing, sales. How the product got to market, well, that wasn’t really considered critically important. Within the past 10 years, however, there have been a number of impressive studies that finally proved the existence of transportation’s equivalent of the Holy Grail. That supply chain management has a distinct and quantifiable impact on a company’s financial performance. And, of course, the majority of supply chain management spend, goes to transportation.

For example, one well-publicized study found that the compound average annual growth in stock value of companies considered leaders in how they managed their supply chains was 10 to 30 percentage points higher than those who DIDN’T do a good job managing their supply chains.

A ground-breaking study by a Canadian professor, Dr. Kevin Hendricks who was the University of Western Ontario at the time (he’s now at Wilfrid Laurier and his thoughtful research is always worth a read), looked at things from the opposite end. He studied what happens to public companies when they don’t get their transportation and logistics practices right and can’t get product to market for one reason or another – say their carrier is on strike just as the holiday season rush starts or an important shipment of a new line is stuck in a hopelessly congested intermodal yard for days. What’s the stock market’s reaction? For anyone who thought, well, the stock market probably wouldn’t take notice, the results were eye opening.

Hendricks tracked more than 800 companies announcing supply chain disruptions. He found they suffered, on average, an immediate 7% drop in their stock market value the day of the announcement. Imagine taking seven percent of everything you will earn this year and throwing it out the window.

The stock market did not forgive.

Nor did it forget.

Over a three-year period, those public companies announcing supply chain disruptions suffered an incredible 30-40% valuation loss. Supply chain disruptions proved to be more damaging than announced decreases in capital spending, IT problems, even plant closings.

It didn’t take long for CEOs at top companies looking at such studies to figure out that transportation was actually important. A recent study found almost three quarters of company executives agreed their CEO now views supply chain management as either “very” or “extremely” important. In fact, for many companies, supply chain risk is now considered the top threat to their main revenue generators.

What that means for motor carriers, is that that they are under the microscope. The margin for error is razor thin. A Canadian study we published last year about the transportation buying habits of shippers in the Windsor- Quebec City Corridor found that just a 1% increase in perceived security risk for a carrier was enough to cause a 3 fold decrease in the likelihood that carrier would be chosen again. Just a 1% increase in shipment damage caused by a carrier was enough to lead to 10 FOLD decrease in the likelihood that carrier would be chosen again.

Our own annual study of more than 2,000 shippers across Canada examines 7 key performance indicators that shippers consider when choosing one carrier over another, across all modes. Every year, we find trucking is held to some of the highest standards among all the modes.

Let me give you one example of what I’m talking about. A few years ago I was out to speak to the logistics team at Home Depot Canada, which is responsible for an inventory greater than 50,000 SKUs sourced from about 2,500 different vendors and totaling over one million shipments per year. But it’s not sheer size of the operation that presents their most daunting challenge. It’s the absolute emphasis on competitive pricing and the distinct seasonality of the business.

When that first warm spring weekend hits and do-it-yourself-minded Canadians start thinking about their gardens and other outdoors projects they head to a Home Depot store. And they expect to find the merchandise they’re looking for on the shelf. If it’s not there, they’ll walk over to the nearest competitor.

The easy solution is to have a robust distribution centre network so Home Depot would have the ability to pre-hold inventory and make last-minute adjustments easier to deal with. But remember Home Depot’s emphasis on a lean operation. They don’t want the costs associated with a distribution empire. The company got to where it is by being able to buy large quantities of merchandise and sell it, in essence, “right off the truck.”

Home Depot has more than 100 stores across Canada, hundreds of suppliers, thousands and thousands of products. Yet up to 90% of merchandise is moved directly from the manufacturer to the individual stores, using just a core group of motor carriers, Toronto’s Muir’s Cartage being the main player among them. And the motor carriers are the ones expected to make this very precise, highly fragile arrangement work. If a Home Depot vendor calls Muir’s today and has ten times the amount of freight it had yesterday because there is a seasonal spike, Muir’s has to have the capability to be able to make that work, in what ever city it’s required.

Do you think Muir’s performance is under the microscope? Do you think they can afford to have trucks unnecessarily delayed while loading, or their trailers lost in a shipper’s yard? Absolutely not.

Just as motor carriers have to become increasingly sophisticated in order to meet shipper demands, so do shippers have to be come increasingly sophisticated in their transportation procurement and management practices to ensure the most efficient operations possible.

In my last blog I began examining the three major trends – accountability, complexity and cost -- that I think drive the success and fuel the fears of motor carriers. The first trend we looked at was the increasing amount of accountability expected from shippers. With this blog I want to examine the increasing amount of complexity motor carriers are expected to deal with. It’s hitting them on several fronts. And I think it will force motor carriers to make changes over the next few decades that will radically change the trucking industry.

From the carriers I speak to on a regular basis, I get the distinct feeling that it is becoming increasingly challenging for them to understand and keep up with the demands of their customers. Most of the shippers that motor carriers traditionally dealt with, grew up believing in the power of vertical integration. That to reduce the costs associated with finding the right suppliers and negotiating with them and managing deliveries and storing inventory, it was best to integrate those functions into your own operations.

But our new technology has made that kind of business strategy unsustainable. Technology has made it much easier, much less costly to tap and manage supply networks outside North America. Integrating offshore, low-cost countries into a company’s global supply chain, for both sales and production, is a strategy deemed important to almost three quarters of Canadian companies, according to research currently being conducted by Industry Canada. Eight out of every 10 Canadian companies that are moving production off shore say they have to do it in order to reduce costs and stay competitive. Goods at an intermediate stage of production now constitute 46% of Canada’s imports and 43% of exports.

What’s does all this mean to the Canadian motor carrier? It means four things:

First it means a marked change in shipping patterns. The traditional head haul from the industrial heartland in central Canada to the West is being met by boatload after boatload of product coming in to our West Coast ports from Asia. Did you know that since 2002 domestic freight movements have been growing three times faster than the hauls to the US, that used to be our engine of growth? You are seeing Central-Canada based carriers, such as Challenger Motor Freight and Consolidated Fastfrate, setting up operations in the west.

Second, it means that key Canadian or US shipper contacts that motor carriers have being cultivating for decades, are changing. Tomorrow’s freight moves could very easily be routed by some freight forwarder in Asia, that worries about transport in Canada only after he has figured out how to navigate the freight through Asia, across the Pacific, through the port of call and into a warehouse, pic’n’ pak or transload facility.

Canadian carriers will have to identify those new decision makers across the ocean so they can ensure they get to move that freight once it hits our ports. I remember Claude Robert, CEO of Robert Transport, telling us that freight forwarding giants such as Schenker will come to control 50-75% of world wide freight distribution… and our carriers somehow have to get on their radar screen.

That’s why you are seeing a forward-thinker like Ron Tepper of Consolidated Fastfrate opening a sales office in Shanghai. That’s why you are seeing him go off to India with a delegation from the Port of Halifax.

Third, it means becoming much more than they are now. This trend already started a decade ago when major shippers like Alcan shifted to core carrier programs, giving all their business to just a few major carriers that had to have both the capacity and the service portfolio to handle the business. The need of shippers to simplify the complexity involved with longer supply chains will drive this even further. Motor carriers of the future will have to formulate alliances with other service providers or become more diversified themselves, offering warehousing, transload and pic’n’pak, etc.

That’s why you are seeing carriers like Yanke or Bison offering intermodal services. Why so many carriers are now offering warehousing services. Why Ron Tepper spent millions building a cargo distribution and warehouse facility in Nova Scotia that can provide not only LTL services but transloading and drayage for international containers.

And finally, it means motor carriers will have to get a lot bigger in order to provide such services.

All of the top CEOs we’ve spoken to believe exactly what Alan Robison, of Reimer Express believes: That the industry will continue to consolidate over the next 25 years until there are just a few major players dominating the majority of the hauls in Canada and niche players that may partner with them.