Lou Smyrlis

In my past two blogs dedicated to understanding the changes driving today’s motor carriers, we examined the increasing importance of accountability and the greater amount of complexity fleets face today. One thing that has NOT changed is the importance of cost control – yet it’s a major driver nonetheless.

Motor carriers are getting hit from both sides. Consider some of the financial performance numbers I go through every quarter.

• Second quarter 2006: Revenues up 5.7%. Expenses also up 5.7%.
• Third quarter 2006: Revenues up 5.0%. Expenses up 5.5%.
• Fourth quarter 2006: Revenue up 2.3%. Expenses up 2.9%.

• 4th Quarter 2006: Revenues up 2.3%. Expenses up 2.9%

Even when expenses started to drop in 2007, mainly as a result of reduced freight activity, they were not dropping as quickly as revenues.

• 1st Quarter 2007Revenues down 2.0%. Expenses down 1.1%

• 2nd Quarter 2007Revenues down 1.3%. Expenses down 0.5%

That’s the performance for the nation’s largest carriers. If we were to look at small and medium-sized carriers, the jumps in revenues and expenses would more pronounced but the trend would be the same. Costs are rising as fast, and some times faster, than revenues.

If we use 1993 as the base year, power unit costs were up almost 18% and that’s before the impact of the 2007 engines. Trailer costs are up 43%. I don’t need to tell you what’s happened to fuel costs and driver costs for motor carriers.

From the end of 2003 to about the beginning of 2006, carriers were able to absorb these rising costs because they were able to do something unheard of since the industry was deregulated more than 20 years ago. Pass through, wide-ranging significant rate increases, and reduce profit leakage through fuel surcharges and other accessorials.

You have to look at a chart to see just how different those years were. Back in 1999 only one quarter of shippers agreed to an increase in their truck freight. By 2004, it was 80%.
And the size of those of those increases was considerable. Back in 2004, one half of shippers were accepting rate increases (exclusive of the fuel surcharge) greater than 4%; a year later almost 2/3 of shippers were doing so.

The main reason why, of course, was that capacity in both TL and LTL got tight enough that shippers for the first time in a long time became significantly concerned there were not enough trucks on the road to move their goods. So motor carriers had the upper hand at the bargaining table.

Some predicted a whole new era for trucking. Some believed the balance in the shipper-carrier relationship had reversed for good. I think it’s important to remember one thing about shippers. Despite their focus on accountability. Despite their focus on complexity, they remain vigilant about costs – because they have to. Year after year our survey of shippers shows that only do the vast majority – 8 in every 10 -- consider cost control one of their top challenges but that it is the challenge to which they attach the highest priority.

Shippers may have had their hands tied when there was a capacity shortage; but that didn’t mean they were going to continue to do that. In fact, soon as capacity started to loosen as the North American economy dipped while carriers were adding capacity with their pre-buy strategy to get around paying for the costlier new engines, we saw a marked drop in rate increases.

I think eventually this situation will change again as the economy picks up and capacity tightens, motor carrier expectations of large rate increases year after year were far too optimistic. And to really put the issue in perspective, even during the best of times, when carriers had driven the operating ratio down to 0.92 – so carriers were making 8 cents on every dollar spent – they still didn’t compare all that favorably with some other transportation sectors. Regional railways make 15 cents on the dollar, the Class 1 railways make better than 20 cents on the dollar. Only air freight operators have to live with tighter margins than motor carriers.

Trucking may be the lion of the transportation industry. But it’s not exactly growing fat on its kills.

The contribution a flexible, agile and responsive supply chain can make to improved customer service and a company’s bottom line is now beyond argument. Study after study has proven so.

Of course, supply chain managers are not paid to merely understand the importance of such outstanding supply chains. They are paid to create them.

The question is how? How do we create the responsive, efficient, secure, supply chains that keep both customers and shareholders happy.

We’re all familiar with the typical imagery provided for corporate strategy and goal setting: The mountain that has to be climbed. The team leader out in front, heading the ascent, forever onwards and upwards. The goal always in sight, always as clearly visible as the mountain peak on a bright clear day.

But in reality, that’s just a Powerpoint slide that is used far too-often.

The typical supply chain manager’s world is one of increasingly global, increasingly complex supply chains. Where understanding the myriad customs regulations may actually be surpassed in difficulty by the challenge of understanding the customs and ethics associated with sourcing and transporting goods in countries very far away and very different from our own.

The supply chain manager’s world is one of volatile rates and surcharges that wreak havoc on transportation budgets and plans. Of increased security threats and demands that require multiple sourcing, distribution and transportation strategies.

And it’s a world where conflicting customer demands for service, and shareholder expectations for returns, are supposed to, somehow, work themselves into a sound supply chain management strategy.

If you think about it, effective leadership in such a reality has a lot less to do with mountain climbing and a lot more to do with cave exploration.

Cave explorers have an end goal, just like mountain climbers do. But their goal, unlike the mountain peak on a clear day, is not clearly visible in the darkness of the cave. Or in the confusion created by competing demands, volatile pricing, market changes and simply through operating very long, complicated supply lines.

Instead they need to have the inner confidence they are heading in the right direction.

At the same time, cave explorers have to accept that rockslides and cave-ins will likely force them to look for alternative routes -- just as effective supply chain leaders find alternative routes when supply chain labor troubles, security threats and infrastructure gridlock mess up the initial plans.

Whatever imagery you think most appropriate, the point is this. These are challenging times for supply chain management and they require leadership. We need supply chain managers whose accomplishments serve as models of new practices that can benefit the entire industry. Supply chain managers whose willingness to innovate serves as an example of the way things could be.