Lou Smyrlis

Shippers and carriers alike have been spending a great deal of time the last couple of years trying to figure out where diesel prices will go – the way fuel prices have risen who can blame them?

But the comments of Faith Goodman from the Canadian Petroleum Products Institute at last week’s 22nd annual Transportation Innovation and Cost Saving Conference, left me wondering if we’re taking the right approach. Actually, to be honest, her remarks left me wondering if we are just plain wasting our time trying to pinpoint where we think fuel pricing will be in the future.

Let me explain. Goodman was quite blunt with her message: “We are in uncharted territory,” she said. “Never before have we seen such volatility.”

The estimates on the future price of crude ranges from a low of $75 per barrel to a high of $500. When even the experts are so far apart in their predictions, what chance does the average CEO, supply chain manager or carrier have in predicting future fuel costs?

Perhaps it would be wiser to prepare our companies for several different scenarios. How would continued pricing above the current $110 per barrel affect modal choices, for example, could be the starting point. Our own annual Transportation Buying Trends Survey shows that up to 44% of supply chain professionals have made changes to their modal selections as a result of rising costs.

What if the price climbs above $200 or even $250? How would consumers react and how would that change current shopping, and therefore transportation, models?

Having several models to work with I think would be a better approach than futile attempts to pinpoint a price in a market driven by volatility and where the only certainty is uncertainty.

Maybe it’s the impact of the humidity on my lingering cold or maybe the long-tradition of voodoo practices here is at play, but I’ve just stepped out of the opening luncheon at the American Trucking Associations annual conference in New Orleans and I feel I’ve just stepped into the twilight zone. Or, more precisely, into the bizarro reality of US politics.

The luncheon speaker was Dr. Frank Luntz, a high-profile pollster and political analyst (he had made Time’s list for America’s most promising leaders under 40) and I was looking forward to hearing him sort out the issues in the closing rounds of the 2008 campaign. After all, what happens in the US often has a great impact on what happens in Canada – both economically and politically.

Funny enough, one of the last conversations I had in Canada before heading to the airport was about the likely outcome of the US election. The jist of that conversation was me being reminded that despite the fact the latest polls show the Democrats with a comfortable lead, Canadians (at least those of us who consider ourselves to be in the political mainstream) have a hard time understanding what drives US voters. George Bush did somehow manage to be re-elected.

There were probably over 1,000 people at this luncheon, most of them executives, and I got an instant lesson in just how tribalistic US politics can be. Luntz asked the audience to indicate, by clapping, how they would be voting. I was astonished to see just how little support there was for Barrack Obama in the room.

When Luntz asked them if they would have preferred Hillary Clinton a total of one person dared to clap. And it wasn’t because they disliked women. They actually preferred Sarah Pallin to John McCain.

The fact that the Republican ticket would be favored in a room full of business executives is not surprising. What was shocking, to me anyway, was the strength and depth of the anti-Democrat sentiment. Based on the audience’s reaction it seemed to feel no Democrat could ever have its interests in mind.

Both sides have talked a lot about the need for politicians to set aside their partisan differences and work together. But this admitted outsider didn’t see much room for bipartisanship in that room. In fact, once the speaker saw that he had a predominantly Republican audience, the speech degenerated into basically a call to raise funds for the Republican party. I’ve attended countless speeches at industry events and this has to rank as the most bizarre.

It made me wonder what would happen if the Democratic ticket did win. Unless they also carried the Senate and Congress just how gridlocked would the political system become? And even if they did, could the Democrats work effectively with business interests, or at least with the transport industry that seems to loathe them? And how would a Democrat government in the US work with a Conservative government in Canada? Efficient commerce and transportation require smooth flows between borders, which requires a great deal of cooperation between Ottawa and Washington. Would this be possible when the two governments involved sit on opposite sides of the political spectrum? For example, some of the current initiatives such as the Transportation Worker Identification Card, are not supported by the unions, which have greater sway with the Democrats.

As sobering as I found those questions to be, experiencing first hand the pessimism Americans feel right now for the future was even more sobering. I’ve travelled to the US countless times over the past 20 years; never have I seen them so down. Even after 9/11 they were not like this. To me they seem angry and they’re confused about what’s happening to their economy. Those who believe the market works best when it’s left to work on its own have to face the reality that their deregulated business leaders screwed up so bad they ended up begging to be bailed out. And that their Republican president is responsible for the largest government intervention since the Great Depression.

For most, the events leading to the economic meltdown are so convoluted it is beyond their understanding. And as long as they remain concerned and confused they’re not likely to spend, which is bad news considering two-thirds of the American economy is dependent on the consumer. This could be a long economic downturn indeed.

As I write this, the North American, Asian, and European stock markets have plunged yet again amid a massive selloff of stocks and escalating fears about not just a North American but a global recession. In Europe they’re debating if they should even bother to open the financial markets on Monday. And I’m just back from the American Trucking Associations annual conference in New Orleans and can honestly say I have never seen the Americans so down about their industry, their economy or their country – even after 9/11 they weren’t this despondent.

A few days previous I was listening to Stephen Forbes on satellite radio saying “this is the closest to the abyss we’ve come since the Great Depression.” And the worst may be yet to come. According to Mark Vitner, managing director and senior economist with Wachovia Corp. and a panelist at ATA’s popular Eyes on the Economy session, all the credit problems in the economy have yet to surface and credit for business will not open up till sometime in 2009. Not only are we already in recession, according to Vitner, but our economic troubles will be deep and long.

It’s obvious there are very troubled times ahead. But managing supply chains during economic adversity is not something new. We did it 10 years ago when the dot com bubble burst. We did it after 9/11. We did it back in 81-82. And again back in 73-75 and those were really tough times when it took 16 months for the economy to show any signs of recovery.

But if you’re a supply chain professional, there is one key difference this time around. This time many of the leading CEOs have a good grasp of how important supply chains are to the health of their companies.

They’ve come to understand that a well-managed supply chain can not only reduce costs but be a significant factor in growing customer satisfaction, market share and revenues.
They seen studies that show, for example,

• that companies that are leaders in how they manage their supply chains have stock growth that can be 10 to 30 percentage points higher than those who don’t do a good job managing their supply chains.

• that if you’re a publically traded company and have to go to the stock market and confess to a major supply chain disruption you will lose, on average, 7% of your stock price the day of the announcement and between 30-40% over a three-year period.

• that companies that have Best-in-Class supply chains suffer one quarter the number of disruptions their competitors do.

The importance of supply chain professionals is no longer the best kept secret in business. The spotlight is on and your task as tough as it gets: Using supply chain innovation to gain competitive advantage in a volatile, downward spiraling market place where the money to invest in innovative new supply chain practices is going to be difficult to find. You’re likely going to be fighting with every other department in your company for the limited amount of funds that will be available to take on new projects.

In the coming year both you and your company will have a choice: You can decide to hunker down and wait for the economy to improve. Simply not take any chances.

Or you can decide to embrace the concept that change creates opportunity. And boldness to seize that opportunity leads to market leadership.

If you do decide on the latter, remember that boldness doesn’t always have to mean large projects and boldness is not something just for large companies with large teams. Good ideas and the conviction to see them through can take root at small companies too. Those that do take the path of innovation – finetuning their forecasts, rethinking their modal options, sharpening their inventory and distribution strategies, etc. -- I believe will find their efforts will deliver not just “one-time” gains but rather permanent improvements to their operations. These improvements will serve as the standard practices that will drive not only their survival in the current environment but their growth in the economic recovery that will eventually take root.

The most important thing is to not be paralyzed into inaction by the depth of the current problems but to roll up your sleeves and start working on the solutions. As CSCMP member Kevin Smith recently wrote in the respected association’s Supply Chain Comment, the companies that decide to take advantage of the current downturn will not only survive the slump but will emerge as breakaway leaders as the cycle winds to an end.

Just a couple of years ago we interviewed leading motor carrier CEOs across Canada about how they saw the industry changing over the next 25 years. To a man, they all agreed on the same thing: They saw the industry becoming much more consolidated than it is now.

There are 10,140 for-hire carriers in Canada. Of those, 6,100 are small carriers running 10 trucks or fewer and earning less than $1 million annually. Large carriers earning more than $25 million in annual revenues number just 97 in Canada and control 26% of the industry’s total revenues.

The leading CEOs we interviewed were actively involved in trying to change this balance. Their plans included both a continued focus on organic growth and acquisitions to ensure they had the size to not just survive but thrive. Their focus on growth was based on two developing market trends. On the one hand they saw Canadian shippers becoming more export minded, moving towards longer and more complicated supply chains, and looking for carriers that could provide them with sophisticated services and one-stop shopping. On the other hand, they saw large players such as UPS, FedEx and DHL moving into traditional LTL markets backed by sophisticated service offerings and awesome technology backbones. It was a typical case of go big or go home.

The time frame for getting to critical size, however, looks like it will be extended for some while, thanks to the current credit crunch. As Walter Spracklin and Jennifer Maeba of RBC Capital Markets pointed out in their recent Compass newsletter, “we anticipate negative organic growth to continue and acquisition activity to remain relatively quiet given the difficulty to secure financing in the credit markets.”

Already many analysts predict it won’t be till 2010 till the North American economy rebounds from its current downward spiral and some are predicting it could two years before the financial markets regain their legs. Question is, how many inroads will UPS, FedEx and DHL have made into traditional trucking customers by that point?

In my last blog I wrote about the growth strategies of large motor carriers being put on hold for some time because the current economic situation is making it harder to secure financing.

The difficulty to secure financing definitely presents a threat to large carriers trying to keep up with the new transportation giants such as FedEx, DHL and UPS entering their market space. The credit crunch, however, could prove fatal to the future of many small motor carriers.

The Canadian trucking industry story remains primarily one written by small carriers. Of the 10,140 for-hire motor carriers in Canada, 6,100 are small carriers earning less than $1 million in annual revenues and, according to our calculations, running fewer than 10 trucks. That means about 60% of the nation’s motor carriers remain small enterprises, most of them family owned. And although they generate less than 6% of total industry revenues, their importance is noted in their willingness to fill the difficult niches their larger competitors prefer to ignore.

But the small motor carrier base in Canada has been under siege for a decade. There used to be more than 8,000 of them so their numbers had dwindled by a full 25% before the current economic crisis. The fuel price spike of the late 90s did in many of those who were caught without a fuel surcharge in place. High insurance, staff, equipment and security costs continued to hammer them this decade as did the return of high fuel pricing.

And now comes the downward spiraling North American economy, the move by several large motor carriers into regional lanes traditionally served by smaller carriers and the credit crunch.

In the first half of 2008, total Canadian trucking bankruptcies already surpassed the total for all of 2007. It’s safe to assume the pace of bankruptcies among small motor carriers will quicken in the months to come. Had the economy not turned south and the credit crunch not been part of our reality many of these may have been considered for acquisition by larger carriers. That may not have been ideal from the point of view of small carriers and the shippers that prefer to use them, but at least it would have saved jobs and capacity.

But with the economy and the credit crunch being the way they are right now, the only answer left to many beleaguered small carriers may be to just close the doors.