The new normal

If you are longing for a return to the good old days of trucking, Lee A. Clair, a partner at Norbridge, Inc. (www.norbridgeinc.com), is not a person you should look to for comfort and reassurance. His message is: Get over it, get used to it and get on with it, because things are not ever going back to the way they were in the past. This is the new normal. Clair has considerable experience advising

If you are longing for a return to the “good old days” of trucking, Lee A. Clair, a partner at Norbridge, Inc. (www.norbridgeinc.com), is not a person you should look to for comfort and reassurance. His message is: “Get over it, get used to it and get on with it, because things are not ever going back to the way they were in the past. This is the new normal.”

Clair has considerable experience advising transportation providers and suppliers to the transportation industry and is a recognized expert in several fields, including electronic commerce/customer automation, activity-based costing and new product and service development. Before becoming a consultant, he was director of business development for IU International (now Landstar Systems).

Fleet Owner had the opportunity to visit with Clair about his view of the transportation industry today and the technology tools and strategies he believes can help companies succeed.

FO: What does “normal” mean in reference to freight transportation?

Clair: Normal is when you get what you are expecting. It means conformance to a standard, type or regular pattern. In the transportation industry, the term normal is used to refer to consistency over time in terms of prices, service levels and buyer/seller relationships.

The transportation industry has really experienced three different “normal” periods over its history: the early days before regulation when capacity was constrained and rates and profits were high; the period of regulation, when prices were tied to cost, there was excess capacity, low productivity and average financial returns; and the post-deregulation period characterized by declining prices, excess capacity, improved service to shippers and ever-increasing levels of productivity on the part of carriers.

It was this productivity, including going to longer trailers and more fuel-efficient trucks, as well as deploying a host of communications and management technologies to streamline operations, that enabled carriers to meet customer demands and still stay profitable post-deregulation. Most of the value from the productivity gains, however, was passed on from the carrier to the shipper as lower rates, rather than retained as higher profits for the carriers.

FO: When did the period you call “the new normal” begin?

Clair: The last 18 months marked the beginning of the new normal, that is, a shift away from the declining prices, excess capacity, increasing productivity and improving services everyone had come to expect over the years since deregulation. Today, it is a suppliers' and a sellers' market. Capacity is tight. As a result, carriers' rates are up and service levels are falling. Shippers are also dealing with longer, often global, supply chains and permanent trade imbalances. While 2004 was financially a good year for carriers, as the new normal progresses, these profits will not come as easily as increasing prices from suppliers and labor, combined with a lack of productivity gains, will make financial success a challenge.

The realities of the new normal are not short-term and they will combine to raise prices. Only improving productivity can change the game at this point.

FO: Realistically, what is the outlook for improving productivity further still?

Clair: There is a long list of trade-offs, of things working against each other, when you consider the issue of productivity today. Take fuel, for instance. On the productivity inhibitors side, diesel prices remain high and may go higher still when low sulfur diesel is mandated. Plus, we don't yet know what the impact of the 2007 emissions standards will be on over all fuel economy.

On the mitigating factors side, fleets are exercising operating discipline to conserve fuel by doing things like minimizing out-of-route miles, limiting idling and monitoring driver performance. Technologies like hybrid power and even fuel cells may also help to reduce fuel costs in the future. However, we do not expect to see any real relief in the near-term. It is the same in the case of labor. On the inhibitors side, we have an aging driver and technician population, plus a number of new safety and security measures that also wash workers out of the population. Driver lifestyle is also becoming an inhibitor. In an effort to attract and keep drivers, fleets are shortening trips and guaranteeing drivers more nights at home. While this may help to attract more people to driving as a career, it also runs counter to productivity.

There are just not many mitigating factors when it comes to labor. Intermodal: “drop and hook” trailer pools reduce the demand for drivers somewhat. Extended hours of operation on the part of shippers, ports, carriers and others could also be a tremendous help, but the question remains how to get the customers to change their practices.

FO: Are there productivity opportunities left in the equipment area?

Clair: Throughput at some shippers' facilities, ports and railheads has increased, thanks largely to technology, and many of the shippers and receivers realizing the criticality of “cleaning up” their operations. However, there is still opportunity for further improvement. Fleets are also using technology to track assets for improved utilization and to manage more driver relays and slip-seating. These factors are all pluses. Un-tethered trailer tracking also has the potential to make dramatic improvements in trailer productivity, but trailers are not one of the larger cost categories.

On the productivity inhibiting side, however, we are not likely to see trailer size increase any time soon, say to 57 feet, and the use of triples and doubles will probably not significantly change either. Highway congestion is also an inhibitor. By 2010, interstate traffic in major urban corridors is projected to exceed capacity. In some areas it already has.

Equipment prices are also not expected to come back down any time soon, due to materials shortages as well as to the 2007 and 2010 emissions standards. Railroads and container ship lines face similar issues. It is not a trucking-only situation.

FO: If improving productivity is the only way to offset higher prices, but there are no obvious productivity gains to be had in the near-term, where should fleets look for new opportunities?

Clair: From our perspective, the best remaining opportunity to improve productivity is to change shipper behavior. Information technology is the other ray of hope we see.

Carriers and shippers must take a fresh look at everything, including defining and becoming the “ideal” shipper or the “ideal” carrier. Together, they need to take a total supply chain costs perspective, blending and integrating all possible networks and processes and then sharing the benefits, which may not always occur within their own companies. It may sound like a cliché, but this is truly a time to seek out and embrace change.

FO: What are some items on your“ideal shipper” checklist?

Clair: IKEA's international transport manager, Thomas DeMarino, talks about “making the carriers want you.” Some of the items on his list include: better payment terms for carriers, quick turn-around of drivers, not using carriers' equipment for storage, pooling volume, monthly forecasting for better planning, working with third-party logistics providers, working with port terminals, looking for local sourcing and reducing administration via strategies such as e-pay and prepay.

Ideas from others include shipping early to spread out peak season volumes, shipping and receiving all day rather than at fixed hours, moving to 24/7 facility operations, redesigning networks, making facilities driver friendly, being flexible and having contingency plans in place, and reconsidering the role of just-in-time inventory management. Honda is even finding its own backhauls.

FO: Do you also have recommendations for carriers trying to deal with the new normal?

Clair: For carriers, the new normal has had positive as well as negative effects. For example, the capacity shortage has given some fleets the leverage to raise rates in order to help offset higher fuel prices and begin to restore healthier operating margins.

Fleets continue to experience cost pressures, however. In the long term, they cannot afford to have unnecessary drains on their profitability, such as customers with inefficient practices and processes. That is why we recommend that carriers identify and be prepared to “fire” their inflexible customers — those who prove to be unable or unwilling to cooperate to create new efficiencies. Then they should be open, honest and proactive with their good customers, bringing solutions and not just problems to the table. Fleets should also plan for shortages of all types — including shortages of fuel, drivers, everything — to avoid disruptions in service as far as possible.

Finally, innovate and automate are the watchwords for the future, and fleets should be prepared to share the benefits that come from change.

FO: Like the other “normal” periods in transportation that you identified earlier, will this new normal eventually be superseded by another reality?

Clair: Of course, but it is important to note that this is not a temporary situation. It will continue until we have another major recession or until there is substantial build-out of the infrastructure, removing the factors currently inhibiting productivity. In the meantime, there will be winners and losers among shippers and carriers. We believe the winners will be those who best adapt to the changes facing us all.

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