Not only has the U.S. economy been decimated by the longest and deepest recession since the Great Depression lifted, but experts contend the recovery now under way is leading us straight into a “new normal” of economic activity — to a level that will force consumers and businesses alike to adjust their activities to diminished expectations for the foreseeable future if not well beyond.
Trucking will get a real taste of this new normal throughout 2010. Motor carriers especially will struggle through the first six months or so awaiting the bump-up in freight levels many industry analysts predict will be widely felt by midyear. From then forward, they will benefit from tonnage that will continue to rise steadily but slowly. At the same time, they will have to keep in mind that freight volume will not again reach pre-recession highs anytime soon — let alone at any certain future point in time.
The key to profitably managing a truck fleet in the new normal will be to continually put in place innovative cost-control measures and operational strategies. And to execute all that within a long-term planning framework, rather than rely simply on the seat-of-the-pants approach to executive decision-making that trucking has for too long glorified. To be sure, metrics-driven management is coming more and more into play and is with trucking to stay.
It certainly won't be business as usual in 2010. According to analyst Chris Brady, president of Commercial Motor Vehicle Consulting, a “moderate freight recovery” began last year when consumer and business spending started pulling commodities through the supply chain. “But the freight recovery [ahead] will be sluggish due to modest growth” in spending by consumers and businesses alike, he points out.
Analyst Eric Starks, president of FTR Associates, says 2009 ended with “modest” freight growth and he pegs the 2010 growth rate as being “in the 2.8% range.” Starks observes that “given the huge decline in freight over the last few years, the increase in freight in 2010 will not be enough to entice fleets in large numbers to buy new, more expensive [engine] technology when such equipment is first made available. Many have usable miles on older equipment to get them through the initial uptick in freight demand.”
That the initial freight uptick this year won't be reason enough alone to buy new trucks underscores how different — and above all, challenging — working through this economic recovery will be for motor carriers. That means fleet management must look at everything with a fresh eye.
For starters, that view should entail the approach fleets take to marketing, advises management consultant Duff Swain, president of Trincon Group. “There is no time like now for fleets to get back to the basics of selling,” says Swain. “More than ever in this environment, they must be adept at marketing their services. That's because shippers will be concerned about the capacity [left] in the industry [when the recovery is under way].”
Swain figures that shippers have learned from this recession about the value of establishing and maintaining relationships with motor carriers that they can be reasonably confident will last through this — and future economic downturns.
When it comes to determining which services to keep offering or to add, he says to bear in mind that while “trucking will continue to provide the lion's share of freight transportation, how trucks will be used is changing. There are more and more shorter hauls being run. While the average distribution run might be 500 or 600 mi., that's shrinking to 300 mi. where warehousing is involved.”
Swain argues that the desire to boost truck utilization while freight rates remain constrained coupled with the wider use of information technology that pushes productivity data to the fore, should lead more fleet managers to implement what he terms “multi-shifting,” also known as slip-seating, trucks.
“With the cost of equipment rising faster than rates can be increased and the advent of shorter hauls, trucks can be put on multiple shifts — slip-seated, if you will — to boost productivity and cut operating costs,” he contends. “This is utilization that benefits fleets, but not owner-operators who can't have others drive their trucks.” But Swain points out that as “trucking's role in the supply chain evolves,” there will be lanes in which multi-shifting will not make sense — “quick inventory turns with short hauls offered at a higher price” — and that is where owner-operators will survive as niche service providers.
“This evolution will be driven faster by the consolidation of freight haulers that will accelerate when the next big fuel hike hits and the smaller carriers can't get [fuel] surcharges through,” he adds. “And when fuel prices go up, larger carriers will be wise to use asset sales to strategically acquire smaller players. Then the drivers newly acquired can be put to work in the larger carrier's newer trucks to make them productive again, which would benefit their bottom line.”
That would be one way to get trucks rolling again relatively fast. Another option, points out Kenny Vieth, partner & senior analyst with ACT Research, is to consider shopping the late-model used-truck market. He says that with sticker prices on new trucks expected to rise $6,000 to $10,000 on 2010 models (due to new EPA-mandated emissions rules) and used-truck values that have fallen by $10,000 or more makes older equipment very attractive despite higher mileage. “When you're looking at a 2005 or 2006 truck being $20,000 cheaper compared to a 2010 truck, that kind of value is hard to ignore,” says Vieth.
Terry Williams, editor of Penton's Truck Blue Book, sees the used-truck market stabilizing rapidly. He considers that good news for dealers, sellers and even buyers in many cases, as values for used trucks are starting to even out after a year or more of wild fluctuation.
Yet another way to get wheels on the pavement as quickly as freight returns is to rent equipment. Bill McCouch, vp of business development for AmeriQuest Transportation Services, which provides services to for-hire and private fleets, advises that two leading indicators of freight coming back are a rise in the remarketing of used equipment and an increase in short-term equipment rentals.
If a decision to buy new equipment is in the offing this year, many fleets will likely turn to the “captive” finance arms of the truck OEMs, which tend to stick with the industry through thick and thin in support of their parent firms' long-term business interests. “There is still excess capacity in terms of matching trucks with freight volumes,” remarks Steven Goodale, director of Global Credit for Daimler Financial Services. “New-truck acquisitions are still very thin [going into 2010].”
And Goodale says to expect “continued conservative discipline” to be necessary, specifically regarding fleet access to working capital lines of credit. “It is evident in our opinion that the banks are focused on limiting their exposure to only top-tier fleet accounts based upon actions being taken by them to limit flexibility or availability of working capital lines.”
But he also points out fleets can work around the continued business credit crunch by “proactively working with their working-capital banking relationships, making sure they address bank concerns related to their receivable base, equipment valuation and overall covenant compliance. From an equipment financing standpoint, we are urging our fleet customers to secure lines of credit today for future acquisitions since we feel strongly that once the industry recovers, tremendous volume [in financing activity] will likely be experienced due to the ‘pent-up’ demand associated with the aging truck inventory.
“Restructuring activity [for existing credit] is marginally down year over year, as numerous small carriers have exited the business,” Goodale continues. “We remain cautious, especially for the near future — the first quarter — as it is traditionally the slowest period in terms of volume and cash flow for the year, with many challenges placed on fleets associated with license, tags and insurance premiums due. Again, working closely with a carrier's working-capital line provider and equipment lenders will be critical if the [freight] market continues to be depressed.”
Whether it's making the numbers work to secure financing or to cut costs to protect or enhance cash flow, AmeriQuest's McCouch contends that now more than ever fleets can ill afford not to pay attention to all the metrics of their operations.
“Living by the adage ‘what gets measured gets done’ has never been more important,” he observes. “To have to do more with less usually taps one's ingenuity and creativity, and having a proper set of metrics available to all would help properly evaluate the success or failure of changes as they are implemented.”
McCouch says areas typically targeted for cost reduction are labor, maintenance and purchasing. But the decisions made about these critical arenas must be carefully weighed, given the tough year this will remain for most in trucking.
“Cuts in maintenance staffing especially may hurt in the long run as major investments in training good quality technicians may wind up a sunk cost,” he states. “Once those folks are gone, they may be hard to replace and as years go by and technology continues to advance, those techs may be hard to get back or replace. Short-staffed maintenance managers often have to send equipment to a dealership and incur a higher charge-out rate than when done in house. So careful diligence and sound intelligence is paramount in this decision.”
STRENGTH IN NUMBERS
He thinks parts purchasing decisions should also be approached strategically. “Price is important, yes, but is it the only thing? What good is it if a fleet saves $0.75 on something if the cost of acquisition incurs additional labor and administrative costs?”
McCouch advises that more fleets are combating this penny-wise-pound-foolish predicament by joining a group purchasing organization (GPO) whose “strength in numbers helps in the negotiations with the supply base to obtain the best possible price. Along with this, many of the back-office process costs now lie in the hands of the GPO. Negotiations, vendor management and software costs can all be absorbed by the GPO.”
He also counsels that skyrocketing administration and transaction costs can be brought back to earth by using an IT-based “workflow system that links the entire supply chain to provide an end-to-end solution. Again, not just price is important to gain efficiency.”
Indeed, successfully trucking in the new normal that starts this year will require fleet managers to measure, consider and act — over and over — with enhancing efficiency ever in mind.