"Freight Broker Training" "We can't talk out of both sides of our mouth anymore"

Freight brokers & Freight Agents we must understand the time has come that the shippers must understand if they are to get quality trucks they must pay the price the following article by Mark B. Solomon lays it out it is important to read and understand

He didn't ask for the mantle, but a case can be made that Tom Carpenter, director of North American logistics for giant International Paper Co. (IP), has become the conscience of the nation's shippers.

At the Council of Supply Chain Management Professionals' 2010 Global Conference in San Diego, Carpenter was asked if shippers should be taken to task for using the economic downturn and truck overcapacity to beat up carriers on pricing. He replied that "if the marketplace is giving us [excess capacity at low rates], we have a fiduciary responsibility to bring some of it back."

At the 2011 CSCMP conference, Carpenter's comments took on a more strident tone. "The shipping community has done a good job of managing our carriers' margins," he said, the sarcasm evident in his voice.

Big shippers like IP are tough negotiators with high expectations, and are accustomed to demanding and receiving superior service at low rates, Carpenter said. But in a world of shrinking capacity, a diminishing supply of qualified truck drivers, and escalating truck life-cycle and regulatory compliance costs, the days of shippers' having it all are fast disappearing, Carpenter warned. "We can't talk out of both sides of our mouth anymore," he said.

Carpenter wasn't the only big shipper at CSCMP to sound the alarm. "We probably haven't ever been through what we will be going through in the next four years," said Mark Whittaker, vice president of PepsiCo Transportation, a unit of the beverage and snack giant that spends $3 billion a year on global transport services and boasts the largest private truck fleet in North America.

For shippers, what lies ahead could be as challenging as what Whittaker fears. From 1980, when the trucking industry was deregulated, to the year 2000, the market experienced price deflation as a plethora of new players—and capacity—entered the market, emerging technologies fostered greater efficiencies, and operating costs held relatively steady. During that period, the cost of transportation fell 65 percent in real terms, according to Noel Perry, managing director and senior consultant at Nashville, Ind.-based FTR Associates.

The last 11 years have been the inverse of the previous 20, according to Perry. Since 2000, fuel, labor, asset, and regulatory costs have climbed, barriers to entry have increased, and in the past 12 to 18 months, truckload capacity has been taken out of the market. Add to that the obsession of many shippers with maintaining lean inventories and their increasing reliance on truckers to serve as a sort of "mobile warehouse," and it's clear the issue of available capacity—and the costs of procuring it—will define the industry for the rest of the decade, Perry said.

"It is probable that capacity shortages will last for several years, not just for one," Perry told an audience at this year's CSCMP conference in Philadelphia. "We could easily see sporadic supply chain failures based on capacity shortages. That's something we are not used to."

Sticker shock
Shippers could also be in for sticker shock where freight rates are concerned. Perry said rates will need to rise 15 percent just to offset the higher costs that truckers will incur to attract and retain good drivers, whose ranks are expected to thin as a result of federal regulations like CSA 2010, an initiative designed to winnow out drivers with marginal safety records.

Making matters worse is the level of driver turnover, which is hitting uncharted territory. Thom S. Albrecht, transportation analyst for BB&T Capital Markets, said driver turnover—or "churn"—hit a stunning 90 percent in the third quarter, more than double the turnover rate for the same period in 2010. Maintaining a stable workforce will cost truckers plenty, and it will be an expense that will likely get passed on down the chain.

At the same time, trucking executives said they would not be adding new capacity for the foreseeable future. The skyrocketing cost of replacing new rigs, combined with freight rates that aren't fully compensatory for the investment, makes it economically infeasible to add to fleets, according to carrier executives. The best shippers can hope for is a straight swap of power units, a move that will put newer rigs on the road but won't have any net effect on capacity, truckers said.

"There is no credible reason to go to the board to add capacity when the return-on-asset [level] is under 5 percent," said Derek J. Leathers, president and COO of truckload carrier Werner Enterprises, at a CSCMP panel session.

Kenneth Burroughs, vice president of revenue management for UPS Freight, the less-than-truckload unit of UPS Inc., was more direct, telling the same session that "we aren't going to be adding terminal or truck capacity."

Increased liability exposure
As truckers grapple with driver shortages and fleet reductions, shippers are being warned not to expect the service quality or reliability they have grown accustomed to. Donald A. Osterberg, senior vice president of safety and security for truckload and logistics giant Schneider National Inc., said truckers face a plethora of government mandates ranging from CSA 2010, to proposed changes in driver hours of service (HOS) regulations, to the 2010 rule that requires virtually all truckers to install electronic on-board recorders (EOBRs) to ensure their drivers are complying with HOS regulations. The EOBR rule, which would make it nearly impossible for drivers that once used paper logs to exceed their HOS limits, is in legal limbo after a federal appeals court in late August ruled that the policy doesn't do enough to ensure that truckers won't leverage the devices to force drivers to stay on the road even when they're tired. The rule, set to take effect in mid-2012, has been remanded to the Federal Motor Carrier Safety Administration for further consideration.

Osterberg said the cumulative effect of these mandates will be to force the supply chain to permanently rationalize service expectations. "I don't believe the current levels of service are sustainable going forward," Osterberg said at CSCMP.

Osterberg advised shippers to take their legal exposure under CSA 2010 very seriously, saying the plaintiffs' bar is chomping at the bit to pursue deep-pocketed shippers for monetary damages in the event of a fatal truck-related accident on grounds the shipper should have known under the CSA guidelines it was engaging a sub-standard driver and carrier. In addition, shippers that were shielded from liability through indemnification clauses written into carrier contracts will see that protection erode, Osterberg said, noting that 30 states already have non-indemnity laws on the books.

"Shipper liability is inevitable, and CSA will exacerbate its exposure," he said.

Shippers speaking at the conference say they are becoming increasingly proactive in tracking their drivers' performance. "We monitor [CSA] scores on a monthly and quarterly basis," said Michael F. Heckart, manager, North American logistics strategic sourcing for the agribusiness giant Deere & Co.

Heckart said Deere's relationships with its carriers are deeper than perhaps they've ever been. "It's not enough to just have a conversation with the carrier anymore," he said.

The difficulty in managing a customer's demanding requirements with fewer rigs and drivers at their disposal could compel some shippers to "roll the dice" and continue to use carriers that might be available but whom they know would be on the CSA bubble, according to Carpenter of IP. "Some [shippers] are probably doing it," he said. "But they are playing with fire and they're going to get burned."