What drives the success and fuels the fears of motor carriers?
July 29, 2007
July 29, 2007
I’m often asked by companies selling products into the transportation industry to outline the major trends that are both driving the success and fueling the fears of their motor carrier customers. I put it down to three main trends: Accountability, Complexity and Cost. Over the next few blogs I would like to closely examine all three.
Let’s look at accountability first. To do that, we must take an important step further back in the supply chain and look at the motor carrier customer, the shipper. I think they are starting to see transportation in a new light. Thirty years ago, heck, even 10 years ago, companies focused their attention on product development, marketing, sales. How the product got to market, well, that wasn’t really considered critically important. Within the past 10 years, however, there have been a number of impressive studies that finally proved the existence of transportation’s equivalent of the Holy Grail. That supply chain management has a distinct and quantifiable impact on a company’s financial performance. And, of course, the majority of supply chain management spend, goes to transportation.
For example, one well-publicized study found that the compound average annual growth in stock value of companies considered leaders in how they managed their supply chains was 10 to 30 percentage points higher than those who DIDN’T do a good job managing their supply chains.
A ground-breaking study by a Canadian professor, Dr. Kevin Hendricks who was the University of Western Ontario at the time (he’s now at Wilfrid Laurier and his thoughtful research is always worth a read), looked at things from the opposite end. He studied what happens to public companies when they don’t get their transportation and logistics practices right and can’t get product to market for one reason or another – say their carrier is on strike just as the holiday season rush starts or an important shipment of a new line is stuck in a hopelessly congested intermodal yard for days. What’s the stock market’s reaction? For anyone who thought, well, the stock market probably wouldn’t take notice, the results were eye opening.
Hendricks tracked more than 800 companies announcing supply chain disruptions. He found they suffered, on average, an immediate 7% drop in their stock market value the day of the announcement. Imagine taking seven percent of everything you will earn this year and throwing it out the window.
The stock market did not forgive.
Nor did it forget.
Over a three-year period, those public companies announcing supply chain disruptions suffered an incredible 30-40% valuation loss. Supply chain disruptions proved to be more damaging than announced decreases in capital spending, IT problems, even plant closings.
Now CEOs get to be CEOs because why? Because they’re good at the “S” word. Survival. (How many of you thought I was going to say, sex? — did you know by the way women have something like 860 different thoughts a day. Men have about the same number, but they happen to all be about the same thing, but I digress.)
Anyhow, it didn’t take long for CEOs at top companies looking at such studies to figure out that transportation was actually important. A recent study found almost three quarters of company executives agreed their CEO now views supply chain management as either “very” or “extremely” important. In fact, for many companies, supply chain risk is now considered the top threat to their main revenue generators.
What that means for motor carriers, is that that they are under the microscope. The margin for error is razor thin. A Canadian study we published in our last issue about the transportation buying habits of shippers in the Windsor- Quebec City Corridor found that just a 1% increase in perceived security risk for a carrier was enough to cause a 3 fold decrease in the likelihood that carrier would be chosen again. Just a 1% increase in shipment damage caused by a carrier was enough to lead to 10 FOLD decrease in the likelihood that carrier would be chosen again.
Our own annual study of more than 2,000 shippers across Canada examines 7 key performance indicators that shippers consider when choosing one carrier over another, across all modes. Every year, we find trucking is held to some of the highest standards among all the modes.
Let me give you one example of what I’m talking about. A few years ago I was out to speak to the logistics team at Home Depot Canada, which is responsible for an inventory greater than 50,000 SKUs sourced from about 2,500 different vendors and totaling over one million shipments per year. But it’s not sheer size of the operation that presents their most daunting challenge. It’s the absolute emphasis on competitive pricing and the distinct seasonality of the business.
When that first warm spring weekend hits and do-it-yourself-minded Canadians start thinking about their gardens and other outdoors projects they head to a Home Depot store. And they expect to find the merchandise they’re looking for on the shelf. If it’s not there, they’ll walk over to the nearest competitor.
The easy solution is to have a robust distribution centre network so Home Depot would have the ability to pre-hold inventory and make last-minute adjustments easier to deal with. But remember Home Depot’s emphasis on a lean operation. They don’t want the costs associated with a distribution empire. The company got to where it is by being able to buy large quantities of merchandise and sell it, in essence, “right off the truck.”
Home Depot has more than 100 stores across Canada, hundreds of suppliers, thousands and thousands of products. Yet up to 90% of merchandise is moved directly from the manufacturer to the individual stores, using just a core group of motor carriers, Toronto’s Muir’s Cartage being the main player among them. And the motor carriers are the ones expected to make this very precise, highly fragile arrangement work. If a Home Depot vendor calls Muir’s today and has ten times the amount of freight it had yesterday because there is a seasonal spike, Muir’s has to have the capability to be able to make that work, in what ever city it’s required.
Do you think their performance is under the microscope?
Do you think they can afford to have trucks sitting in the shop when a seasonal spike hits?
So what does that mean to suppliers serving the Canadian trucking market?
Quite simply, motor carriers can’t meet such high expectations without your help. They need expert help to select the right products for their operation. They need products that work the way they are supposed to. And they need immediate help, not excuses or stone walling, when they don’t.
With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics. All posts by Lou Smyrlis