Jevic Transportation was founded in 1981, a year after trucking deregulation in the United States. Its closure on May 20, 2008 came as a shock to the trucking industry, representing the largest failure of an LTL carrier since the departure of Consolidated Freightways in 2003. The Jevic demise can be viewed as another in the long series of trucking company failures in the very competitive northeastern United States freight market. Its failure was preceded by A-P-A Transport in 2002 and USF Red Star in 2004.
A closer examination of Jevic and its operations tells an important story, a story that should be discussed in the boardrooms of trucking companies throughout North America. Jevic had a unique and innovative business model. It was established by Harry J. Muhlschlegel as a carrier providing direct dock to door LTL transportation. It rejected the hub-and-spoke breakbulk way of handling LTL freight. Focusing on large (5000 to 30000 pound) LTL shipments, the idea was to cut order cycle times by as much as three days. The company grew rapidly as a niche player serving shippers seeking superior transit times on shipments that fell within certain weight breaks.
The paradigm of the business at that time was sound. The trucking company could reduce costs by eliminating break bulk terminals and the associated handling costs of unloading and then reloading freight onto specific schedules. The shipper enjoyed the benefit of superior transit times. Jevic grew its business to $350 million in revenue and employed 1500 people.
In recent years, Jevic began to have difficulties as it went through changes in ownership, going from the YRC Group to being part of SCS Transportation to being sold to private equity group Sun Capital Partners in 2006. Why did a concept that seemed so clever and innovative at the time fail?
The most significant change has been in the cost of fuel. The business model was based on a totally different fuel cost / labor cost paradigm. The business was based on a “cheap fuel” foundation. It made economic sense to run essentially an irregular route LTL carrier, making pickups and deliveries over a much broader geographic area than the more traditional LTL players since the costs of driving additional miles were offset by the reductions in terminal and labor costs. This business paradigm has completely changed in recent years.
With fuel becoming the largest operating expense in most trucking companies, the foundation of the business exploded. In addition to the large and irregular routes driven by Jevic drivers, they were forced to buy fuel at gasoline stations at market prices, which made matters even worse. As business deteriorated, Jevic reportedly deviated from their business model by taking shipments less than 5000 pounds.
While this series of events were unfolding a Jevic, its LTL competitors were bypassing some of their own breakbulk terminals and running more schedules direct to destination, reducing their transit times. With their competitors operating in more fuel efficient, condensed pick and delivery areas and being able to purchase fuel more cheaply, the underpinnings of Jevic’s business model collapsed as did the company.
Here are some of the lessons learned. Every trucking company needs to reevaluate its business model. With fuel being such a significant cost, the energy efficiency of a trucking company should fall under the leadership of a VP of Energy Conservation. This individual must be charged with looking at the company’s operations from a fuel conservation point of view.
Every lane must be evaluated in terms of contribution, freight density and energy consumption. Can the company continue to operate in some areas if its freight costs and fuel surcharges do not cover its operating costs? Can Sales secure additional profitable revenues in those lanes to make them compensatory or should the company look at focusing on other regions and corridors of traffic or other businesses (e.g. logistics warehousing etc.)?
Does the company have the KPI’s and management tools to monitor its energy utilization and conservation activities? Does it have the right types of trucks on very lane? Does it have data on miles per gallon on every truck, every day? Does it have a solid speed limiting program? Does it have accurate data on empty miles? Is it ensuring that its freight costs and fuel surcharges cover full operating miles rather than just loaded miles?
The American Trucking Association reported that there were 935 trucking company failures in the first quarter of 2008, a 142.9 increase over last year. Many more will disappear before the economy improves. To survive and prosper during this difficult period, trucking companies need to reassess their operating paradigms and learn the lessons from the trucking companies that fly too close to the sun.
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