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Decisions Roundtable

MT: Looking At Over-The-Road Transportation, There Is Some Very Real Pain In The Marketplace. Just How Bad Are Things Right Now?

MT: Looking At Over-The-Road Transportation, There Is Some Very Real Pain In The Marketplace. Just How Bad Are Things Right Now?

Guimond: I think there is a lot of pain on both sides of the border, with probably a little bit more pain south of the border. But pain is pain and we are certainly experiencing our fair share of that pain in Canada.

Harrison: One of the biggest challenges will be the impact of the dollar on Canadian manufacturing (a key customer base for trucking).

We’ve also seen big shifts in fuel pricing, so how do you react to that? I think overall you will see further consolidation in the industry, in Canada and in the US. And I think it will be very much like any other industry, the strong will survive while others will either restructure or go out of business.

Einwechter: One of my sayings is that volume is vanity and profit is virtue. There are not many virtuous carriers right now. If I talk to American or Canadian carriers, the general theme is freight volumes are down anywhere from 15% to 30%. If you look at new truck sales they are down significantly because of that. I heard earlier of a major shipper doing quarterly checks on its carriers. I wish more shippers would do that to check out the financial viability of the carriers hauling their freight. Make sure you work with the right carriers because there are big challenges and there are failures either occurring or going to occur. Do I like it personally? I don’t like living through it, but as a carrier that is big and substantial, I think it will be good for the long term. It’s nature’s way of culling the herd. But it hurts like hell.

MT: As leaders in the industry, you all have implemented, I’m sure, survival strategies to take you through this time. What would you say have been the most effective strategies you have implemented?

Harrison: It’s a multi-pronged approach which includes making sure we are operating effectively, making sure we have the right headcount, are spending capital correctly, and we have the right dialogue with our funders and lenders. The other piece is the fact this presents an opportunity as well. In March, we announced the acquisition of three carriers, we are continuing to make investments in the business, we are top-grading talent and adding new roles. It comes back to financial stability, not only during this period, but in the period that follows, because if you don’t manage through this and be ready for the upside, you will be suffering.

Guimond: The most important strategy, for sure, is to stay close to the customer. Understand what they are going through and understand their needs and the needs of their customers. It’s very easy during these times when freight volumes drop to do your analysis to just assume that the decline in business you are experiencing from a particular client is because of the economy. It’s important to separate the economic decline from customers who may have left you. Another important strategy is to enhance and accent for your customers your value proposition. What are you bringing to the customer to help them get through this difficult time? Understand their business, understand their supply chain and then point out how your value proposition is going to benefit them during this time.

MT: Looking at things from the shipper side, how has the downturn affected supply chain operations?

Venslovaitis: We got whacked right from last year when everything with the economy started to go bad. There’s no money to hire new people; when someone leaves they don’t get replaced, so you have fewer people to do more work, especially if you are buying companies and taking on more work. The biggest agenda for the supply chain this year is focusing on reducing inventories. It’s obviously good not to have your money sitting on unnecessary finished goods or raw materials, but the problem is you are also shrinking your capabilities to service your customers and that falls back on transportation. When product does finally come in to the warehouse, you have to be able to react quickly. You may end up sending by road what you would normally send by rail, so your costs are going up as you try to service the customer.

Owens: There is a focus to reduce inventory at Nestle too, but you build inventory according to sales forecasts and they may not be realistic. We are now focused on trying to make our whole network variable. We are looking to go with 3PLs for warehousing, common carriers for freight; in essence, we don’t want to be sitting on bricks and mortar in this market because then your fixed costs become very burdensome. The other thing is potentially looking at decentralized inventories.

Kelly: It’s a pretty simple formula: Reduced Demand equals Reduced Production equals Reduced Inventory equals Reduced Freight and Reduced Asset Utilization. How do we work with that? We park trucks and idle railcars. It’s all about planning and good forecasting.

MT: When Looking To Reduce Costs On The Transportation End Of Things, What Are The Key Areas You’re Taking Into Consideration?

Owens: The rate is important. I want to make sure carriers realize that. But it’s not the only thing. In the CPG industry, we hold ourselves to a 95% on-time standard. At Nestle, we use a lot of intermodal into Western Canada and we had only 66% on-time in the west about a year ago and now we are up to 95%. So we’ve really worked with our carriers in the intermodal market to bring that up. If you are using intermodal or switching to a different mode of transportation, you can generate savings. The other thing we’ve implemented at Nestle is a project we rolled out last June to deal with the increase in fuel pricing. We put a routing table together and we work with our customers to decide, for example, what is the best day of the week to go to Vancouver and align that with equipment availability, which allows us to maximize the cube on a trailer when going into Western Canada. It’s not rocket science and it was very easy to sell to customers when you explain you are doing it to hold pricing for the consumer. We saved good money and were actually able to improve our on-time performance as I mentioned earlier.

Venslovaitis: For us, a lot of our large TL freight has gone to customer pick ups. For almost all of the rest of our non-TL business, we are left with LTL shipments going all across the country to smaller customers. What we are challenged with is trying to pack the most LTL freight into a trailer to get the best cube density utilization and use the least amount of trailers that we can. Last year, we invested in some technology that was originally designed to provide better loading of a trailer, but we found it can be rolled back into the WMS, allowing our warehouse to pick the pallets much more effectively to create a much denser cube on each pallet position so you are getting more on a trailer. Once we got the front end of that process worked out, we went back and said a better way to move western region goods is to do a line-haul and distribution rate versus an LTL rate. You start playing with the numbers and it’s frightening when you realize how much it was going to be. It requires stepping aside and looking at your volumes, looking at your limitations and taking advantage of getting cube density by the whole unit and then farming out the distribution in Calgary and Vancouver.

MT: There are more than 10,000 for-hire trucking companies in Canada, so there are likely a lot of strategies out there for surviving the downturn. When you look at the industry, what are some of the strategies you see being put in place that are the wrong ones and may be making it difficult for everyone else?

Einwechter: The obvious thing that is occurring is rate stupidity. We have been in business for 34 years and when I talk to our new class of driver recruits every week, I tell them that we make decisions every day that hopefully will allow us to stay in business for another 34 years. But it’s extremely tough in a marketplace where a lot of our competitors are making decisions for the next 34 days or even the next 34 hours. They need cash flow, they have truck payments to make. I liken truckers to the Old Wild West. They go into a bar, get in a fight, dust themselves off and go back at it. They can’t do that anymore though, they’re getting older. I see a shift happening. This recession in trucking has been going on since August of 2006 and the stamina is just not there. So we are seeing a lot of prospectuses coming across our desks from carriers that would like to exit with some dignity. There are a lot of really good people in this business, but I am surprised at the number of carriers who have been able to continue to exist in a very challenging environment and there are a whole number about to fail.

MT: We went through a good three or four years of strong financial times. I would have assumed during those times there would have been some money set aside by these companies to weather a future storm. We know that we get an economic downturn about every seven years or so. What happened?

Einwechter: I think that did happen to some degree, so people are living on borrowed time. There is a saying that a bull market disguises intelligence or lack thereof. I think that’s what happened; with the dollar at 60 cents, getting paid in US dollars was great, trucks were getting financed at 110%.

You would actually get the truck financed, get the money for the GST, pay for the truck a month later and get the GST refund -not a bad deal. We were out of sync and that’s why there was such a proliferation of new carriers.

But at the end of the day, we are in a demanding, challenging environment where we need the technology to monitor the freight; we need to have on-time metrics. I welcome metrics. Tell me that I need to perform at a certain level and measure me, or if you can’t measure me, I’ll do it and report back to you. That is key. That’s where so many carriers now are not going to make the grade, because they don’t have the ability to invest in technology, the desire or the interest. They are spending their kids’ inheritance now.

MT: The significant drop in freight volumes and excess capacity will continue to place downward pressure on rates. However, it is also causing carriers to shed capacity, which will likely place upward pressure on rates when the recovery hits. What’s the smart way for both carriers and shippers to handle these developments which make for an unstable yo-yo effect on pricing?

Venslovaitis: For me, for all the volume that I have and all the various lanes that have to be serviced, we have a small number of carriers that handle all the business. I feel it has taken a long time to develop those relationships and I trust them and I believe they trust me. I’m not taking calls from people who tell me they can haul my freight from Montreal to Toronto for $100 less than I’m paying today because that company may not be around tomorrow. I’m working with my carriers so they can continue to make a profit, because it’s much more important to me that freight is going to continue to move for the next year. I’m not out shopping rates.

Owens: Nestle pretty much mirrors that strategy. We’ve signed some two-and three-year contracts with carriers. We’re not about shopping rates, it’s really about performance and getting to the market and getting to our customers on time. There is always someone walking in with a lower rate.

MT: By how much would you estimate capacity has decreased in your sector, and is it likely to come back?

Guimond: It’s difficult to place an absolute number on the capacity reduction that has occurred, but certainly there has been significant capacity reduction in all the transportation sectors. Especially with the idling of equipment, laying off of drivers and reduction to the volumes experienced. When the economy does come back, it will be those carriers who have set up processes and procedures to improve their service and improve their relationship with customers that are going to thrive. When the volume does come back, capacity, especially for the LTL industry, is fairly easy to ramp up again with respect to drivers and equipment. There are areas of the country, Western Canada for example, that may experience difficulties as we did before, but overall, the ability of the industry to ramp up capacity is fairly good and somewhat flexible.

MT: In the past, whenever we’ve had an economic upsurge, a lot of the capacity additions have come from the smaller and medium-sized companies. Will those players be able to come back this time or is the financing so tight that those players will no longer be able to be players?

Harrison: I don’t think you are going to see capacity come back. I think the pressure from the capital markets and the learning that has gone on will make people much more cautious coming out of this downturn. Volumes now are off 20-25% and you look at some of the forecasts for 2010 for maybe 4-5% growth, you are still not going to see the return to capacity we’ve seen in the past. I think we’re coming into a very different world entering 2010. I think you will see everyone focusing on what investment to make and you will continue to see bankruptcies and consolidations. The strong will survive, but the challenge will be with the small and medium-sized carriers who will struggle because at the end of the day, if you don’t have cash, you can’t pay, and margins have always been tight in this industry.

Einwechter: The trucker is the last frontier of the cowboy and the entrepreneur and I think that’s great. But it will be tougher to do that, and with all the challenges out there, the numbers will definitely go down.

In regards to capacity specifically, I’ve spoken to carriers who have taken 15% capacity out of their fleet and we are probably about the same. But when volumes are down 20%, there is still some space to tighten up before seeing the rebound. As far as growth, the big regulators of this industry will now be the financial institutions and the insurance companies. The banks are going to be so much tougher in their criteria to lend money, so you are not going to see easy access to capital. By 2013, when all of this is in the rearview mirror, it will get looser again, but not as liberally as we’ve experienced.

MT: With so many carriers facing bleak revenue projections and sinking profit margins this year, the possibility of transportation supplier bankruptcies must weigh on your mind. As purchasers of transportation services, how do you go about minimizing the risk of service disruption? Are you looking at carriers more closely?

Kelly: This environment is not the time to go out and try new carriers unless you’re willing to assume the risk of doing that. We are staying with our incumbents, we are staying with the carriers that have helped us through the years and with whom we have built up relationships. And we try to work with them to gain efficiencies from the network.

Owens: I’m running a quarterly check with Dun & Bradstreet and anything else we can get our hands on. I’m really looking to make sure I have viable business partners; it’s not going to do me any good if I have a major carrier go under. If we have someone who is high risk, then it’s a monthly review. It’s a different environment out there. Capital is harder to get, especially for smaller players. We need to be aware of that and minimize the disruption. We also try to go with intermodal -if CN or CP go under, we’ve got a bigger problem than trying to get a chocolate bar to Vancouver.

MT: Ten years down the road, do we see a much more consolidated industry? How is that good for shippers?

Harrison: I think we will see more consolidation. There is no doubt about it. There are carriers that want to be seen as an acquisition target. In terms of a benefit to the shipper, I think there is great benefit.

There is economies of scale, the ability to invest in the business, the ability to have greater reach, not only domestically, but globally. It’s stronger companies which create a stronger industry and bring more value back to the customer. It will be a good thing for the industry.

Guimond: I definitely see mergers and acquisitions occurring. They are occurring right now and will continue to occur. If the acquisitions are strategic in nature, such that the acquirer is increasing their scope and capabilities, it will be beneficial for shippers when the carrier provides a better and broader product for their customers.

MT: Operating efficiently during difficult times is paramount. Are there technologies which you insist carriers must implement in order to be more efficient and be able to report to you in a more efficient manner?

Kelly: As of late, we are contracting with carriers with GPS technology. We need the visibility to know where the truck is. We do a lot of crossborder shipments and CTPAT requires knowing where the truck is, where it’s going, and if it can be intercepted. We are also looking for truck availability. A lot of our lanes are such that our trucks can do two trips in one day. If a truck is held up somewhere and can’t get to that second load, we need to know that in advance so we can plan accordingly.

Venslovaitis: It depends on the lane. In some places, we use small carriers and they don’t need GPS or EDI capability. I just want them to pick it up, drive it five kilometres and make the customer happy. In other lanes, for example Toronto to Western Canada, it is about both technology and another level of customer service. We are getting downloads every morning with what’s going on with each shipment. And I don’t want that information coming to the transportation department; I want it going directly to customer service. No matter who the client is, the information gets funneled directly to our customer service representative so they are on top of their customers.

MT: What is the most significant way in which the current economic turmoil has changed the shipper-carrier relationship?

Venslovaitis: I don’t know if it has for me, to be honest. We’ve always been pretty open and honest with carriers and tried to give them as much notice as possible about what’s going on with our business -whether it’s shedding volume or buying a new company or expecting spikes or expecting our cube density to change. We are trying not to hide anything because we realize they are going out and investing in equipment and need to make the right financial decisions for themselves. We’ve been lucky that most of our carriers have been willing to come to us about reducing their capacity and asking how that would affect us. We’ve tried to be open and honest in the past and it’s even more important now because they are under the gun financially.

Owens: I think first, with the current economic crisis, one of the things we’ve done is be very transparent as well, recognizing operating capital in particular can be a challenge. I’m on our payables people making sure we are current. If you’re a carrier and the days outstanding are getting longer and longer, talk to your customers. Your logistics contact may not even know it is being dragged out. Going forward, I just see that we are going to be a lot more transparent with a lot more partnerships where it isn’t just the rate.

MT: Allan, we’ll give you the final word. If there was one piece of advice you would like to give carriers that want your business, what would that be?

Kelly: We are all in this together, both the shipper and the carrier, to make the customer successful. Try not to only understand what the shipper wants, but what his customer wants. I consider logistics like tennis or volleyball: those who serve poorly, lose. We’ll pay for service because at the end of the day, the customer has to be successful.

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