TORONTO, Ont. - Desperate times call for desperate measures is a wellworn phrase and a too often used practice when the going gets tough in the transportation industry. But slashing rates to attract b...
TORONTO, Ont. – Desperate times call for desperate measures is a wellworn phrase and a too often used practice when the going gets tough in the transportation industry. But slashing rates to attract business during an economic downturn was identified as the worst mistake a motor carrier can make by the experts participating in Markel’s Driving a More Profitable Trucking Business 2 seminar, part of the company’s Let’s Talk series.
“Undercutting yourself and getting into rate wars – you can’t be doing that. Our costs are going up so why should rates be going down?” emphasized Kevin Snobel, general manager of Caravan Logistics, a mid-sized LTL, TL, logistics and warehousing provider.
The motor carrier industry is experiencing a sharp reversal of the rate trends that had driven shippercarrier relations since the end of 2003 when growing freight volumes and tight capacity placed carriers in the driver’s seat during contract negotiations.
By 2004, 80% of shippers were reporting they had agreed to a rate increase for the year. In comparison, back in 1999 only one quarter of shippers using trucking services had agreed to a rate increase. Just as important was the magnitude of those increases.
Back in 2004, almost six of 10 shippers were agreeing to rate increases above 4%, exclusive of the fuel surcharge, according our own Transportation Buying Trends Survey.
But the drop-off in freight volumes over the past year (Canadian GDP was negative in the first quarter of this year) has led to a drop in capacity concerns among shippers and the power during contract negotiations has shifted back to them.
By last year, only about one-third of shippers buying trucking services were paying increases above 4%, according to our research. This year it’s down to just a quarter. And the carrier CEOs participating in our annual Shipper-Carrier Roundtable complained that contracts in a lot of cases don’t seem to be worth the paper they are written on. No sooner are they signed than the carrier finds the shipper is being enticed by lower-priced offers and wants the contract revisited. Probably in 85% of the RFPs the incumbent carrier that had the business is able to resecure it but the rate ends up being rationalized down to a lower level.
“A lot of carriers get more hooked on cash flow than on margin,” cautioned Ray Haight, executive director of MacKinnon Transport and recently named chairman of the North American Truckload Carriers Association. “You need to have discipline in your rate setting. You just can’t be buying volume because that’s a slippery slope.”
He pointed out the smartest operators take all costs into account before setting their rates and the most sophisticated motor carriers are using intelligence tools to help them set their rates by lane. He added that MacKinnon Transport has a rate grid that no salesperson is allowed to violate in trying to secure a contract without proper justification.
The need to consider the impact of continually high costs despite a cooling North American economy (the latest report shows Canadian GDP was negative in the first quarter and US economic growth has cooled considerably as well) is certainly borne out by the latest for-hire carrier financial statistics. Consider the most recent revenue and expense reports reported for the nation’s largest motor carriers, reported by Statistics Canada:
1st Quarter 2007: Revenues down 2.0%; Expenses down 1.1%
2nd Quarter 2007: Revenues down 1.3%; Expenses down 0.5%
3rd Quarter 2007:Revenues down 0.7%; Expenses down 0.1%
Clearly, the nation’s largest carriers are not only suffering from a drop
in revenues but their costs are not declining in similar fashion.
The financial results from smalland medium-sized carriers are even more problematic. As a result, the operating ratio of the nation’s largest carriers has deteriorated to 0.95 on average. Making five cents on the dollar is a marked deterioration from the profit margins witnessed a few years ago and considered by industry experts to be just at the edge of what’s considered healthy.
Snobel and Haight pointed to several factors that must be taken into account when setting rates and securing new business:
Understand the market trends for specific lanes rather than setting general rates. You must do this to ensure you’re not offering rates below market value. As Snobel pointed out, if the market rate for hauling to destination X is $750, you don’t want to be offering rates at $500. He added that’s where owner/operators who leave a motor carrier to start their own business often get into trouble – they end up low-balling rates by hundreds of dollars. That hurts not only their own fledgling company but the industry as a whole if it ends up having to adapt to the new lower rates. While some may consider rate indexes a helpful source, Haight said in his experience they are not of much value. “They recommend, 6-7% rate increases every year and that’s just not going to happen.”
Take the total round trip costs and the total value and cost of the contract into consideration. Insurance costs, for example, need to be figured out for the different commodities hauled. How easy the freight is to load, get across the border and deliver to its destination are other issues to be taken into consideration. It’s also important to consider the impact of the new business on the fleet’s owner/operators. “You have to keep your people profitable to keep them happy and, in turn, keep yourself profitable,” Haight said.
Consider if there are strings attached. Haight related his experience with shippers who will provide what initially seems like regular business in a lane the carrier wants only if the carrier will also accept loads in a lane the carrier does not particularly want. “Usually what happens is the loads that you do want don’t end up coming in the numbers expected and the ones you don’t want are there like clockwork. You have to talk your way out of such situations.”
Consider the impact a new contract will have on your capacity. You may find that the cost of having to invest in additional equipment to handle new business eats away at the margin you initially expected to make on the new business. “It’s unfortunate that truckers like equipment too much. Do you want to be a 50-truck fleet making money or a 100-truck fleet that is losing money?” is a question motor carrier executives must ask themselves.
Is the new contract with the right kind of shipper? Large shippers will tend to set the rates but compensate by providing long-term stability while smaller shippers will fight for every last detail, particularly during tougher financial times. You need to consider the fit with your operation.
Don’t do too much business with one shipper or in one sector. Snobel said when he joined Caravan nine years ago, the company had the majority of its business in one industry, a situation it worked to resolve because it placed it in a precarious situation during economic downturns. “If you are heavily involved in one industry, with everything being cyclical, you’re going to be in trouble. You have to diversify,” he advised. Both Snobel and Haight also cautioned against doing too much business with a particular client. “If a contract is more than about 30% of your business, when he’s in trouble, you’re in trouble.”
Help shippers lower costs without dropping your rates. Many carriers are starting to offer intermodal solutions and helping shippers drill down into their operations to uncover costs due to inefficiencies – costly delays at the loading dock, for example. “If you are going to have a winwin relationship with your clients you have to have shippers that are profitable and offering them service options is key to that. If you don’t do that, someone else will mow your lawn,” Haight said.
Do use surcharges where appropriate. If you don’t, you’re allowing your business to bleed at the edges by not cover
ing costs beyond your control. A study conducted by the Freight Carriers Association a few years back found that of the 35 hours, on average, that truckload drivers spend in loading and unloading tasks, 23 hours are spent just waiting to load and unload. That’s a considerable amount of inefficiency to be borne by the carrier. Our Transportation Buying Trends Survey found that about one-third of shippers are paying detention surcharges, usually if they keep the driver waiting for more than one hour. Our research also indicates about one-fifth of shippers using trucking services pay border security and border delay surcharges. And while almost every shipper responding to our Transportation Buying Trends Survey reported paying a fuel surcharge, Haight said, surprisingly, there are still some carriers who may not be asking for a fuel surcharge. “How those carriers are surviving, I don’t know. If you don’t ask, you don’t get. Ask for the money. In most cases it’s there,” he emphasized.
Keep rates reasonable by addressing your own inefficiencies. “Track, track, track. Measure, measure, measure,” was Haight’s straightforward advice. “If you lose track of just one of your variables, you can get caught pretty quickly.” Take for example, the cost of driver turnover on a variety of areas. MacKinnon Transport has done a remarkable job in recent years in reducing its driver turnover ratio and Haight once asked his managers to calculate the cost of doing business with the company driver turnover ratio at 120% versus 20%. “Ask any maintenance manager and he will tell you that having multiple drivers on a piece of equipment is hard on that equipment,” he said, adding the same could be said about the negative impact of driver turnover on streamlining accounting costs and providing customer service. “Turnover is the cancer of the industry,” he stressed, adding it poses a drag on profitability that needs to be recognized.
Don’t be afraid to confront problem customers, and fire them it they don’t improve. Not all shipper relationships can be forever. That should be particularly so if their freight causes operational problems you would be best off without, if they are constantly looking to change the contract, if they’re not paying enough or taking too long to pay. “You have to consider, do I really want to deal with these people and at what price? Your service is worth something, just as the shipper’s product is worth something. It has to be a win-win situation,” Snobel said. Haight advised that shippers don’t always know they are causing problems for their carriers. In large organizations the person signing the contract may be far removed from what’s happening on the loading dock. A few years ago, MacKinnon asked its drivers to rate their favourite and least favourite customers. Haight said some of the worst performing shippers were surprised to be on the list, highlighting the need for regular communication between carrier and shipper.