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Showing posts with label transportation. Show all posts
Showing posts with label transportation. Show all posts

Friday, November 25, 2016

October Results are Not encouraging for Transportation Providers

It may not be a complete "Happy Thanksgiving" for people who manage 3d party transportation.  After some very large decreases in the last few months, the CASS Transportation index decreased again in October.  The transportation index dropped 1.4% in October.  While this is better than the drop of 2.8% in August and 3.5% in September, it still shows that there is over capacity in the transportation industry.

The Intermodal index rose, YoY for the first time since 2014 by 0.4%.  This, I would call a "rounding error".  Let's call it flat.

Source:  CASS Transportation
Source: CASS Transportation
As I have discussed for many years, there is a fundamental shift in the way freight is moved in the US and I am wondering if even the metrics are wrong?  Should we be so tied to this freight index and does this really tell us about the economy? Today, the economy seems to be moving fairly well but transportation continues to decrease.  The issues:
  1. Miniaturization of product
  2. E-Commerce (reduction of movement of product to stores
  3. Digitization of product - more product delivered electronically (Books, newspapers, inserts, music etc.).
  4. Localization of suppliers - This is very interesting because it is a function of transportation costs getting out of control a few years ago. As more finished goods / component mfgs localize, transportation requirements decrease dramatically (Better cube utilization when shipping raw materials v. shipping finished goods or components).
  5. The Borrowing Economy:   I will write more about this and the impact to supply chains but this is real and it is impacting how much we buy.  Think about how many items you have that sit and do nothing most of the time.  If people start aggregating this in a borrowing economy, the total amount of product bought and shipped will be reduced dramatically. 
So, the macro trends fully support this reduction in transportation even though the economy seems to be moving along quite nicely.  


Sunday, September 18, 2016

A Balanced Summary of Where The Trucking Industry Stands

Fleet Owner summarized the FTR Transportation conference with an article about the headwinds facing the transportation industry.  They are real but they are what every business faces - uncertainty. That is what makes a business a business.  Certainty is what utilities have.

Usually the press out of this conference is designed to scare the shippers into paying higher rates than they need to but, at least within this summary, it appears they are becoming more realistic.  Here are some key points:

  • 2% GDP growth for the next two to three years (A number I have used for many years now). This is significant because virtually all the transportation executives I know say the real capacity crunch comes at 3% GDP growth.
  • Eric Starks states the industry will flat in the foreseeable future.  Flat means leaders tend not to know what action to take; what bet to make.
  • Mark Rourke, President of Schneider claims they have a 4% to 5% productivity decline due to electronic logging devices (ELD) and they have not recovered from this since.  This I will never understand and wish someone would explain.  How can ELD's cause a productivity decline unless you are not already following the Hours of Service (HOS) laws. I would think this would make them more competitive as it will ensure everyone follows the laws.
I also think one of the biggest issues facing the trucking industry is just the nature of the "new freight".  With freight now going to central and very large DCs and then parceled out to the consumer, the entire leg of freight going to the store is being eliminated.  Think of this:  Rail gets it to the DC and the part that was truck (DC to Store) is being eliminated.  As leases run out, more and more retailers will close stores and go to on line.  This will have a huge impact to the trucking market.  

Perhaps this outlook (grim as it is) is what is driving the Schneider IPO?

Monday, August 1, 2016

Cass Indices for June Report Real Issues with Trucking and Intermodal

The Cass Indices for June reported what observers knew was to be the case:  Once again the trucking "recovery" has stalled and capacity exceeds demand.  Part of this is due to the elevated inventory levels with retailers and part just due to increased capacity.  Remember, items are much smaller today then ever and with advances in packaging, the trucking industry just has too many assets chasing too few loads to sustain a lot of pricing.

For the last three months, the truckload index has decreased 2.3%, 1.2% and 1.8% respectively and the graph shows how difficult this market has become.  We now are looking into 2017 before there is any tightening of capacity and pricing.  I believe capacity will need to exit the market as not only is there too much today but the economy will start slowing and that means just the normal cycle would require removal of capacity.

Interestingly, this comes at a time where trucking costs are rising and as we saw in the Swift 2Q reporting, OR rates are starting to increase (SWFT 2Q2016 OR rate was 92.7% - highest in the last three years). JB Hunt sees margin erosion in the latter half of the year for both trucking and intermodal.  Great if you are a shipper as soon trucking companies will start working to get any contribution to fix but bad if you are an investor or a trucking company itself.

Starting in late 2015 and through this year, the pricing index has gone down and continues to go that direction.

Suffice to say, Intermodal is following the same trends.

So, what is going on here?  Why do we continually get told that "this is the year" and yet for the last 3 years at least, the tightening has never arrived?  I attribute it to three main items:

1. The Economy is not nearly as robust as you may think watching the markets.  Remember, finance (which requires no trucking) has grown to be a substantial part of our economy.  In the past when you said GDP went up x% you could correlate that directly to an increase in the need for transportation of goods.  Today, that is untrue.

2.  Inventory levels remain elevated.  Think of it this way, when inventory levels are as high as they are this essentially means you shipped the product in previous quarters.  This is like "borrowing" against the future.  Made those quarters look good but because there was not enough sell through, the product just sat and now when sales tick up, the inventory has already been shipped.

3. Miniaturization, packaging and digitization of products.  I have always said the shippers would not sit idly by and just watch rates go up.  They have figured out ways to streamline packaging, digitize what they can (including the growth of 3d printing, and make things smaller.  This means less transportation capacity needed.  

Overall, given the way the economy is headed, I would be shocked if 2017 was anything different.  Hunker down, we are in for a bit of a ride here.

Sunday, June 26, 2016

Revisit "Favored Shipper" During Downturn in Rates

I have advocated over and over that the idea of getting better rates because you are a "favored" or "preferred" shipper is a red herring.  The idea that a trucking company will take less in profit because you are preferred just does not make sense.

In the environment of rate reductions and over capacity I am sure shippers are starting to hear the same old mantra from the trucking companies:  "Stick with us and pay higher than market rates.  Once the "worm turns" we will stick with you".  This is the logic. Yet by all accounts, even the transportation executives believe transportation is a commodity play.  Less capacity and more demand = prices go up.  More capacity and less demand = prices go down.  That simple.

I had been somewhat a lonesome person in this argument until C.H. Robinson, along with Iowa State University, attempted to quantify this with a white paper entitled:  Do "Favored Shippers" Really Receive Better Pricing and Service.  Let me cut to the chase and let you know the answer is NO.  Here is a quote:
"Carriers cite many attributes that may result in "shipper of choice" status.  Research shows that keeping the driver moving and generating income is more important to these carriers than keeping a shipper as a customer".
The bottom line is that dwell time of the driver is the overriding factor to determine if you will get best price or not.  And really, it is not even the driver rather it is the trucking company asset (Truck and trailer) they truly care about.

So, remember, no matter what you do in terms of "market rates" what really matters is dwell time. The research clearly suggests that regardless of what you do in terms of rates now, in the future, it is all about dwell time and if you do not have best dwell time, what you did when rates turned down will be meaning less.

My advice is the same now (and even strengthened) as it always has been.  Take what is yours in terms of rates because the trucking company will take what is theirs when the environment changes. Then, of course, do the right thing and keep the trucks moving.

Wednesday, June 22, 2016

Predictions Coming True - Inventory Adjustment Under Way and Rates are Down

A special edition of Marcoeconomic Monday today!  The results are in and they are really showing a slowing economy (GDP adjustments have been lowered), inventory adjustments being made and therefore truckload and intermodal rates going down.

I have shown throughout this year that the inventory to sales ratio was telling me that inventory was growing at an unsustainable rate and sooner or later a correction will come.  The Wall Street Journal recently acknowledged this with an article called: Inventory Pullback a Drag on Logistics Spending. As companies have realized the need to adjust inventory levels, the need for more product decreases and therefore the need for transportation goes down.  Result?  A capacity / demand imbalance that supports lower rates.

The newest CASS readings show this is coming out in the industry rate structure.  The truckload index fell 1.2% in May after reductions in April and March.  The intermodal index reduced by 2% and Cass has acknowledged this is 17 consecutive months of YoY declines.

Bottom line:  Rates are going down, the economy continues to sputter and another year of "this is the year" seems to be fading away.

Saturday, April 30, 2016

Pricing Declines in Both Truckload and Intermodal


The promise of "pay me now so you don't have to pay me later" continues to be a mirage.  With the release of the March CASS reports we saw that pricing actually declined in the truckload sector YoY for the first time since 2010.  Intermodal continues to be a problem as well with significant price declines.  Intermodal declines were 3% YoY in March and 2.2% in January YoY and 3.8% in February YoY.

This all stems from the fact there is overcapacity.  Further, as shippers get far smarter in terms of network design, designing products for efficient shipping and inventory management, the problem of overcapacity is being exacerbated.  Avondale partners believes the "risk" is to the downside of 1% to 2%.  The overcapacity in rail can be attributed to the sharp decline in some commodity shipping such as oil.   The other part playing havoc on transportation is the Inventory to Sales ratio which I will discuss in my next posting.

At the end of the day, this continues to behave as a commodity market.  The idea that you should "pay up" during overcapacity months / years so you are protected when the market "turns" is a fools errand.  Of course, you should always be a good partner, you should always work to turn drivers fast, make their life easier and work with your carrier partners to balance demand.  But those are things a good business person does anyway.  Just makes sense.

But, to think you should "pay up" to be a "shipper of choice" is crazy and will only put you in a position of uncompetitiveness relative to your peer group.


Wednesday, April 13, 2016

Another Year of Dashed Hopes for Trucking

Well, another year starts off with the "this is the year for trucking" story and it is starting to look like it is another year where it is going to fizzle.  I am traveling a lot this week so it will be tough to get into the details here.

Having said that there are clearly two big data points.  As the Wall Street Journal pointed out in an article titled "Trucking Stocks Tumble on Downgrade, Pricing Outlook", the bid season has not gone well for truckers.  This generally means there is excess capacity and that is driving lower prices.  An interesting quote (which blows apart the "shipper of choice" boloney over the last few years) is the following from a Stifel report lead authored by John Larkin:
"Many shippers have effectively elected to toss to the wayside any talk of partnerships, relationships, cooperation, collaboration, etc.,” the report read. “Shippers are under enormous pressure to cut transportation costs and seem not to be satisfied with the massive fuel surcharge reductions racked up over the past year and a half.”

If you don't believe that then use the trucking companies' actions to tell you what they think.  FTR reports Class 8 Orders at Lowest Level since 2012.  Having worked in the trucking sector I know as soon as the trucking executives see a prolonged slowdown the first thing they do is cancel truck orders.

Back to the future....

Class VIII Orders source:  FTR

Saturday, February 6, 2016

Courier and Delivery Driver Employment Fall; Warehouse Employment Up

Post the holiday e-commerce surge, the inevitable arrived.  According to the Wall Street Journal, courier and delivery jobs were shed quickly by companies with lower demand.

Warehouse employment continues to outpace the overall economy.  Just go to towns like Lakeland, FL, Memphis, TN or Nashville and you can see that for mile upon miles.

What is fascinating about all this is this means buffer inventory is increasing. The graph below shows the incredible climb of inventory relative to sales in our economy.  Wasn't this what all this fancy supply chain software was supposed to solve?

Inventory to Sales Ratio
We are back to roughly 2002 levels which, if you measure supply chain efficiency by inventory levels you could say that we are in a "lost decade" of supply chain improvement.

Is Your 3PL Working for You The Shipper or For The Carrier

Anyone who reads my blog regularly knows I am not a fan of this carrier creation called "be a shipper of choice".  To simplify my reasons I break my reasons down into three categories:

  1. The carriers themselves speak as a commodity.  They always talk about the fact that if demand is greater than supply - prices will go up.  This is the text book description of a commodity.  I have never met a carrier who, in a time of rate increases, tell you "We will take less price because you are some magical "shipper of choice.
  2. It takes all the requirements for continuous improvement off of the carrier's shoulders and puts them on the customer.  I have never seen an industry (except for maybe the airlines) where the supplier's strategy is to essentially go to war with their customer.  This is the new trucking industry.  The icons of the industry (Don Schneider, JB Hunt - the man) would never do this. They would compete for customers by providing a higher level of efficiency and better service. Not try to put fear in the customer.
  3. This is a race to the bottom for shippers.  Imagine if everyone followed the checklist of "Shipper of choice".  Now, all shippers are equal and who is actually the shipper of choice?  Well, what happens is the carriers ratchet up what they want out of you.  This is a perverse way to run an industry.  
To help with carrier management and to help shippers navigate this craziness some hire a 3PL.  But, what happens when the 3PL is in the tank for the carrier?  Well, we know what happens - the 3PL tells the customer they have to pay "higher rates" to ensure capacity (any third grader could have figured that out - no need to pay a 3PL).  But, of course, the 3PL makes more money off of these higher rates so on and on it goes. 

So, here is my checklist for how a CARRIER can be the CARRIER of choice:

  1. Provide great value - service for price.  Overdue the service.
  2. Understand your customer's business so you can understand why they are asking for what they are asking for. 
  3. Do what you commit to do - don't over commit. 
  4. Don't complain about stupid stuff.  I love it when a carrier complains that we should level load our freight volume.  Great request.  What is a person to do, tell the consumer (who is the only one in this entire chain who is actually injecting money into this supply chain) they can't buy more product on the weekends?  They have to buy as much on Monday - Thursday?  
  5. Communicate, communicate, communicate.
  6. Use technology to everyone's benefit. 
The Transplace checklist for shipper of choice is one example where a 3PL is no longer working for their customer.  They are working for the carrier.  

Sunday, July 26, 2015

FTR Responds to 10xLogisticsExpert - Are We Driven by Fear

You may have read my blog posting Another Summer and More Fear from FTR.  I am happy to link back to the thoughtful and well written response from Jonathan Starks on the FTR Blog entitled "Are We Driven by Fear"?

First, he is right, I read a recap and did not listen to the entire webinar so today I went back and listened to the entire replay.  My opinion does not change and here is why.

 The point I was making in my post is threefold:

  • FTR and the "industry" very frequently report "now it is soft" but they predict "sometime in the future" capacity will tighten up and rates will spiral up. (This was exactly the position taken in this webinar)
  • They talk about it as if it is very homogeneous when really it is a lane by lane, area by area phenomenon. 
  • The carriers use this "in the future" research to spin their sales pitch.  Any shipper knows the pitch goes something like this:

Shipper to carrier:  "Wow, seems real soft now and rates have come down in the spot market (per FTR), what can you do to help lower my contract rates?"

Carrier to Shipper:  "Well, yes, may be down now but look at the research (provided by FTR and others), capacity in 2016 is going to tighten dramatically and when that happens rates will spiral up. You, the shipper, need to stick with us now (maybe even give us a cost increase) and we will "stick with you" when spiraling rates occur. 

Now, what comes of this:
  1. Shipper gets scared (thus the fear trade).
  2. Shipper pays more now as "insurance".
  3. The "insurance" never pays off (either the spiraling rates never occur or if they do, the carrier is still back at the table asking for more money). 
OK, so why am I so skeptical of this scenario?  It is really all about who the clients are of any consulting organization. I do not believe you can serve two masters .. absolutely impossible. Yet, some consulting companies try to do this.  Imagine this scenario:

Consulting company "A" gets 50% of their revenues from the carriers and is about to go to market with the following research: 
  1. Trucking capacity is loose and rates have softened dramatically
  2. This is going to exist into the foreseeable future.  We are "long" on the recovery and all indications are a recession is upon us (commodities are slowing, etc.).
  3. Shippers should use this as an immediate opportunity to ask for rate reductions to stay competitive.  Prices are about to fall.  
What do you think would happen to the "50%" of the revenues that are paid by trucking companies?  I will leave you to answer this question. 

I want to be clear: I think FTR produces the best research in the industry and it is a "must" listen to and a "must read" for anyone dealing with the shipping industry.  

I am merely saying you need to combine this with other research and, more importantly, what you are empirically seeing in the marketplace to determine your overall transportation procurement strategy.  

NOTE:  My comments about "serving two masters" are the whole idea of where the fiduciary responsibility lies.  Think of your investments.  If your investment advisor is paid for, in some part, by a specific mutual fund do you think that investment advisory can truly be "neutral" and "agnostic" in his or her advice?  Again, I leave it to you to answer.  

Saturday, July 18, 2015

DOJ Investigates Airlines - Are the Trucking Companies Next?

A while back I wrote about how I thought executives in the trucking industry were getting dangerously close to collusion as they discussed capacity in the industry.  My comments were around a concept of "signaling".

I am not a lawyer and do not pretend to be one but "signaling" is when one company sends a signal to the other about its intents in terms of key actions effecting pricing.  So, for example, an executive says in an interview in a prominent industry magazine something like, "Until we see better ROI we cannot and will not add capacity to our system".

Ok, what just happened?  He essentially told his competitors two things which normally a company, especially a private one, would want to keep private.  He (or She) said:  "I am restricting capacity and raising rates".   Now, the executive on the other end knows he or she can do exactly the same thing and voila!  you know have thinly veiled collusion.

See the graph below, from the article cited below, which displays the profitability of the airline companies who publicly "restrict capacity":



I was thinking about this yesterday as I read in Bloomberg BusinessWeek an article about the FTC complaint against the airlines entitled "What Does it Take To Prove Airline Collusion"?  The core of the matter is what they call "unlawful coordination". A line from that article:
"A trigger may have been the June meeting ... where airline executives talked openly about 'capacity discipline', a not so subtle code for limiting the number of seats available" [My comment: thus increasing prices] (Bloomberg Businessweek, July 20, 2015)
It went on to say the following:
"At a press conference, Delta President Ed Bastian said his company is "continuing with the discipline the marketplace is expecting".  American Airlines CEO Doug Parker told Reuters it was important to avoid over capacity: "I think everybody in the industry knows that." (Bloomberg Businessweek, July 20, 2015)
 Does any of this sound familiar to the shipping community out there?  The DOJ has never really looked at the trucking industry because it was so fragmented.  However, is is becoming very consolidated at the top with the top 5 or 10 carriers commanding a huge market share and, of course, if you are a very large shipper, about the only carriers you can use are the very large ones.

At least we have come a long way. Businessweek recounts the following from 1982:
"Robert Crandall of American Airlines told the CEO of Braniff Airlines, Howard Putnam, 'I have a suggestion for you. Raise your goddamn fares 20%. I'll raise mine the next morning. "
While doing what is right for drivers and treating people right is the right thing to do (the infamous "shipper of choice" debate),  I really think shippers should be far more concerned about this.

Sunday, July 12, 2015

A More Thoughtful Article on Capacity

This, from BCG, is a much more thoughtful article on the true capacity issues in transportation.  The issue is NOT trucking capacity as that can easily be solved with private fleets, some technology, moving DCs to more efficient locations etc.

The real issue is around port capacity, rail capacity, infrastructure and consumer demands.  These cannot be moved around.  And this is what companies have to be thinking about now assuming they want to stay around.

What the trucking companies ignore is the demands being put on transportation are due to rising consumer demands - the demands are not just created by the shipper for the heck of it.  My advice is shippers really need to think more about private fleets.  You can be very competitive, get higher loyalty from the employees and be far more nimble.

Don't Be Fooled Again..

For those who read my last post and are not sure it is true, I refer you back to the post from November 7th, 2013 titled:  "The Fear Trade Picks Up Steam... Don't Be Fooled".   Same story from the carriers and the "analysts" (who mostly are just talking their book) just years ago. 

And, since it is starting again, I think a great rendition of "Won't Get Fooled Again" is in order:


Saturday, July 11, 2015

Another Summer and More Fear from FTR

It is like clockwork.  I can set my watch by the articles that will be printed by the logistics' press such as FTR.  Here is the story of the "study" (it has been the same for 5 years):

  1. We thought prices would be a lot higher than they are
  2. Freight is softer than we thought
BUT.....
  1. Watch out, it will tighten soon
  2. Give in to the demands of your carriers as they try to get you to "pre-pay" for price increases.
  3. Those who do this will be rewarded...
And of course my response continues to be the same:  Prepaying for tight capacity is a waste of money.  Those who followed this course 3 to 5 years ago have paid a lot of money for a day that still has not arrived.  

Actually, you should follow the direction of the executives running these companies:  They essentially say when capacity is tight, rates go up and when capacity is loose rates go down. That is the ultimate definition of a commodity.  So,  therefore, treat it that way.  

Wednesday, July 1, 2015

Is Being The Shipper of Choice a Rational Buying Behavior?

I once again had to sit through a "shipper of choice" meeting with a carrier and I was as disappointed as I am with every one of these I attend.  First, congratulations to the consultant who coined this phrase "shipper of choice" - you have done a great job peddling this idea and I hope you have made a lot of money with it.  Every presentation I go to is the same so I have to believe they emanate from the same person.

For those who have not been "blessed" by one of these presentations, let me walk you through what they mean.  In a nutshell it is:  "If you (shipper) do everything in the way we want it done, regardless of what your customers want, then you will be a "shipper of choice".  Things such as:

  1. Pay your bills on time
  2. Give the freight the carrier they are awarded
  3. Perfectly forecast the freight
  4. Pay above market (or what the carrier will call "fair") rates
  5. No window times for deliver - let the carrier deliver and pick up at their leisure
  6. Have a luxurious wait room for the driver
  7. Don't have the driver do anything when he shows up
Well, you get the feeling. 

What is missing from all of this is what does the CUSTOMER really want?  I raised this question to the trucking company and, honestly, I am not sure they ever had thought about this.  I mentioned to them that we (the shipper) are not the ultimate customer.  We have customers (call them consumers) who are demanding certain things.  We are looking for the freight provider to partner with us to fully understand and respond to what the consumer wants (which, as I pointed out to them, is what each of us wants as a consumer).  So, what does the consumer want:

  1. Short order to delivery times
  2. Windows (anyone want to sit at home all day waiting for someone or do you want to know that they will come within a two hour window)
  3. Be market competitive in pricing
  4. Full delivery (White glove).
These are what the consumer wants and these are not things that are being put on the logistics network for any other reason then they are customer demands. 

Of course, there are things that make sense and should be done:  Pay bills on time, if you award the freight give them the freight etc. 

But this idea that we can ignore what the end consumer wants is completely ridiculous.  The challenge for us the shipper and the trucking company is how do we meet these complex and ever increasing demands AND be efficient. 

I wonder when that meeting will occur?

Wednesday, November 13, 2013

Rethinking The Core Carrier Strategy - Too Many Eggs in One Basket?

There are two sides of a continuum in procurement strategies for transportation.  On one end is full "auction" type purchasing where you put everything out to bid, almost constantly, and let the market adjust the prices.  On the other end is single sourcing where you don't bid anything and you partner with a core company.

Close to sole sourcing is a strategy called "core carrier".  This strategy has you limit your carriers to a "vital few" and then you work with them.  Sounds great however lately I have seen this degenerate to what is virtually a sole source strategy.  So, what is wrong with this and is it time to rethink it?  It appears Amazon thinks so.

As I wrote on Monday, Amazon is teaming up with the United States Postal Service (USPS) to execute Sunday deliveries.  Sounds great and the possibility of this occurring I wrote about back in 2012 but there may be more to this.   In The Wall Street Journal's "Heard on the Street" column (subscription required) they mention how this may actually be a strategic decision to ensure they have options beyond FEDEX and UPS.

In conjunction with their private fleet for grocery deliveries, Amazon appears to be diversifying and growing their options.  A real strategic risk for Amazon is they become so beholden to Fedex and UPS that they are controlled by them.  This strategy appears to be their attempt to counter that risk.

For the average shipper you should be thinking about this strategy as well.  Initially the idea of sole sourcing or core carrier sounds great - low administrative costs, one point of contact, easy to do business with.  Long term, however, you have to ask yourselves if you are turning the keys to the kingdom over to someone who many not have your best interest in mind.  No fault of their own but their interest will always be in the profitability of their company.   So, here are some actions you should be thinking about to protect the long term ability of your company to execute their strategy:

  1. Be careful on too much concentration in one carrier - especially intermodal
  2. Ensure suppliers know (and it is believable) that you have options in the market place.
  3. Be careful of tying systems together which are core to your business.  Beyond EDI, once their are unique systems integrations you are married (sometimes for life).
  4. Think about strategically propping some carriers up to ensure they are competitive.  Think about Amazon and the USPS.  Why go with what is essentially a bankrupt carrier?  Amazon wants to keep them in business and is going to help them.  You may have to do that with some smaller carriers yourself. 
  5. Keep options open with private fleet.  By running a private fleet you will know as much or more about running a fleet than your suppliers.  Keep that as a competitive advantage. 
As always, there is a lot to learn from Amazon.  

Sunday, November 10, 2013

State of Transportation - XPO Logistics

I have reported on XPO logistics  (Follow this link on XPO to see all my thoughts) a lot as it fascinates me how a company comes out of nowhere and becomes so large so fast.  It also amazes me just how much money a company can lose and still be wildly successful (think Amazon.com).  But, since I am not a financial person I trust Bradley Jacobs understands these financial rules and is using them to his advantage.

The real reason I listen to their calls every quarter is no CEO I know of is as honest, direct, and has as much just common sense as Brad Jacobs.  I had the pleasure of meeting and talking with him a few weeks ago and for someone who has done as much as he has, he really is a down to earth person who knows this business well (especially for someone who is relatively new to the brokerage business) and, something that is refreshing, he is very upfront and honest.  So, listening to what he has to say about the industry is very interesting.

On this quarter's conference call he said three things which really were insightful on the market and match what I have said relative to telling shippers not to engage in the fear trade.  Here they are (Paraphrase):

  1. This is a lousy business environment for brokerage companies due to the fact that shippers do not have much of a problem finding trucks.  The reason for this is the market is balanced at best case (for transportation providers) and may even be edging to the shipper.  The shipper has no problem finding trucks (except for unique and specific lanes). 
  2. XPO is able to find trucks and is able to "clear their board" relatively early in the day so it is pretty clear that trucks are available.  
  3. This is probably the most important: When he was asked if he is seeing any issues with Hours of Service or other regulatory issues he clearly said no.  In fact, he said that the one thing which he hears most is just the transportation companies complaining about it.  
My mind is not made up on brokerage in general or XPO for the long haul.  I still wonder why good transportation departments need a "middle man" but I know there are reasons - I always think of them as back up capacity - but people do use them for their core transportation.  The dream of the internet was to eliminate the "middle man" yet in this space the middle man seems to be growing.  

Having said all that, I listen to the XPO call every quarter as you can learn a lot about what appears to be a strong emerging company and the industry in a very straightforward manner. 

Thursday, November 7, 2013

The Fear Trade Picks Up Steam - Don't Be Fooled

One of my favorite songs from childhood is "Won't Be Fooled Again" by The Who and this is my theme for what I have called the "fear trade" in transportation.  This is the time of year when people put their freight out to bid and as expected, and right on queue, some of the major transportation providers are putting out press releases and other statements to start the fear trade - make shippers fearful that truck capacity is magically disappearing and that trucking companies are suffering.

As reported in LogisticsViewpoints, both Schneider and Werner have, on queue and somewhat coordinated, put out press releases and statements saying there is a big problem with capacity, productivity is down and the big bad regulations are making it hard to run their business.  This will, I predict, be echoed by many others over the next few days.  All while earnings at the best run trucking companies are better than they have ever been and OR rates are at record levels (the REAL data in their annual reports).

These statements, of course, are designed to create the fear trade and to get the shippers to buy into a "fear premium" as they go into bid season.  Now, for the real data:

Using CASS data from the October report we see that both expenditures and shipments are down year over year.  In fact in 7 months of 2013 we have seen shipments down year over year which indicates, as CASS rightfully points out, that the economy is slowing and the shippers are finding alternative ways to deal with transportation problems (i.e., network redesigns, packaging, better inventory management etc.).  During these turbulent times it appears shippers have rolled up their sleeves to find innovative ways to solve transportation problems and it appears the transportation industry is issuing press releases.  The graphs below tell the story:

As I reported recently, I told my readers not to overreact to the numbers from September.  They were too strong to be sustained and if you see any other economic indicators you will know that strength was not supported by the underlying economy.  And, this month we find that to be accurate.  They were not supported.

Another interesting statement out of the CASS reporting was that for the first time since 2008 the National Retail Foundation is forecasting a decrease in holiday sales by 2.5% and this is supported by the less than robust holiday stocking.

For sure I am not saying to ignore capacity - if you claim the world is going to end and you live long enough, sooner or later you will be right.  However what I am saying is three-fold:

1.  Let the data speak.  Don't get wrapped up in the fear trade.  Watch this blog, watch the CASS information, watch macro economics and, of course, watch your own sales as a shipper.  These are the most telling indicators.

2. Look at your network and understand your network relative to freight flows.  I have said it many times that transportation is not a homogeneous network.  There are specific lanes (Northbound out of Mexico as an example) that are always under stress.  However, if you ship westbound you should be getting great deals almost always.

3. Understand that there is another side of the equation and that is demand.  Shippers have done an incredible job of productivity enhancements through packaging, product design, loadability studies, and network design which has allowed them to service their customers with higher quality goods at lower costs and lower transportation requirements.  There is no reason to think this will stop.

So, in conclusion, do not get caught up in the fear trade.  Do not think you need to pay a premium now as an insurance policy against future capacity.  One thing is for sure, capacity will flow to where the margins are and even if you pay more now it will not ensure future capacity.  If you pay a premium now you will be in a "Pay me now AND Pay me later" scenario.

Stay calm, stay focused and keep reading the data.

And now, enjoy the Who and Won't Get Fooled Again:



Tuesday, October 29, 2013

Truckload Strong; Intermodal Weak



I have not reviewed the CASS information for a while but have used other sources which have all told the same story.  Intermodal freight is soft relative to capacity which is putting pressure on rates.  However, the September truckload numbers show strong expenditure increases with shipments staying moderate.  Translate this into higher rates.

To show the issue with the intermodal market right now look at the chart above.  Clearly, going into Q2 in both 2012 and 2013 we see the price index decrease.  However, in the latter half of 2012 it rebounded.  In 2013 it tried but quickly was rebuked.  IM rates are in check mostly due to the capacity situation.



The real question though is whether this is a short term bump (The Christmas "rush") or is this a long term trend.  My belief is to watch it closely but be skeptical of anyone who says this is a long term trend.  Hours of service or none I believe there is no evidence to show the economy picking up or shipments growing rapidly.  Yes, there are bumps up and bumps down but the trend is pretty flat.

Don't get involved in what I call the fear trade.  The fear trade is when your carrier base comes running to you as soon as some data supports higher prices and tells you to "pay up".  Watch the data closely and I think you will find this to be a blip.

Friday, October 25, 2013

Energy as part of the Global Bill of Materials

If I told you there was a portion of your bill of materials which could make up 20% -40% of a major component would you want to know what that was?  I hope the answer would be yes and that element is energy.  I heard a person talk this week (A VP of a car company) talk about the "energy it takes to make a car".  The interesting part of his talk is he was not just talking about the plant where the car was assembled.

Rather, he walked all the way back to the extraction of raw materials, through the various "tiers" of suppliers, to manufacturing then to the final delivery of the finished product.  He discussed energy as a component of the BOM and therefore it needed to be managed.

In transportation, people are just now starting to look at this way and the more enlightened managers see this clearly.  If you look at the "bill of materials" for transportation, energy is about 40% of the cost.  Who would ever not manage 40% of the cost of a BOM?

Between emissions and the actual cost of energy it is clear the time is now to manage energy.  Those who say to not manage it or, worse yet, turn it over to the transportation companies just do not understand how important this element is to their costs and to the security of their supply chain.  What element could disrupt the supply chain worse than the lack of energy?

It is time to step up and take control of this and think like that speaker... thing about transportation as you would manufacturing.  Think about what the bill of materials is and what deserves your attention.  40% deserves your attention.