TABLE OF CONTENTS Jan 2013 - 0 comments

Shifting gears

Is there a better way forward with rate negotiations?

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By: Lou Smyrlis
2013-01-01

Shipper-carrier freight rate negotiations are a tug-of-war at the best of times. But in the face of a deep recession followed by a slow recovery, they have too often turned nasty.

Shippers are pressed to keep the lid on rate increases as long as they remain uncertain about future demand. Carriers, meanwhile, need to rescue their profit margins from the carnage of the recession.

Are we doomed to be stuck in acrimony until the economy regains its normal strength? Or is there a better way forward, even now?

To find out, I spoke to leading motor carrier and shipping executives during a panel session specifically dedicated to rate negotiations at our recent Surface Transportation Summit, a one-day event presented in partnership with Dan Goodwill & Associates.

The shipper-carrier rate panel discussion, sponsored by Shaw Tracking, brought together:
• Dan Einwechter, CEO of Challenger Group of Companies;
• Wesley Armour, president of Armour Transport;
• Brian Springer, vice-president of transportation, eastern Canada, with Loblaw Companies; and
• Michael Tan, vice-president of supply chain and transportation with Hudson’s Bay Company.

I believe their comments on how to build an environment of trust and collaboration that allows both sides to achieve these business objectives show the better way forward.

Lou Smyrlis,
Editorial Director
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CT&L: Just a few years ago, we went through one of the most severe economic downturns since the Great Depression and for the last couple of years, we have been working our way through a slow recovery. What impact did the Great Recession have on your company’s supply chain strategy and how it procures freight transportation services?

TAN: My general philosophy is that a relationship where one party is struggling to make money and hating the partnership is really not a healthy and sustainable partnership. Beating down vendors for a couple of points really has no good long-term impact. That being said, we certainly were pressured to cut our costs. One of the first things we did was apply more sophisticated procurement expertise to our transportation services. We hired procurement consultants, but we also beefed up our analytics and negotiation skills and tightened up the details of our contract terms and conditions. It also forced us to re-examine the transportation modes that we were deploying while ensuring we had the proper people in place and processes and systems to support our operation. From an overall supply chain perspective, and having taken on the supply chain group, I had the luxury of going beyond transportation. It also forced us to find ways to maximize sales, to really segment our businesses and the departments within our businesses and, in turn, to completely revamp our transportation strategy to support each. Moving fashion for The Bay was entirely different, as we quickly learned, from moving home products for Zellers and Home Outfitters.

SPRINGER: Similarly, the Great Recession forced us to focus on our transport costs in a lot more in-depth way. One of the things that was really prevalent in our business is that we were very decentralized. One of the downfalls of that is that you have regional cost centres, accountable to their own P&Ls and they really don’t look at the greater good. One of the things we had to do was become a lot more centralized in our business. We also had to look internally at how we were structured in terms of our own fleet and 3PL – did we have the right balance? Even within our own fleet, did we have the spec’ right? Did we have the right labour models in play? Did we collaborate with the 3PL players we deal with as well as we should? Are we a little too internally focused? One of the things that we realized was that our technology wasn’t there. From an outbound perspective, we planned from manually to spreadsheet and some degree of systems, but even within that, where we did use systems, our outbound freight and our inbound freight weren’t integrated. So we would never portray a real accurate profile of what our network looked like. We always put carriers in a bit of a struggle because we never gave them the full picture. So one of the things we had to do was completely revamp our technology platform. We are now one integrated system, both inbound and outbound. That helps us explain to carriers where we need to be and what we need from them.
I disagree with comments that there is no room for formal RFPs. I think there is. Formal RFPs done in the right way; not RFPs where you just grab the lowest cost and run with that. That doesn’t do anyone any good. Six months down the road, you’re back to where you started. But a formal RFP provides the opportunity to share all your lanes, both ways, with the carrier community and then really capitalize on balancing those lanes with the carrier freight also. I think there are good opportunities there.

CT&L: Wes and Dan, what impact did the Great Recession have on your company and the freight transportation services it offers to shippers and how it prices them?

ARMOUR: Certainly, we saw less volumes during this period of time. It wasn’t fewer customers; it was smaller shipments. Instead of having a 1,000-lb. shipment every week for a customer, you ended up with a 600-lb. shipment. So when the truck went out, it still had the same number of stops, except the truck was generating a lot less revenue because the shipments were smaller. That is coming back slowly.

The other thing in our area that really hurt our industry was the closing of paper mills. Most of our paper mills are closed now. Some of these mills were shipping 550 metric tonnes a day to the US, Ontario and Quebec and their loss created a huge imbalance and that situation really hasn’t been fixed and never will because these mills are closed for good. These were huge volumes for our industry for years and years and helped reposition our trucks.

We certainly went through fierce competition. We didn’t see much in rate decreases. We were able to hold our rates, but went two or three years with no increases. It’s hard to say, ‘How did that make you better?’ but that has made us a better carrier.

We thought we had all our costs under control, but what we found when we started looking was that there were better ways to do things. We started working on that and became very active on it in 2011 and 2012.

We also went out to look for more long-term partnerships. Losing the paper mills, we obviously had to replace that with other traffic. We’ve been able to do that, but it’s a different type of traffic than the trailer loads the paper mills created.

We were fortunate going into this recession. One of the advantages of owning my own company is that I was able to put the profits back into the company, so we had very little debt. In fact, we didn’t have any. Our equipment and buildings were paid for. I made the decision that I was better off investing my money in my own company that I had control over rather than into the stock market or other places that someone else looked after. That philosophy has been with me for years. So we were in a strong position going into the recession and we continued to upgrade our trucks and give our people small increases. Now that we are coming out of the recession, we are really in good shape because our equipment is upgraded, and our people are staying with us. That’s a lesson that many carriers have to learn. It’s tough to get through tough times if you are not in a similar position.

EINWECHTER: I would mirror a lot of Wes’ comments. It was dramatic in Central Canada, it was dramatic in Eastern Canada, it was dramatic in the US. Almost every carrier was looking around in wonder. So how do you deal with that reality? Well, you have to be engaged with your employees and fill them in about what is going on in your own company, in the market around them. They are wondering, ‘Is it just us or is it everywhere?’ We made a serious commitment, in spite of the economy, to continue to upgrade our equipment. We went into some different markets on our heavy haul and wind energy side. We expanded in some areas, changed some areas on the van market side. We faced some additional competition on the van side because the transborder market was dramatically affected because of the volume of business and the dollar. A lot of carriers that weren’t on the east-west business that we’ve been involved in since 1994 decided to go into that marketplace. So there was a lot of turmoil, a lot of change, challenge and opportunity. It was interesting to watch carriers race to the bottom on rates at times. There was no rationale. When there is less volume, you would think rates should go up so you can get a little more profit on each load to cover off your expenses, but it went the other way. So rates that were $850 became $700, and $650.

To Brian’s comment that there is a place for RFPs, there is. But for every good RFP that we see, I would tell you I see two bad ones, where they’ve empowered the wrong people to put the data together. It’s a dummying down of the information, it’s not correct information. At our place, RFP, at times, means ‘Really Friggin’ Pathetic’ because of the lack of data and inconsistency. When you hire these outside agencies, they are full of young, intelligent, skilled people, but reality eludes them. It’s a hell of a learning curve, but the incumbent carrier pays the price and, at times, the shipper pays the price because when they least need turmoil, they have it inflicted upon themselves. So for RFPs, as long as you don’t just use the lowest cost provider like some companies do; if you look at the data in an informed fashion, then that’s okay. But God forbid if the CFO or some executive who doesn’t have an understanding of transportation is looking over the shipper’s shoulder, and all they know is to take the lowest price. We saw an RFP show up from a customer and their target rate for loads to Toledo, Ohio, southbound was $45 and their northbound was $45. I just told my guys, throw it away, don’t waste your time.

CT&L: That was an insightful look at how we got to this point. Next, I want to focus on where we go from here in terms of rates. I want to start with our shipper panellists. What are the competitive pressures that are affecting your decisions today when it comes to transportation rates?

SPRINGER: We are in a very competitive retail environment. There are lots of good, strong players in the market. For us, it’s about pushing initiatives that reduce costs. We are in a very fresh environment; it’s important to our business, so speed to market is key. We are to the point where we are looking for carriers that have more diversity, where they are not just carriers. What other added value can they offer in terms of consolidation centres, etc. Shippers have a responsibility to make sure they provide the carrier with the right information. If you don’t, the carriers can’t make the right decisions in terms of business costing and, inevitably, you end up down the road at loggerheads. It’s really about understanding the strengths of the carriers, understanding our complete network. There really isn’t a whole lot of magic to this. If I have freight into Quebec and into Atlantic Canada and loads that come out of the US and the carrier has freight from the Atlantic into the US, I can fill that third lane. You sit down and talk about these things and those are the synergies that you find. But you only find those synergies through a truly collaborative process.   

CT&L: Is it your policy to treat all carriers the same from a freight rate standpoint or is each carrier treated differently, depending on what they have to offer?  

TAN: Every carrier has its own strengths and constraints, so it’s necessary to treat each carrier differently. How differently depends on a lot of factors, such as regional presence or their existing customer base, their own strengths and weaknesses, their asset base and driver structure and in relation to our own demand. I think that while I would apply the same strategy towards two carriers within the same mode, I wouldn’t necessarily apply the same strategy across my entire network.  

CT&L: Does it make sense from both a flexibility and cost-control standpoint to include in your stable of transportation providers both carriers who provide best-in-class service and get paid for that, and carriers who simply provide low-cost service and are paid accordingly, in the same way you may have differently-priced products for different income segments of your markets?

SPRINGER: I think you always need a mix of carriers in your stable. I don’t prescribe to the low-cost carrier option. We prescribe to the best cost carrier and that includes cost and service. We look at things such as is the carrier running the right equipment? In several of our scenarios, we are asking carriers to pull our billboards down the highway, so it’s extremely important that it’s not just the low-cost solution. But that doesn’t mean that smaller carriers with good costs can’t be the right solution. It comes down to having the right mix and the right synergy and right lane and niche. If the smaller carrier can execute on cost and they can execute on service, why wouldn’t we want to have them in our stable? By the same token, we have large carriers in our stable who provide cost and proper service as well. The expectations between those two carriers really is the differentiator at the end of the day. Whether you are a small carrier or a big carrier, we are going to hold you to a standard of cost and service. But larger carriers bring something extra to the table: the ability to flex when our volume flexes. In Ontario, we do just north of 6,000 outbound loads per week and you can multiply that by 1.5-fold for the inbound. If we have a five-truck carrier in the mix, am I really going to expect them to flex with our volume, relatively quickly? Obviously not. They don’t have the resources to do that, they don’t have the asset base to do that. But I look at large carriers in a different light because there is some leverage against that volume. It’s not just about the low-cost carrier. Cost comes hand-in-hand with service.

CT&L: If rate negotiations with each carrier are handled differently, what criteria are used to determine how a particular carrier should be treated? For example, are some of your longstanding core carriers treated differently from the carriers that receive less volume from your company?

TAN: I certainly apply a set of criteria in evaluating our carriers. Reputation in the marketplace is extremely important for me. What is the bargaining power of the carrier’s customers? I look at whether they have a disciplined approach towards performance and service control and cost control. If I were to put a longstanding core carrier that we are very satisfied with next to one just off the street, the contrast should be fairly evident. And my approach with each would be fairly different. When HBC and Armour Transport sat down to discuss a potential partnership, for example, while it was initially predicated on an RFP, my team and I decided to throw the formalities of the RPF out the window and, instead, we ended up with fairly candid dialogues with Wes and his team. I don’t necessarily take the same approach towards every negotiation, but in this case, it worked out very well.  

CT&L: I would like to take it back to our carrier representatives. Are these comments representative of what you heard from your clients during the past few years? Is the value of the service provided by best-in-class motor carriers understood, appreciated and paid for by the shippers you do business with?

EINWECHTER: Yes and no. I have shippers who are well informed, like the two here today. And then I have others who, during the height of the recession, had a very different attitude. They opened up their contracts, feeling they owed it to themselves to double-check the rates due to market conditions, but now they are the same ones who are complaining because we want to open up a contract because the market is going in our favour. It was interesting to see. But I also have customers who understand what is looming, understand the dynamics, the history and they’ve had great dialogue with us and I like that. The rates may not go down, but the costs may go down because we will be collaborating. Educating customers has taken longer than many of us would have thought. Our customers have a mandate to keep their costs low, just like we do. They have to barter and negotiate, but the issues of our industry are becoming more challenging and we have to continue to deliver that message while we continue to provide good service. If we don’t deliver good service and still try to deliver that message, all our efforts are gone.

ARMOUR: I think there is no one answer to that. There are certainly shippers who look beyond just the price at the value you have to offer and those are the ones I enjoy dealing with because I think we can hold our own in that environment. There are customers now who are giving you $30,000-$35,000 a year and they create an RFP. Any money we make on the business we spend trying to fill out the RFP. And often there is no room for flexibility, such as moving some loads by intermodal; all they want is the rate. Carriers are focused on long-term stability. That’s what good carriers are looking at. Whether you have 1,000 trucks or are running a fleet of 10 trucks, when all of a sudden growth isn’t top line, you have to think of how to show a profit for what you’re doing. Also, going back to the impact of the recession, nobody seems to mention this, but I can tell you that my experience is that what seems to have happened with our customers is that they lost a lot of people during the recession. In order to stay competitive, they had to let people go. And now, what our customers used to look after, we end up looking after. That has really changed the whole focus. When they’re looking for value, I don’t know if they all realize just how much a carrier does now. In a lot of cases, the customer just doesn’t have the horsepower to do a lot of these things they used to do. In fact, in a lot of cases, it’s hard to even get a phone call back from them when you have an issue. We are running into more and more of this and every time we do, we have to add more staff or change our IT systems in order to comply with the customer’s needs.

CT&L: We’ve heard that shippers use different criteria to evaluate carriers and that carriers are looking to treat different shippers differently, based on the relationship they have with them. When you are going into rate negotiations this coming year, what are the key criteria that will guide you as to how you will treat a particular customer?

EINWECHTER: Profitability of the account, obviously. The amount of effort that needs to go into it – things such as trailer detention, do they pay for it? There are easy relationships and there are tough ones. The ones that are easy and give you the same amount of return or better, we will gravitate to those. The ones that fit our lanes, the ones that appreciate our value such as all the information we provide, all the backroom support, our customs capabilities, the monthly analysis of their trends and patterns. We have customers asking us for reports they can’t get from their own staff and we can turn that around in 10-15 minutes and that stuff doesn’t get picked up on an RFP.  Volume is vanity; profit is virtue. We have to focus on the bottom line not the top line.

CT&L: Back to the shippers as we continue to explore how you value service. Do both of you use scorecards and what are the main points you look at on those scorecards?

SPRINGER: One of the things we make sure we are doing is to have a standardized process. We do have scorecards in place. They are, for the most part, service-oriented, looking at key things such as percentage of loads turned down, ability to flex, on-time arrival, CVOR in good standing, etc. At the end of the day, the KPIs that any shipper uses are going to be somewhat consistent. There are KPIs that shippers need to run their business properly. For me, I become more engaged in terms of understanding from the carriers what are the things that are preventing them from hitting those service milestones – that’s the real value of the scorecard. It highlights issues on both sides. For example, if you are picking up the phone one day to tell the carrier you have 102 loads and the next day that you have 92 loads and then you struggle to understand why the carrier isn’t always executing to the levels that we need. Well, quite often, it’s because we put the carrier in a predicament. Understanding those issues, so that you can give the carrier a six-month, six-week, six-day and 24-hour forecast, means you no longer blindside the carrier. Now that we understand those core issues and we’ve put steps in place to mitigate them, the expectation is different. We’ve shared information and the expectation is that much higher.

CT&L: Michael, what’s part of your scorecard and when carriers are being evaluated, how much input do they get on that evaluation?

TAN: Our scorecards include a mixture of on-time performance metrics, lead time metrics, volume and cost metrics, and an issues log with, basically, root causes applied to every exception. Kudos to the carrier that comes to me with the kind of reporting I need to manage my own lead times and costs and sales objectives. I haven’t come across one that exactly meets my reporting needs, but I’ve come fairly close and inevitably carrier engagement in scorecard development is certainly necessary. At the end of the day, what sets apart a great carrier from a good one is what is proactively done to address the results of the metrics before a scorecard is even presented to me. Today, I’m working with a carrier on reporting that tracks and measures every stage of my logistics model between Toronto and Alberta with the intent of addressing every single exception with the accountable party, whether it be with the distribution centre, the carrier or consignee. If we are able to successfully administer this program it would drive 66% of my lead time out in serving the Alberta marketplace from Toronto without really impacting my regular costs and while maintaining near-perfect service performance levels.  

CT&L: One of the things we saw during the recession and during the recovery is shippers changing many of their carrier partners. What’s your strategy when it comes to dealing with incumbent carriers? Is it basically their contract to lose?

SPRINGER: In some regards, within a lane, all things being equal, unless there is a strategic reason to want to split that volume, there really wouldn’t be a need to not give the incumbent that opportunity. Getting back to RFPs, one of the things that we find is that being the incumbent doesn’t always give them the leg up because they know some of the inefficiencies in the network and tend to build that into their price, whereas the new carrier may not be privy to those issues and price accordingly. That’s why an RFP is an opportunity for carriers and suppliers to get connected, not to just grab the lowest cost and run. It really comes back to understanding what is in the incumbent’s cost and what is in the newcomer’s cost. There really isn’t a lot of magic to this. We all can do the math. Carriers I would say are in a lot better place today because we do understand what those costs are. We have a vested interest in having the right freight structure in place so the carrier can be successful. That’s the name of the game. We want them to be successful. We want them to survive. But it’s with the understanding the incumbent has to be very careful in terms of how they position themselves.

CT&L: I would like to ask you to look forward 5 or 10 years. We’ve heard about a lot of issues from both sides surrounding rate negotiations. Can the differences in priorities and viewpoints between shippers and carriers realistically be brought into sync and how can that be done?

EINWECHTER: It has to happen. Forget that we are truckers or shippers. As citizens of this country, for us to stay competitive and have a vibrant economy, forces are going to dictate that there is going to have to be better collaboration. We are going to be short staffed  and over regulated and we are going to have to work very collaboratively to make sure we can still move our freight as cost effectively as possible and in a timely fashion. I think it is going to happen. I’ve seen it. I’ve been hoping for it to be much closer by now than what it is. Unfortunately, 2008 was a bit of a reality check and set us back for a bit with a shell shock effect but we are still marching forward. It has to happen.

SPRINGER: I think collaboration can’t be an overused word. We are just scratching the surface to breaking down carrier-shipper relationships. Gone are the days where shippers just demanded without understanding the true cost from the carrier’s perspective. It really comes down to the opportunity of taking the waste out of the system. Until we sit down and understand that and drive towards a win-win scenario we’ll never get there. The key to making that happen is going to come down to a lot of trust. When you get into that collaborative environment it means we really need to truly understand each other’s costs, and how what we are doing is affecting the other’s bottom line.

TAN: I’m going to reiterate the collaboration. I don’t think we can afford not to be collaborative going forward. Supply chain demands are only growing in complexity from both the carrier and shipper perspective. Carriers have real cost pressures to deal with and shippers in Canada will be pressured more than ever by ever increasing competition, not only nationally but globally. We need to be much more transparent with each other to identify mutually beneficial opportunities and I think we owe it to ourselves, our businesses, our national economy and, frankly, the environment to collaborate on ways to reduce idle time, excess capacity and empty miles.

ARMOUR: I think it’s so important today that a relationship of trust and respect is built up between the customer and the carrier. Also I think it’s important that the people who are involved in the negotiations for each company know that trust and respect is there. Without that, I’m not sure how far we are going to go. The other issue is the availability of people in the future. I don’t think there is anyone who can say it isn’t tougher to find good people for all industry positions – not just drivers. It’s much tougher than it was 5 or 10 years ago. We all realize it’s just going to get harder to do. The only thing that could prevent a carrier from expanding is finding good talent for the company. It’s not the assets that’s the issue; all of us can go out and buy assets.I don’t think we want to see this industry get to a point where it becomes very unprofitable and with no competitive solutions. I know that’s not where shippers want to be. So how do we make sure the customer really understands carrier costs and wants the carrier to be successful because that’s so important long term? We have to do that together as a team. We have to trust each other, we have to be open about what our costs are but we have to be careful who we do that with because you have to make sure they understand and that you are both on the same page.

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