Rates for shipping will continue to escalate as regulations increase, insurance rates rise, fuel cost escalate and equipment gets costlier.  During the past year, many shippers saw increases of 6-8% on a year-over-year basis.  Those that didn’t see that are likely to be under constant pressure to pay more for services.  In fact, some analysts predict that trucking rates will raise 15-20% over the next few years as capacity, especially in the domestic truckload market remains tight.

Without a doubt, many truckload fleets decided to limit capacity after getting caught in the 2008-2009 recession.  That intentional strategy fit well with the very tight driver supply market currently being experienced.  Drivers are a premium due to the nature of the job, other employment options and most importantly tighter regulations.  None of that is expected to change anytime soon.  Capacity will remain tight and thus allow for an increasing environment when it comes to rates.

LTL carriers continue to see more robust volumes and higher yields over the last 2 years and will continue to exert pricing pressure to earn an adequate financial return.  Driver wages, healthcare, equipment costs and insurance continue to escalate.  LTL will continue to seek increases of 4-6% annually.

I recently modeled the operating costs for fleets on a cost per mile basis.  I used equipment costs, insurance, wages, benefits, maintenance, tires, taxes, and tolls and incidentals.  Based on research and other factors, with fuel running about $3.85 per gallon, the average cost of operating a tractor-trailer unit runs between $1.41 per mile for low cost operators to $1.90 per mile for high cost operators.  Those numbers do not include allocations for overhead and profit.  So, check out your rates and if you are currently below these levels, be prepared for increases.

I recently returned from my sixth trip to the Express Carriers Association (ECA) annual marketplace.  This year, the marketplace was conducted in Chicago and attendance was up.  I don’t know if it is because the economy is doing better, or if Chicago is just a more luring location than others.  For those of you not familiar, the ECA marketplace is a speed dating affair where shippers/3PLs/intermediaries are matched with about 50 ECA carriers for 15 minutes each.  In the past, there would be nearly 50 “shipper” tables, but this year there were 60, or a 20% increase.

I continue to hype this conference as one of the more productive in the industry, because real and actual business get done.  While 15 minutes isn’t sufficient to negotiate contracts and define process, it is enough time to both carrier and shipper to determine if there might be a fit for various business opportunities.  It’s exactly why I attend.  SmartFreightWare has many clients where we consult and help them find solutions to improve their process, cut their costs or both.  For example, this year I had a client who requires inside delivery and lift gate services for 70% of their shipments and their primary LTL carrier rates for this are quite expensive.  I found a solid number of carriers who not only can provide inside and lift gate, but minor set-up, dunnage and pallet removal and true white glove service.

It’s very difficult to categorize the carriers that belong to ECA.  One might think that by its very name, all of these carriers would offer expedited services.  I really don’t think that is a common theme.  I met carriers who did provide hot shot services or airport recovery/delivery but most carriers concentrated on various niches.  There are regional parcel carriers, messenger services, retail distribution, home delivery, white glove, warehousing and fulfillment and just about everything in between.

During this year’s ECA conference, I asked one of our partners to attend and they were blown away by the scope and quality of the providers.  It gives them more options for their customers as it does me.  Unfortunately, of the shippers in attendance, only about a dozen were true shippers and the rest some type of intermediary.  However, it just makes the intermediary more valuable to their client because by partnering with an ECA carrier, an intermediary can expand its solution.

Yesterday we looked at the some of the discrepancies between the types of carrier accessorial and extra service charges and how they are calculated. Today we look at:

 LTL Carrier Rate Myth #3: LTL liability coverage from one carrier to the next is all the same.

 Fact: Carrier liability coverage for freight loss or damage can be very confusing and can vary by carrier and commodity being shipped. I haven’t reviewed the limited liability section in every carrier’s tariff, but think it is safe to say that coverage can be as high as $25.00/lb. up to a maximum of $100,000 per shipment and as low as $10.00/lb. limited at $50,000 per shipment. There are also many commodity exceptions. For example, carriers usually limit their liability to cents on the dollar on used/refurbished/rebuilt commodities being shipped.

 Amongst other things, shippers also have to be wary of how a negotiated FAK affects carrier liability, NMFC released value provisions, and so on.

Take away point… there are lots of rules, and these carrier rules are much like law in general.  Lack of knowledge doesn’t bail you out.  If you don’t know the rules up front you have to suffer the consequences.

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Yesterday I shed some light on the misconception that good routing decisions can be based on LTL carrier rate discount percentages alone. Today we look at:

LTL Carrier Rate Myth #2: “All carrier accessorial and extra service charges are the same.”

 Fact: There is a wide discrepancy between the types of carrier accessorial and extra service charges and how these fees are calculated. As many as 20+ of these additional fees may or may not be found in your carrier’s rules tariff varying from notification and limited access charges to single shipment and inside delivery/pickup fees. Types of charges that seem to be industry standards ( fuel surcharge, hazardous material fee, lift gate fee, residential service and over length surcharge) can vary by carriers by as much as 50%. The format as to how these fees are assed can also fluctuate by carrier and fee type. Some fees are charged using cents per hundred pounds, some are flat fees and percentage add-ons, with minimums and maximums.

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I get to talk with a lot of shippers all over the country about their transportation and am stunned by some of the misconceptions I hear about LTL carrier rates. So… I decided to take a week and expose 5 of the most common LTL Carrier Rate Myths.

 Myth #1: “I have great rates; I’ve negotiated a 70% discount with all my carriers.”

 Fact: There are a lot of variables that go into calculating a LTL shipping rate. Basing rating decisions on discount alone is a costly mistake as base rates themselves can vary by as much as 36%. In order to accurately determine the net cost of a base rate you have to do the math. For example, check out the difference in the base rate’s net cost between ABC Trucking and XYZ Carriers for a shipper looking to move a 1,000 lb. shipment at a class 50 from Columbus, OH to Chicago, IL.

ABC Trucking
Carrier Base Rate $488.10
(Less) 70% Discount (341.67)
Net Cost $146.43

XYZ Carrier
Carrier Base Rate $388.50
(less) 65% Discount ($252.53)
Net Cost $135.97

Even though  ABC Trucking had a 5% greater discount than XYZ Carrier its net cost was actually 7% or $10.46 higher.        

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I continue to ask carrier sales representatives about the various job titles they call upon.  My instincts tell me that the days of the Traffic Manager or Transportation Manager have all but disappeared.  I do engage with Logistics Managers from time-to-time but only in larger organizations and their responsibilities go well beyond the management of shipping.  In most cases, Logistics Managers play the role of supply chain manager and are involved with purchasing, warehousing, inventory, order fulfillment and customer satisfaction. Yes, transportation management falls in this role, but only as a complimentary role.

 Logistics and Supply Chain Managers mainly reside in very large organizations with multi-million dollar budgets.  Small and mid-sized companies have mostly determined that having anyone with extensive knowledge of logistics and, especially transportation, is a luxury they often cannot afford.  Thus companies either just get by, hire a third party logistics company to assist them or do nothing.

 The reason traffic and transportation managers were so abundant 20 years ago is that shipping costs can be a substantial portion of the supply chain equation.  A traffic manager could easily be justified, especially with budgets in excess of $1 million.  The complexity of transportation has not decreased, in fact, it has probably increased.  So what happened?  Like so many positions, companies that ship or receive goods simply could not afford the extra resource.

 Unfortunately, CEOs, CFOs and COOs of organizations don’t understand the inner-workings of shipping and whomever they have managing the function is expected to “figure it out.”  When I talk to C level executives, they trust their people to do the best job, but in all too many cases, don’t provide their people the tools and authority to manage the function.  For example, I know transportation managers who have a $1 million budget, but are not authorized to purchase a new pen.  They can make costly routing decisions, but cannot make other critical decisions about overall transportation strategy.

 The C level has to understand that shipping costs are going to continuously increase and that if they really want to prevent that from happening, or minimize the increases, they have to empower the people doing the work, and more importantly provide them tools.  These tools take the form of software programs to help optimize routings, collect detailed data, integrate with other systems, and insource what might be outsourced.

 I often joke with CFOs that if they wanted they could create financial reports and controls using a simple spreadsheet.  They all laugh at that suggestion as it would be totally counter-productive and waste a lot of time.  Giving the people who ship or buy product , transportation management software is the equivalent of using accounting software in place of spreadsheets.  If the C level really wants to know what is happening in the shipping trenches, simply talk to a transportation management software provider and compare the functions that can be automated and optimized versus functions being managed manually and sub-optimally.

The USPS released their financials for first fiscal quarter of 2012 (click here to view financials).

For those who don’t want to read the article, here are the highlights, or as I prefer to say, the lowlights.

A net loss of $3.3 billion for the Quarter

• Follows a net loss of $5.1 billion for fiscal 2011
• The loss for 2011 would have been $10.6 billion but legislation was passed to postpone payment of $5.5 billion to pre-fund retiree health benefits
• Also postponed is a consolidation of the postal network that would save $2-3 billion
• Total mail volume is down 6%
• Operating revenue down 1.1%
• First Class mail revenue was down 4.1 percent year-over-year
• First Class mail volume is down 15-25% since peaking in 2006
• Mail, excluding First Class was down 2.9%
• $8.5 billion loss in 2010 and $3.8 billion in 2009

One of the more interesting tidbits is that the USPS has a plan for rationalizing its network and closing down 252 of 487 mail processing center, but agreed in December agreed to delay the closing of any Post Office or mail processing facility until May 15, 2012.  That decision was made in response to a request made by multiple U.S. Senators.  An industry consultant predicts that due to upcoming elections, that May 15^th day will be pushed back post-election.

Are you kidding me?  Is this really happening?  Now, I don’t want to see anyone lose their job whether that be in private industry or the government, but common sense tells me that changes are needed and not after the election. Now!  We all know that if these circumstances were present in private industry, changes would happen so fast it would make our heads spin.

While many think the government can’t run anything correctly, the fact is the leadership of the USPS has plans but politics are getting in the way of making hard, but necessary changes.  One consultant suggests that the USPS should simply raise its rates to cover its costs.  That would mean rates would have to go up 50% or more, and with those prices there would be further erosion of business.

I have two very novel ideas.  The first would pass legislation (if that is really necessary) that dictates the USPS operate as a real for-profit business.  The USPS has an infrastructure that could be leveraged several ways to increase revenue  and ultimately customer satisfaction.  The other idea would be to privatize it.  Have a real company run it. I can guarantee you that a for-profit company would run the USPS in such a way that it would turn a profit and that the rates for service would be competitive.

The only other option is to continue running it as subsidized service so all Americans can enjoy USPS service at great rates.  It can simply stand in line behind Medicare, Medicaid and Social Security to have the government bail it out.

Old Dominion Freight Line reported an 84.4% increase in profit during 2011 while revenues increased a whopping 27.1%  Old Dominion’s profit was $139.5 million while revenue during the 4^th Quarter almost equaled revenues during the 3^rd Quarter.

 Furthermore, Old Dominion’s yield, or revenue per hundred pounds increased by double digits and their overall operating ratio was an impressive 86.9.

 It is clear that Old Dominion continues to out-perform its national carrier peers.  Many LTL carriers are experiencing improvements but not to the magnitude of Old Dominion.  In fact, Old Dominion is beginning to leverage their success by adding drayage, international and logistics services. 

 I recently toured the Old Dominion facility here in Kansas City.  It is an impressive facility and they go to extra lengths to prevent claims and run a clean operation.  Old Dominion is also a carrier that doesn’t use much if any rail to help them balance their network.  Whatever, they are doing, they are doing it right.

Bill McGee recently wrote an article for USA Today discussing the “f” word, or the “fees” that obscure the bottom line for travelers.  I think many people know about the various fees airlines charge and he stated that a survey conducted by Consumer Reports, CR Survey Finds Comfort Issues and Extra Fees are Sore Point with Air Travelers, indicated that 40% of travelers are flying less because of various airline fees.  Recently, the DOT stepped in and implemented rules regarding transparency of airline taxes so as not to mislead consumers.  However, these hidden fees have now been adopted by rental car companies, hotels, resorts and cruise ships.

 Anyone dealing in the shipping world has experienced the sometimes unkind world of hidden fees in carrier rules tariffs and surprise accessorial fees.  Especially, dominant in the LTL industry, these fees can upset anyone’s budget apple cart.  As the ridiculous carrier base rates continue to escalate along with nonsensical discounting, carriers will need to have ways to cover costs and make a profit.  Many rely on these extra fees to do just that.

 The more astute shipper uses a Transportation Management System (TMS) to store carrier contracts complete with up-to-date rules and accessorial fees so they know to the penny, what the exact costs of shipping will be.  I suppose it’s about time that someone brought another type of TMS to the market, a Travel Management System so travelers will know exactly what each component of traveling will cost.

 If not, we might be in for some government intervention in the form of more regulation.

Saia reported vastly better financial results for 2011 than it did in 2010.  An overall 11 percent increase in yield drove the company above the $1 billion revenue mark for the first time and higher profitability.

 Saia’s President attributed the yield improvement to more disciplined pricing as evidenced by a 1.2% decrease in shipping activity in the 4^th Quarter.  Rick O’Dell also stated that he believes pricing will continue to increase during 2012.

 LTL carriers have seen double digit percentage increases in yield during 2011 coming off very slow and depressing years of 2009 and 2010.  Tighter capacities, increased regulations and higher equipment costs are driving operating costs up and LTL carriers have not been shy about seeking increases from all of their customers.

 Many analysts expect pricing to remain firm with very modest increases for 2012.  LTL pricing will follow suit with the overall economy.  If the economy picks up slightly, expect rates to do the same.  If not, pricing should only marginally increase to cover slightly higher 2012 operating expenses.