Logistics Quarterly

It’s difficult to find a better exemplar for innovation
than Phillip Yeager. Here’s an instructive look at what differentiates leadership in logistics and transportation.

LQ: I believe you began your career at the railway. What prompted you to begin your career in the logistics field and what are some of the milestones in your career?

Phillip Yeager: The basic reason that I left the railroad, which was the Penn Central, (The Pennsylvania and New York Central Transportation Company was formed by the merger of the pennsylvania Railroad and the New York Central Railroad in 1968) was that I didn’t feel that I was getting positions that were sufficiently rewarding. I was the assistant director of the railway, in various capacities. I felt I was second-best in terms of the level of these positions or the roles I had at the railway and I hated that. I wanted to get involved at a more senior level in a company. When I decided to leave the railway in 1971, I had spent 19 years there, 12 of which involved in intermodal transportation.

I decided that I would start a company and that it would be the best company in the intermodal business. So my wife and I moved from New York to Chicago because Chicago is the hub of transportation, and this is where my big competitors worked.
This move made the situation much more difficult in retrospect, but starting this company was something I thought I was capable of achieving. I had a wonderful wife. At the time, she was a legal secretary. She was a very efficient person, and I knew she and my family would back me in this endeavor. We had little money, and we were very cautious, as well as very conservative. I guess that’s been a pattern throughout my life, to be conservative. This is a great advantage in some ways. You must also have discipline and follow it through.

However, being conservative can also it can impede your growth later in life, when your company develops to a point where this conservatism does not help the company progress. In fact, this may have been the case when we reached a point where we were by far the largest intermodal marketing company.

In order to take the next step, we went public — to help develop the company’s recognition and profile and to contribute to a dependable future for all of the people we had brought with us during our first years. That was in 1995, and we recognized that there were many people in our company who deserved part of the profits and the value derived from the money that would be received from going public.

My son David, who was 43 at the time, was ready to take over, and we made him our company’s CEO. He had been with the company since he completed college and had done a great job; he had opened our hub in Pittsburg and our hub in St. Louis. Clearly, he was ready, and our younger son, Mark, was getting ready to contribute to the company as well. I could see that this was the time to make the changes to take the company to the next level.

There were distressing personal circumstances at the time as well. I had lost my wife, and this was very difficult for me and our sons. In this context, however, we took the company public. It was a very positive and important event. We had a network of 29 hubs when we went public. We also sold off some parts of the company before they announced the IPO.

We had an IPO and then a secondary offering a year and a half later. Both were very successful because we had had a 25-year record of moving up and improving our profits, plus the business practices of the people we had with us. We tried to bring the best people with us, and we really had — and have — in my mind, the best people in the intermodal business. Today, we're developing other phases of our business, which encompass the logistics and the brokerage parts of our business. So we’re a company that is very young, and strong, and it’s getting stronger. We are growing, and we feel there are many things in addition to what we are doing today that we will be able to do in the future.

LQ: What have been the most rewarding and inspiring things to you in this industry over the years?

Phillip Yeager: Seeing the growth of our company and the young people that came into our business to start hubs, and their professional development. This has been very rewarding. Most of them had only sales experience, not overall business acumen. But they joined us and built their own company. They were part owners; I think that was one of the best things we ever did with the company, to make it similar to a franchise, whereby the ownership was there, in the field.

As I look back, I realize this produced some interesting things. We did not supervise the people who joined us. We expected them to be the best. This was the primary criterion. The second criterion was “make money,” because you must make money to grow a company. I think that’s the most rewarding element — to see these young people grow in skill. Their ethics were very good. Not surprisingly, we also had a few little problems along the way. This is natural. But we took care of those things, and we always gave our customer the very best we had, and I think that was one very important characteristic common to all the young gentlemen who came into this business.

LQ: As partial owners of your operations, these people were stakeholders. Could you elaborate on this point?

Phillip Yeager: They were individual companies that were subsidiaries of our company. They were shareholders and part owners, normally about 25 percent, with their investment in the company’s stock. We also tried to bring in people with intermodal experience, not just good sales experience, and made a point of emphasizing the value of good intermodal experience in recruiting the right people. We had a lot of husband-and-wife teams; of the first 20 hubs, 15 were husband-and-wife teams. Generally, the women did not have much knowledge of transportation, but they worked very hard in other areas and helped their husbands to work hard because they wanted their business to be a success. These teams gave it everything they had.

LQ: Could you single out one or two elements of leadership that you consider of paramount importance in this business?

Phillip Yeager: I think of value of the individual in this context; we called them principals, rather than presidents, because they owned part of the business. These principals were known for their hard work, their ethics, and the desire and passion to make their company get better and better. A lot of times you see people who are successful, and they get to a certain point when they don’t have a desire to go further and to get better. These young men and women had that desire. I always used to say, when we were talking to people and bringing these young men in, that this is the crucial thing: if you want to be successful, you must work harder than you’ve ever done in your life. And in the case of husband-and-wife teams, they’re going to work together harder than ever before. I emphasized from the start that it’s important to never forget your family but that people must be dedicated to working hard.

And when you as part owner reached a point where you would be hiring people, I recommended hiring people on that basis — their desire to succeed, their work ethic and their desire to help the customer. These things will make you successful. And we expected you to be successful; within a year we expected you to be the second-largest and second-best intermodal marketing company in your area. The next year, we expected you to be the best. These are the things we strove for. We set these goals and expected you to achieve them. If you were not achieving them, I wanted you to talk to me about it. I think these were the golden rules.

LQ: You selected these teams and mentored them to perform to very high standards. When they were measured against these baselines and they weren’t where you wanted them to be, how did you proceed?

Phillip Yeager: Naturally, there were challenges, but these situations were corrected. When people couldn’t live up to what we considered our most important requirements, we simply did not continue to work with them. We wanted people with a desire to succeed. They had to be successful. We had only one situation, with a Hub Group hub in Columbus, where we had to close the operation down. I had picked the wrong man; my wife had even told me so when we first met him. If there was a problem, we took care of the vendors, and we took care of the shipper, no matter the circumstances.

On the other hand, we have had some wonderful people. There were young men who came into our company and made and fulfilled some incredible commitments. For example, one fellow told me that he would eliminate all debt within a year. Amazingly, he achieved this objective. These were memorable things, the happy parts of the business. We also had our disappointments, but we took care of them.

LQ: At a symposium in Chicago last year, one of the keynote speakers asked the delegates, “How many of you would put your hands up and say you’ve made some mistakes over the last year?” Many of the executives in the room raised their hands. The speaker expressed the view that if you haven’t made some mistakes, it’s likely your company has not been very innovative. How have you encouraged innovation and yet maintained your conservative approach to business growth?

Phillip Yeager: One of the most important lessons is learning not to bite off more than you can chew. In other words, in being conservative when we were expanding, we didn’t start off with 15 or 20 offices, or try to buy 15 or 20 companies. We started new offices at a rate of one to three each year. With this approach we could monitor the new companies and help them where they needed assistance to develop.

One of the most noteworthy things we learned was that you cannot substitute your knowledge for their knowledge; our principals had to make their own decisions in the field. We told them that if they had a problem, it was important to talk to us. Often I would answer our principals by asking them how they might resolve the problem. Nine out of 10 times they came up with the exact same answer I’d have given. On occasion, we would caution them, normally in the case of someone who was stepping out and was doing something that we felt was unlikely to be successful. We did have to curb some of that kind of energy. After all, all of these gentlemen were young and very energetic, and few of them had business experience. We felt they would grow into these business positions — and that’s what they did.

LQ: There is a view that tumultuous circumstances are better than stable ones to drive innovation in the supply chain. If a company has a supply chain that has been built on thousands and thousands of sound and informed decisions, why would executives want to make any departure from the status quo in order to change their supply chain or business? In the case of The Hub Group, what was the greatest impetus to transform your business when you went public?

Phillip Yeager: I can tell you that this is what happened to us and how we approached it. For the first 25 years of the company’s business, our company enjoyed prosperity and significant growth. Twenty-nine hubs were established, comprising a network of hubs that were completely independent. It was clear we were the top intermodal company, and nobody doubted this point. Even my competition couldn’t doubt it. Clearly, we were very successful. We were all doing very well, both personally and professionally. However, we felt that we were not accepted by many large companies as a partner because of our business model. For example, they couldn’t tell if we were going down the tubes.

So what did we do? We decided to go public. This was the best way to bring our company to the public’s attention and gain the corporate recognition that we required. After we went public, we found that there were a lot of things that we didn’t understand about the market and the marketability of our company.

At that time, we found that we needed to develop the ability to present ourselves well before the public. As a result, we began to change the company. We bought out all of the hubs and, after a few years, we centralized our operation. There were some bad feelings surrounding this move to centralization. These young men were out in the field, and they wanted to continue to make their own decisions. What we found, though, was that we were competing against huge companies, much bigger than us. We were faced with companies the size of J.B. Hunt and Schneider, which are very aggressive and well-run companies. In this context, we had to adapt, and eventually we completely reorganized our company.

Prior to our company’s reorganization, we had the view that everyone was an expert in everything. As we evolved, we found that logistics and transportation were becoming forces with new levels of requirements and sophistication. In transportation, for example, there were times back then when we could have taken even better care of our customer’s needs. All the people in our company who made decisions regarding logistics practices or brokerage decisions primarily knew the intermodal business. That was very characteristic of our company for almost
25 years.

A few years ago we made some big changes. We started to bring in people from the trucking industry. Trucking was not then a core competency. Later we became more international, and we had to bring in international people to teach us what was necessary to operate internationally. We made these changes and set up a department in international business and then took the same kind of steps to develop our company’s logistics expertise. We started to bring in people with logistics knowledge. I think those were the big things, the big changes in our company.

We also centralized our financial resources and found this was every effective. We thought for many years that it was best to administer our company’s financial resources locally. For example, our network of hubs had previously collected monies owed to them locally. In any company, cash flow is very important, and if you’re not collecting your money in a timely way, you can get into big trouble quickly. I think the centralization and reorganization of these resources, which took place only two or three years ago, have been a tremendous success.

Instead of having the person in charge of a hub also be the head of brokerage, logistics, intermodal and everything else, we centralized these areas of expertise and reorganized. For example, if we had a person in St. Louis who was a leader in logistics practices, or there were others who specialized in trucking in other cities, they were now able to focus on these specific areas of business. This was a big change in our company, and it happened only three years ago. We’ve had a tremendous overall improvement. We had a few people who left our company because of the scope of this transformation. We didn’t want them to leave, but they felt it was necessary. I still talk to an awful lot of people in the field. I don’t travel like I used to, but I still talk to many of them, and I could see their attitude changing. Initially, many people appeared to be against this kind of change. But they have since changed their minds, and stayed with us. With regard to those people who couldn’t make this change or didn’t want to, we hated to lose them. Good people are what made this company a great company.

LQ: The next two questions were prepared for LQ by Tom Menzer from the University of Tennessee and David Closs from Michigan State University, about corporate performance;
As you review your relationships with your customers who have outsourced activities to your company, what do you think are the characteristics that differentiate the successful relationships from the less successful ones?

Phillip Yeager: I think the most important aspect of growing a relationship with customers is, first and foremost, that they must have confidence in you. Your reputation is so important, your ethics and your past record. When you sit down and talk with people who are potential customers or existing ones, I think you have to show you have experience in the situations that they’re asking you to manage. I think experience and reputation are the two really big factors in getting a relationship started. Then you must produce. If you can’t produce, you’re not going to be around very long. You must do what you say and say what you do. I think that’s very important.

LQ: Of the major criteria used by your customers to evaluate outsourced proposals, which criterion do you think they rank most highly? Would it be service, price or technology?

Phillip Yeager: You know, they all meld together to work. You must have all three of those elements, and they must be at the level that the customer requires for that particular part of their supply chain. Each company has different needs, and that’s what makes it so very complicated. You can’t promise the customer something that you can’t produce because, as I said earlier, you just won’t stay around very long.

We have attempted to take on some logistical programs that we found were too big. We weren’t ready for them. We are still a young logistics company, but we’ve gained so much experience in that area that we’ve been able to make the adjustments, and people today are doing excellent work in this field. In the first three or four years in logistics, we lost our tails because we went in without a comprehensive understanding of what the shippers were asking us for. Perhaps this was due to the fact the shipper was trying to gradually ease into a program. However, by the time we finished such a program, we were pouring resources from our company into the program without remuneration from the customer that was necessary to cover our costs. Unfortunately, despite these extra resources, we were not providing them what they needed. We lost those companies as customers, and this was just a few years ago.

Today, we’ve gained so many new companies in the logistics field. But size-wise, it’s so important that you know what you can bite off. You have to know when the customer asks you to do something whether you can or cannot do it. Tell the customer if you can’t do it, so they can get other resources or you can work toward alternative solutions. But you cannot fail to deliver on what you have promised a shipper.

LQ: This is a very profound point. What are some of your insights on service provider performance measurements? I often hear the comment that people in this industry don’t draw a baseline to create an alignment of expectations.

Phillip Yeager: I believe we are fairly advanced in intermodal performance metrics. We monitor, I think, approximately 40 major lanes with the four major railroads. We generate statistics each month and give the shippers the benefit of these reports.

LQ: If you had the ear of the government and you could make three wishes that would most positively impact our industry, perhaps in terms of legislation, what would they be?

Phillip Yeager: I think that my primary concern, which relates to a very important segment of our business, is that the intermodal sector and the railroads need help in their infrastructure. The United States, as a nation, must help the railroads. And I don’t mean give them the money. I mean give them the opportunity through tax credits or low-cost loans to rebuild their infrastructure.
A lot of people don’t realize that in 1975 we had almost 80 Class A railroads. Now we have six. Before deregulation [through the Staggers Rail Act of 1980], the railroads were all going bankrupt. We were heading very dramatically toward the government taking over the whole railway system, which would have been a total disaster.

But the deregulation in 1980 gave the railroads the opportunity to run themselves on their own instead of based on the government’s expectations, which had compelled them to do things that they knew were wrong or they knew were killing them by needlessly heightening their costs. I would hate to see, more than anything else, a return to regulation. Reregulation would destroy the railroads. But there’s a fairly large group of shippers who are angling for this today, and I hope that Congress will understand the needs of the railroads and help them to improve the railways’ infrastructure.

LQ: At the Council of Supply Chain Management Professionals (CSCMP) annual conference in San Antonio, in 2005 (cscmp.org/wp/Events/ViewConference.asp?EventID=7909), Matthew Rose noted that the railways are still very regulated in many places and that people fail to recognize this fact.

Phillip Yeager: What happened during deregulation was that the railroads began to reduce their costs. They had to do this to survive; they either tore up track or they did not continue to spend the money on their infrastructure that they needed to.

Just to give you an example, when I started in the intermodal business in 1959, we ran the trains between Chicago and New York in a 24-hour cycle. Today, the best trains run in that corridor on a 36-hour cycle. When I was with the Penn in those years, they used to run it in a 15-hour cycle — ahead of the Broadway LTD, which had a 16-hour schedule. That’s how fast they can run it. But to maintain this schedule, you can’t have slow freight trains in front of you. What happened is the railway tore up the sidings so that they could no longer put those slower freight trains over that corridor.

The railway companies are spending billions of dollars today to get back the sidings they need to run the freight trains again. And in intermodal, companies are getting some very big chunks of money so that they can double-stack on all major rail lines and get the clearances they need with regard to overpasses and so on. Recently, intermodal companies have received very substantial amounts of money from the states of Ohio, West Virginia and Virginia to enable the movement of fast, double-stack container trains between the east coast and Midwest markets, from Norfolk all the way to Chicago.

There are some very nice things happening with the government recognizing that the alameda corridor [a fast rail cargo line that links the ports of Long Beach and Los Angeles to the transcontinental rail network] was a tremendous success. People were saying, “We didn’t have a peak,” but the alameda corridor helped them avoid the peaks and congestion at the ports. These two ports changed their methods and helped avoid the peak-type situations that we had during the last few years there. Those ports were in terrible shape, but they worked out their agreements with their unions and provided 24-hour service, which is what they really needed. Before, they had the capacity, but they couldn’t work the terminal or provide the hours that were needed during the peak periods.

This goes to a very broad statement, which is that people are starting to understand the needs of the various vendors and shippers who are supporting these things. You know, over the years, I’ve seen a lot of negotiations between shippers and railroads and shippers and intermodal companies, which have often been contentious. This is not the case anymore. They’re talking, they’re asking good questions, and they’re working together. I think that’s one of the most important things that is happening today.|