Logistics Quarterly Magazine - Volume 16, Issue 1, 2010

A Conversation with Derek J. Leathers, COO, Werner Enterprises and President, Werner Global Logistics

Interviewed by Thomas Goldsby, PhD, Associate Professor, Supply Chain Management, University of Kentucky and LQ Executive Editor

Strategies to Mitigate Risk and Build Better Business Relationships

LQ: Are more logisticians and 3PLs alike focused on the financial stability of their businesses in today's economic climate, as they cannot afford disruption to their supply chain. What are we seeing today in terms of due diligence on both sides of the relationship?

Derek Leathers: Today the first risk you must manage is your partners' financial viability and determining if they are going to be there long term. We've seen more interest by the shipping industry to understand and vet the financial strength of their suppliers. Interestingly, 3PLs and carriers alike have had to also take a much more prudent approach to vetting their shippers. If you look back five years ago, on occasion providers would be asked by their customers to provide detailed financial information. But this was the exception, not the rule. Now there's a new dynamic between shippers and 3PLs because we spend a lot of time making sure our shippers are going to be around next year and looking at their financial viability. This includes understanding the product they're selling and whether it, in our opinion, has a long-term value proposition in the marketplace. Then, we look at the underlying structure and financial health of their company and determine if we can really extend credit.

At Werner we prepared for the economic downturn and positioned our company well beforehand. We were debt-free going into the financial crisis. We're debt-free coming out of it. We sit today with around $750 million of equity. Our customers know, and feel confident, that no matter how long this crisis lasts, we'll survive the storm. That's given them great confidence.

With some customers that are struggling, we try to have an open dialogue to make sure we understand what they're doing to survive the storm. This gives us a better understanding to mitigate the potential risk that may exist. If they have a plan and strategy we try to stand with them to the greatest extent possible.

LQ: Is there a positive outcome(s) related to these due diligence practices?

Derek Leathers: Our financial strength has become part of our go-to-market strategy and it has taken on additional prominence as the CFOs become more involved in vetting the financial stability of underlying suppliers. If you're in our position, you're strengthened in the bidding process for business because there are very few carriers/logistics companies that can irrefutably speak about not having to use leverage or financing to develop or maintain their business. "Consistent, conservative, credible" are words that have become sexy again. Not long ago these same words might hold you back in the marketplace because people wanted flashy, highflying and leveraged firms. Now I think the "consistent, conservative, credible" approach makes more sense. Another positive thing is that today's world has led to a lot deeper dialogue between shippers and carriers on the long-term viability of both partners, and prompted them to look at how they can help each other through the storm.

We also practice what we preach. We've worked with some of our suppliers that are struggling because the market has never seen a downturn like this. Original Class A truck orders are down to record lows in terms of where they were just a couple of years ago. They went from 250,000 down to 80,000 annually. The OEMs aren't going to survive this kind of a downturn if some of their customers don't stand by them. We're still placing orders, albeit on smaller levels, to make sure their production levels stay alive and well. We need those plants to be around when this economy turns so we can buy trucks and trailers again.

There's also a significant tug-of-war going on every day right now; Shippers have said as soon as their sales drop, their supply chain comes under pressure to cut cost. The quickest way they feel they can cut cost is through calling for reduced 3PL rates. That's a short-term view. We don't begrudge anybody for making sure they have a balance between short and long-term strategies. The problem becomes, if you cut too deep in the short term - and only aim to deliver just rate-based savings - you drive a lot of providers out of the market. In the long term this will result in a much steeper curve from a price perspective when business improves. We talk to customers about rate optimization to reduce their rates and create efficiencies: How do you find the right mode to ship by? How do you eliminate unnecessary empty space and make sure you're cubing out every trailer? How do you make sure and eliminate unnecessary LTL shipments that really ought to be going truckload? This creates sustainable savings, both environmentally and economically.

LQ: When your firm looks at developing innovative and susA Conversation with Derek J. Leathers, COO, Werner Enterprises and President, Werner Global Logistics Interviewed by Thomas Goldsby, PhD, Associate Professor, Supply Chain Management, University of Kentucky and LQ Executive Editor stainable supply chain practices how does it look at innovation in its alignment with partners?

Derek Leathers: It's a great question to talk about how an asset-based truckload provider transforms itself into a more consultative logistics service provider. It's taken the better part of the last five to ten years achieve this. Today, our professionals focus more on being consultative with the customer and understanding their business before selling them anything: What is it that ails them, where are the gaps in their processes, where are the gaps in visibility, where do they feel they have information gaps that might lead to poor decision making? After we gather this information, we prepare a solution for them that goes well beyond the assets we offer.

One of the things we often talk about with customers is our company's migration from what we used to call freight movement into freight management. Many pundits sometimes suggest non-asset 3PLs are the future. But if everybody goes to non-asset 3PLs, we've got a real problem. Spreadsheets don't move freight; trucks do - and obviously, air, rail and ocean modes of transport. We want to be a freight management company that manages and consults on the best practices, but we also back it up with freight movement capabilities and hard assets.

LQ: How important is the investment in technology to continuously improving the business relationship between logisticians and their outsourcing partners in terms of mitigating risk and growing the business?

Derek Leathers: We love that fact that people have leaned up their inventory levels, especially retailers, because the leaner they go, the more technology you need from your logistics service provider to be able to back up these lean practices. You can make a strategy play and say, "I'm going to cut inventories by 25 percent," but if your Lead Service Provider (LSP) does not have capability to give you total visibility through the supply chain, the backlash of that step could be your product out of stock and lost revenue.

We've made a compelling case to a lot of customers that it's not only the freight under your control that you want visibility to. It is also important that you have visibility to your suppliers' freight that they're controlling. We have platforms now for those vendors to be able to input all of their orders. We can build the loads and provide the end-customer with this visibility, even on freight that isn't controlled by them today from a payment perspective. I think that's really critical because it doesn't matter if you know where 80 percent of your input components are if you don't know where the other 20 percent exist in the supply chain.

LQ: What are the "enablers" in technology that your firm has identified (or your clients) to maximize flexibility and mitigate challenges?

Derek Leathers: The biggest one we've worked very hard on over the last decade, and we really believe it's best in class at this point, is a platform by which a vendor of any size can log-on to a platform, as long as they have an Internet connection, and use a set of screens that we've set up to be skinned in order to look, feel and provide an experience like they belong to the end-retailer or the end-manufacturer. But they are, in fact, riding on Werner's system.

The vendor can then use those screens and a portal to accept purchase orders (POs), validate POs, or confirm a shipment on a specific PO. Our linkage with our underlying carrier partners enables us to track that PO all the way down to the

SKU-level and into the final destination, such as a manufacturing plant or the final store. Offering this service to the small vendor does not cost them money and it enables them to participate. If you go down the path of costing your vendors increasingly high dollar amounts in IT investment, it's going to end up in your component cost. We really try to make it seamless for those vendors and pain-free. We've received phenomenal feedback on this service from very large multinational manufacturing companies that have thousands of vendors now operating on our system.

It is also prudent to be very forthright with how you provide visibility. The honest truth is you often get the visibility in some of the countries around the world only through old fashioned muscle power; this often means you have people on the phones dialing multiple times each day. What we want and we're getting closer to, is a system by which all of this visibility is truly provided through electronic data interchange (EDI).

One of the things we've built is a "poor man's EDI;" If you've got Internet and you're in the hinterlands of China, we can send files in an email format that are auto converted into EDI with status updates and everything else. It allows the gentleman in the western provinces of China, with an Internet connection, to be able to communicate with us and, ultimately, with the customer, in a way that looks and feels like a multinational company.

LQ: What are the flexibility-based strategies that your firm uses, or its partners, to define its overall supply chain strategy?

Derek Leathers: When you think about the global marketplace for 3PLs, the global integrators, your FedExs, UPS', DHLs and people like that, they're obviously always going to have a place. They cast wide nets across the globe and provide one IT platform, one network for their customers. I believe they'll continue to grow and you will continue to see consolidation within the 3PL industry, just as you'll see global monoliths like Walmart, Home Depot and Lowes, and other big companies, continue to expand.

There are only a few true global multinational monolithtype retailers, though. Underneath that level, there's a need for all the mid-size and even large retailers to have 3PLs with a comprehensive portfolio of solutions who can make more customizable solutions. Where we try to prosper, for instance, is in making sure that we're able to customize our model to meet our customers' requirements from a technology perspective, and overall needs perspective. They're often a little further behind some of the global retailers because they simply haven't had the investment in their IT resources or in their supply chain resources.

At the same time, UPS, FedEx, DHL, and other firms in this field are valued partners of ours. When they deliver the goods to the United States, they must be delivered to the stores, and as a result they often end up riding on a Werner truck. There's a lot of "co-opetition" out there, where we're both competing, but co-operating. We need each other to really be effective.

(This interview is an abridged and edited edition of LQ's Executive Insight Interview Series, held December 2, 2009.)