The Future of Transportation
This year’s Council of Logistics Management (CLM) Transportation Roundtable, Toronto, kept logisticians and 3PLs better informed about global rules and business practices that have changed dramatically over 12 months. In addition to a snapshot of the panelists’ presentations, we’ve provided some supplementary information in this article.
The good news is transportation is poised to grow in the second half of this year, according to a panel of experts that recently spoke at the Council of Logistics Management’s Toronto Roundtable, entitled “The Future of the Transportation Industry.”
This road to recovery, however, has daunting challenges to mitigate, as well as key opportunities in some segments of the industry, noted the four-executive panel, comprised of: Patrick Byrne, senior partner A.T. Kearney, based in Washington, D.C.; Dan Einwechter, president of Cambridge Ontario-based Challenger Motor Freight; John Smye, CEO, of Nadiscorp Logistics Group, Mississauga Ontario; Carol West, president of the Canadian Society of Customs Brokers, Ottawa. Dan Goodwill, vice president, Business Development, Mississauga Ontario-based QuikX Group of Companies Inc, chaired the event.
Transportation revenues in the United States, often considered a bellwether for Canadian corporate performance in this sector, are forecast to fall an estimated 2.8 percent to U.S.$587 billion in 2002, down from U.S.$604 last year.
Not surprisingly, the purchase of trucks, planes and rail equipment has diminished but the predictions for transportation in the second half of this year are brighter and earnings are expected to rebound with strength due to increased volumes and due to new efficiencies that transportation companies have honed during the downturn.
Several segments of the transportation industry, such as the Less Than Truckload (LTL) segment, non-asset-based Third Party Logistics providers, and logistics and transportation companies providing an integrated portfolio of global solutions, can be singled out as likely to give particularly outstanding performance in an improving economy. Internet-driven logistics companies, are also poised for growth. UPS Logistics, for example, is focusing on the management of supply chains and in an investors’ conference, held in tandem with CLM’s Roundtable, UPS’ chairman and CEO, Mike Eskew, explained that... “More than ever, businesses realize there’s still too much fat in their distribution systems. But these are costs that can be reduced and managed more effectively with better supply chain planning and execution.”
The trucking industry, which carries up to 80 percent of Canada’s and America’s freight, has contended with a particularly difficult environment, noted Challenger’s Mr. Einwechter. But since September 11, the trucking industry’s importance in our economy has gained more stature, he said. Mr. Einwechter, who started the forerunner of Challenger Motor Freight in 1975 as a one-person truck operation, emphasized with candor that pundits such as the Citizens for Reliable and Safe Highways (CRASH) convey a message that often belies the outstanding track record and performance of the industry, and referred specifically to Challenger’s research into fatigue management involving four trucks and 24 of its drivers.
Insurance rates for “good” carriers are rising as much as 60 percent and in some cases soaring 800 percent, he noted. Even though truck manufacturers are at an estimated 30 percent of their capacity, “... trucks will soon go up by $8,000 per unit,” he cautioned, alluding to the federal government’s rules for emissions for heavy trucks that are designed to bring Canada into line with the United States and accelerate the use of cleaner fuels and engines. Canada’s fuel regulations, initially introduced in December 2001, will begin to take effect in October. They are expected to reduce emissions of sulfur content by 97 percent as was cutting emissions of other particulate matter.
Mr. Einwechter also referred to the crisis in finding skilled drivers to meet demand. (A Quebec Trucking Association poll recent indicated that the industry must fill up to 2,400 jobs immediately in that province.)
The Ottawa-based Canadian Trucking Alliance (CTA) is working with the Federal Department of Human Resources Development Canada (HRDC) to determine the scope of the problem and define solutions, which may include attracting skilled drivers from other countries, promoting the trucking industry to Canadian youth, and taking steps toward improved training.
A quick survey of some of North America’s largest trucking companies clearly echoes Mr. Einwechter’s overall view of the industry, reflecting the previous downturn in the economy as well as the convergence of other market forces.
ABFS, for example, a transportation holding company engaged in motor carrier transportation operations, intermodal transportation operations and truck tire retreading and new tire sales, saw its revenues fall 17 percent to U.S. $1.53 billion for the fiscal year ending December 31, 2001.
Yellow, one of U.S.’s largest trucking companies, reported a fall of 13 percent over 14 months starting in from mid-January. Revenue for 2001 was U.S.$3.3 billion compared with U.S.$3.6 billion in 2000. Nevertheless, Yellow Freight Chairman Bill Zollars has stated that the second half of this year will likely bring growth to the economy.
All transportation sectors have been impacted by the rising price of crude oil, which has risen to as high as $28 per barrel, up from $22 a barrel last fall. Canadian Pacific Railway Ltd. has stated it is looking at moving ahead with a fuel surcharge, a step already enacted by transportation companies such as Air Canada.
In a comprehensive overview of the industry, A.T. Kearney’s Patrick Byrne told CLM delegates that the primary market forces reshaping transportation in North America can be divvied into four areas, collectively driving a call for greater efficiency, expanded reach and integrated solutions. Evolving customer requirements, technology, supplier markets and globalization are the four key elements that are transforming the field, Mr. Byrne summarized.
Customers’ quickly evolving business needs are have huge ramifications in driving change, demanding more outsourcing to 3 PLs, single-source providers and global solutions. The focus on technology has resulted in the development of freight exchanges, e-fulfillment and shipment visibility. But perhaps most impactful is the drive for globalization and international traffic.
Many transportation companies have not been able to meet these requirements as well as contend with harsh economic variables such as rising fuel prices and a dearth of truck drivers. For example, Mr. Byrne noted the trucking industry has witnessed a sharp increase in the number of bankruptcies, from 1,610 in the United States in 1990 to 3,670 a decade later. And according to some analysts, lower-priced Mexican truck companies, which are expected to gain access to the U.S. market this year, will result in heightened competition in North America. Mergers in the rail sector have decreased the number of U.S. Class 1 Railroads from to five from 14 over a decade in that country, and analysts forecast revenues for U.S.’s ten freight railroads to grow by two percent at best in 2002. Sea capacity is projected to grow by up to 14 percent this year, while demand lags at an estimated eight percent. In the airfreight sector, mergers are accelerating and U.S. domestic airfreight carriers have slashed their capacity since September last year by up to 20 percent overall.
Air Cargo volume fell 9.6 percent in February, according to the Air Transportation Association based in Washington D.C., exceeding January’s 9.3 percent drop. February marks the 13th consecutive monthly drop. Air freight traffic declined to 11.64 billion revenue-ton miles as companies have not yet returned to production and inventory levels which were diminished during the economic downturn.
Mr. Byrne also emphasized that in the airfreight and logistics sectors there have been a spate of acquisitions, with UPS completing 20 acquisitions in the past year, including Fritz and Livingston, as well as Deutsche Post making acquisitions in more than 20 countries. Also noteworthy is FedEx Corp recently purchasing Viking and American Freightways.
This year’s CLM transportation panel of keynote speakers also shared the perspective of last year’s CLM panel concerning the blurring of modal boundaries. Parcel/small package and airfreight, and as well as LTL, TL and rail are coping with significant change. Heavier weight packages are now commonly sent via air freight and time-definite and critical shipments are often sent via LTL while TL are often transporting smaller shipments.
It’s a trend also evidenced by companies broadening their scope of transportation and logistics services through buyouts. In addition to the recent spate of acquisitions by giants such as Federal Express, UPS and Deutsche Post, companies such as Roadway Express Inc., have broadened their portfolio. Roadway, for example, entered the freight forwarding business to inaugurate Roadway Air earlier this year. (Its predecessor, Roadway Global Air, started by Roadway Express’s sister company Roadway Services Inc., was subsequently sold to FedEx, with its name changed to Calibre Logistics.)
The QuickX Group of Companies is another prime example, having recently launched an intermodal service to Western Canada under the brand name, QuiktraX Intermodal. In a press release, Gary Babcock, QuickX Group’s president and CEO, states: “We believe we can take this service to another level by establishing QuicktraX as a scheduled LTL and truckload service.” For 12 years QuickX has established itself as an expedited service provider.
Nevertheless, the outlook for some market segments looks brighter today than for others, Mr. Byrne noted. LTLs are particularly well positioned for a rebound in tandem with economic recovery, he said, referring in his presentation to companies such as ABF, Roadway, Yellow, Conway and USF, as performers in 2001 whose rate increases have held while passing on fuel surcharges, and maintaining cost controls. Mr. Byrne also alluded to these companies’ network optimization to improve transit times and their success in offering premium service such as expedited time-definite service.
The demand for time-definite service has certainly been heightened on a worldwide basis, as recently evidenced, for example, by Schenker’s announcement concerning its development of a new service standard for logistics services in land transportation to provide time-critical logistics services with an absolute and reliable deadline in most European centres.
There have been volume increases in the TL sector, largely due to the impact of bankruptcies and mergers, Mr. Byrne noted. Still, yields have remained weak.
The railway segment has lost considerable market share to the trucking sector, and suffers from persistent service problems, according to Mr. Byrne. Merger integration costs are declining, however, and synergies are taking effect. They are also starting to develop offerings and partnerships in the United States and Canada with other railroads to improve service levels while facing the prospect of a new regulatory framework.
Not surprisingly, UPS and FedEx were called the defining forces shaping today’s integrator market. In both cases, service offering and geographic reach is expanding. For example, UPS has just announced its foray into the Asian market with a new intra-Asia hub based in the Philippines at the former Clark U.S. Air Force base that was badly damaged by volcanic activity in 1991. Today’s hub is located at the Diosdado Macapagel International Airport, which features a pair of the world’s longest runways, 50 miles northwest of the Philippine capital city of Manila. As the missing link in that company’s global supply chain, UPS executives acknowledged recently in a conference call that their operations in the Asian market are smaller than those of FedEx, but UPS offers later pickups and earlier deliveries.
Both companies are becoming more like 3PLs, managing entire supply chains, pointed out Mr. Byrne. They are also facing intense competition from postal organizations. In Canada, UPS has challenged Canada Post with a law suit to the Canadian government based on NAFTA provisions. FedEx and UPS executives also have indicated that the U.S. post office has a monopoly on mail and it does not pay the same taxes - plus these couriers are required to set their package list prices at twice the rate of those of the post office in the United States. While UPS and FedEx have been likened to being the milkmen of the old days, some pundits have projected the post office’s share of Internet-driven deliveries to holdholds to rise by as much as 20 percent in the next few years.
Nevertheless, both companies are predicating a significant amount of their growth on the idea that fewer products today are moving via pallets - with thousands of identical products delivered to the same destination, a warehouse or factory. Instead they are going to the end-user, such as individuals or small businesses.
Due to the fact that 10 percent of all goods of all goods is comprised of warehousing and transportation costs, internet-based logistics management tools have risen in value to many companies. UPS and FedEx have made sizable annual investments in technology. UPS spends up to $1 billion annually. Oracle, SAP, and PeopleSoft are some of the software companies these companies have worked with. The old days of keeping plenty of product in a warehouse, whether routers or running shoes, are fading with the drive to enable companies to accelerate parts of an order on very short notice to coordinate delivery. New systems will likely enable some companies to make more strategic decisions about where they locate factories worldwide and save them a fortune in tied up inventory capital.
John Smythe, CEO of Nadiscorp Logistics Group, Toronto, singled out an old paradigm of logistics founded on the traditional model of maintaining large inventories and money tied up in goods, coupled with the resultant opportunity costs, and dollars dedicated to inventory instead of business development elsewhere. This paradigm is quickly becoming obsolete, he said. In fact, Mr. Smythe called the cost of inventory a “sin” as it covers up the fact that companies cannot always match supply and demand. “It is really a bridge because we cannot match information between supply and demand,” he stated.
Today it’s important that logisticians look at all the components of the economy from primary to secondary manufacturing segments, to retailers and consumers, with a view of logistics and transportation as the glue or connector that tethers the economic elements together.
Mr. Smythe referred to technology as a vital tool in helping to mitigate the paradigms of the past. “It’s more of a perfect world,” he said, adding, “transportation is the winner.” Integration, collaboration, smaller shipments, consolidation and outsourcing shipments to meet order fulfillment requirements, not warehousing requirements, is how the new paradigm is being defined, he suggested.
In his overview, Mr. Byrne clearly shared Mr. Smye’s perspective about the heightened value placed on today’s information systems. He also noted that 3PLs infrastructure investments are paying off in higher operating margins, mentioning UPS Worldwide Logistics, Menlo, Ryder, Excel, Tibbet (US), and APL Logistics.
He also emphasized that non-asset based 3PLs have traditionally outperformed asset-based providers.
Three items were top of the list formed by an A.T. Kearney global survey concerning 13 shippers’ expectations of “value from logistics suppliers” in the future - global access, supply chain integration facilitation and supply chain integration implementation. These elements also signified the greatest ways suppliers can differentiate themselves from others in the market.
Today, however, 95 percent of the survey’s respondents placed a premium on labor-cost savings and 100 percent valued transportation savings - versus projected values for the future where only 60 percent of the respondents noted labor-savings would be of great value and 66 percent signalled transportation savings as of high value.
In summary, Mr. Byrne stated shippers will likely continue to rationalize their transportation and logistics providers, while demanding single-source suppliers with global reach. This means logistics providers must develop comprehensive suits of integrated mult-modal systems with high service levels. The drive for state-of-the-art technology is also essential for integration with all supply chain participants and e-enable capabilities - and logistics suppliers must realize the convergence of information, funds and physical goods flows.
Carol West, president of the Canadian Society of Customs Brokers, emphasized that the world’s two greatest trading partners, Canada and the United States, are dealing with a morass of issues at the border, and security instead of a “business first” approach continues to predominate customs at the border.
Canada and the United States have since taken steps toward developing an integrated North American security network by stationing U.S. Customs inspectors at the port of Vancouver, Halifax and Montreal. Canadian inspectors are now at work in posts in Seattle, Tacoma and Newark, N.J.
Customs is aware that of the 158,000 importers who conduct 10 million commercial shipments annually across the border, the top 1,000 of those importers represent 49 percent of the transactions and 72 percent of the import trade by value.
Ms. West noted that Canadian customs brokers handle up to 80 percent of all commercial importations and collect up to $16.5 billion annually for the federal government in taxes.
Some of the factors defining the future for customs are: the need to facilitate the movement of low-risk goods, to have more information in advance of importation and have it provided electronically
One of the greatest challenges coming to the fore is the Customs Self Assessment (CSA). It’s designed to facilitate low-risk transactions and focus on the high-risk transactions at the border, but of the 15 importers that have applied only two have been approved and of 21,000 truck drivers that have applied up to 1,400 have been rejected. The federal government is also calling the first phase of its Advance
Commercial Information System (ACI) to be implemented in May this year in regard to the mandatory usage of the Harmonized System (HS) code.
ACI, which is designed to ensure the admissibility of data is provided and transmitted electronically for pre-arrival purposes to automate the targeting and selection process at the border, will continue to roll out in phases until November 2003, before it is fully operational. This will include reporting in regard to mandatory cargo and importer data for all modes of transportation.
This means business will be required to follow mandatory HS classification, data elements compatible with the G7, liability of provision of data sets as well as other criteria.
One of the key problems today in this context is the process of matching customs brokers and their importer clients. It’s both “expensive and imperfect,” Ms. West noted. She suggested a new level of collaboration between carriers, importers and government. Getting information from source to maximize use of the pre-arrival processes at Customs, is of paramount importance in the solution process.
As the “unequivocal voice of customs brokers in Canada, committed to develop and support a broad, industry-wide solution,” Ms. West noted to delegates that CSCB is in a unique position to develop collaborative solutions with its many partners.