Looking for LTL savings in all the wrong places

at a glance

This article examines why shippers feel powerless to negotiate better LTL rates, and offers suggestions for better LTL sourcing.

These are turbulent times in the less-than-truckload (LTL) freight industry. Bankruptcies, mergers and rising fuel and insurance costs are all combining to make LTL sourcing a greater challenge than ever before.

In this new environment, traditional sourcing techniques are losing their effectiveness, leaving shippers with little or no ability to protect themselves from rising costs. Let's look at some of the ways you can beat the trends and lower your LTL costs even in a seller's market.

A sluggish economy has hurt transportation providers of all modes, but the LTL industry faces some specific challenges of its own. The demand for freight in general has increased significantly over the last decade, yet the LTL industry has not shared proportionally in the overall growth. At $18 billion, the industry today is not much larger than it was in 1993, while the demand for truckload and parcel freight has more than doubled during the same period.

Much of the move to truckload and parcel is being driven by fundamental changes in the way businesses use freight. As more and more manufactur-ers and retailers look to logistics as an area of strategic competence, programs to optimize freight usage are driving volume away from LTL. Many shippers now actively look for opportunities to consolidate larger LTL shipments into full truckload.

At the same time, parcel carriers' hundredweight programs have provided increasingly attractive alternatives to LTL for low-weight shipments. In addition to competitive pricing, hundred-weight programs offer vastly simplified tariffs and much shorter transit times — the latter advantage becomes particularly significant in view of the increasing prevalence of lean manufacturing and just-in-time techniques.

In addition to the long-term issues facing the LTL industry, a variety of near-term pressures are combining to squeeze carriers' margins:

• Insurance costs have skyrocketed over the past several years, rising on average by 37% between 1999 and 2002, with some carriers' rates increasing up to 800%.
• Volatility in fuel costs has also hit the industry hard, with the American Trucking Association estimating that each $.10 rise in diesel costs triggers 1000 bankruptcies.
• Federal regulations are poised to take their toll as well. Emissions regulations have increased the cost of new trucks; additional cuts scheduled for 2006-2007 may also force a transition to no-sulphur diesel, further exacerbating fuel cost pains.
• And while the new hours-of-service regulations will affect LTL carriers much less than truckload, long-haul carriers in particular may find themselves forced to hire new drivers in order to maintain current service levels.

So it should come as no surprise that the LTL industry is consolidating with a vengeance. The Yellow-Roadway giant will control over 17% of the total LTL marketplace, and almost 60% of long-haul traffic. While Consolidated Freightways's exit from the LTL business made the biggest headlines, a record setting 2500 other carriers also folded in 2001. This has translated into a general tightening in capacity, as the survivors have not rushed to pick up excess business that's unprofitable for them.

Carriers are increasingly focusing on efficiency and profitability, and with an excess of freight in the marketplace, they can afford to be choosy about what they carry and at what price. The bottom line: LTL is a seller's market, now and for the foreseeable future.

The traditional approach to LTL sourcing is to avoid it. Given the complexity of the category, most companies have chosen to concentrate on driving as much LTL spend as possible to other modes. Those who have negotiated LTL positions have focused on tactics designed to wring concessions from carriers — forcing carriers to take low-margin or loss freight in order to win profitable business, and insisting on aggressive FAK (freight all kinds) structures, fuel-surcharge/accessorial caps and low minimum charges.

Unfortunately, these tactics are increasingly ineffective in the seller's market. Faced with a detrimental FAK or unattractive shipments, LTL carriers will respond by hedging with less-aggressive discounts or simply walking away. Some shippers have responded by running their LTL spend through the e-auction tools which have lately gained popularity in other categories, only to find that the lowest bidder generally provides service to match. Others have resorted to single-carrier solutions that maximize their leverage, but also render them vulnerable to future rate hikes.

Most shippers have simply resigned themselves grudgingly to 5-6% annual cost increases.

But resignation isn't the only option. Shippers who are willing to change their LTL sourcing philosophy can still recognize savings, even in a seller's market. The key lies in building strategic relationships that intelligently align your carriers' strengths with your distribution requirements.

The trend towards consolidation in the LTL industry can obscure the fact that carriers have significantly different areas of strength, particularly at the regional level. For example, a carrier with a terminal one mile away from your facility in Chicago will almost certainly offer better pricing than one who needs to run shipments to that facility through St. Louis.

Moreover, each carrier's strengths and weaknesses are constantly evolving as their customers' networks change. What if the carrier who services your plant in Atlanta just picked up three other customers nearby? Now their trucks don't have to run back to the terminal empty — you're making your carrier's network more efficient, and if you're on top of the game, you can negotiate for a share in the cost savings.

But implementing this kind of intelligent, dynamic sourcing requires a real change in your approach. Traditional negotiation tactics can obscure your distribution requirements and prevent carriers from giving you their best bid. Instead, the emphasis of your sourcing process should be on achieving clarity. Give carriers as much visibility as possible into the structure of your transportation network, and make sure they have incentives to submit creative proposals which capture their specific economic efficiencies. You'll also need the right tools to gather carriers' proposals, analyze them and track ongoing compliance.

The savings are there; you just need to know where and how to look. LT

Jeff Ryan is a principal at Tigris Consulting (www.tigris.com), a specialized supply chain management consultancy. His specialty is in transportation sourcing.

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