Seventy percent of the goods in the U.S. move on a truck, which largely accounts for the attention shippers give to the motor carriers who carry that freight. For the first 20 years following deregulation, shippers largely were in the driver's seat, able to dictate the terms of their dealings with carriers, but those salad days have come to an end. The carriers now are enjoying the swinging of the pendulum to their side, which is leading savvy shippers to finally get serious about forming collaborative relationships with their key carriers.
The motor carriers themselves, however, are facing issues that will not be easily resolved, such as driver shortages, ever-increasing fuel prices, requirements to purchase cleaner burning engines. How the carriers confront these issues are sure to carry consequences for the shipping community.
Logistics Today conducted a series of exclusive interviews with top executives at some of the country's major truckload and less-than-truckload (LTL) carriers. These logistics experts shared with us what they see as their business challenges today as well as how they envision the domestic transportation market playing out through 2006 and beyond.
Hours of Service
The ever-evolving Hours of Service (HOS) regulations have forced truckload carrier Werner Enterprises Inc. (www.werner.com) to concentrate on efficiencies in operating its trucks. "We use a lot of technology to split loads or trips at the mid-point or other points so a driver can maximize hours while the load continues to move," notes Derek Leathers, executive vice president of Werner's van division and international.
Werner, like other carriers, works with customers to emphasize the importance of accurate loading and unloading times and honoring those commitments.
Truckload carrier Schneider National (www.schneider.com) finds the new HOS regulations are tightening driver time, with a loss in productivity and less flexibility for drivers. More work is being handled in daytime hours, explains Scott Arves, president of Schneider's transportation sector, "so we look a lot more like a 6AM-to-8PM fleet, which puts more work into congested hours."
Although LTL carrier FedEx Freight (www.fedex.com) hasn't had to make major adjustments because of the HOS rules, FedEx Custom Critical, which is within the group overseen by president and CEO Douglas Duncan, has had to change operations to meet the new regulations. The main issue has been whether drivers have to spend an entire eight-hour stretch in the sleeper berth or split it.
Although other means have been used to challenge the new rules, the American Trucking Research Institute is investigating the matter to determine the facts about split shifts. "I feel confident we can go back to the Federal Motor Carrier Safety Administration (FMCSA) with research in hand and get them to make changes," says Duncan.
It's the rare carrier today that isn't actively recruiting more drivers. Facing competition from the manufacturing and construction industries for essentially the same labor pool, the driver shortage is predicted to last for years.
As Arves explains, Schneider is doing the same as others in retaining drivers. "It comes down to pay, treatment and accommodation of life style," he says. The carrier raised driver wages aggressively last year, did so again in January and is looking for another increase later this year. The company has a wide range of job opportunities for drivers, including over the road, regional and dedicated.
Schneider is also seeking to hire more Hispanic and female truck drivers. "One of the other markets we're looking at for drivers," notes Arves, "is the more mature driver, kind of the second-career driver market. We've been working with organizations like the American Association of Retired People (AARP), as an example, to try to appeal to 50- to 55-yearolds that want to work another 10 or 15 years and find driving to be a very attractive second career."
To retain its drivers, Werner focuses on the quality of life issues by developing jobs that get drivers home every night or more often than previously. "We're doing everything we can to give them the newest trucks on the road," adds Leathers. "We think our fleet is one of the newest out there, and that's something drivers appreciate."
Werner has in-cab communications as well as a paperless log system the company feels gives it a competitive advantage in seeking new hires or to retain present drivers. In the carrier's view, its drivers are able to more productively use time that other drivers spend filling out paper logs.
Bill Zollars, chairman, president and CEO of YRC Worldwide Inc. (www.yrcw.com), parent company of national LTL carriers Yellow Transportation, Roadway Express and the USF family of regional carriers, feels that in addition to paying well, having good benefits and quality of life for its drivers, being primarily a unionized company greatly contributes to YRC's turnover rate being only about 2%. He also notes that because of its driver wage and benefits-package, the company has had good luck in attracting experienced drivers from other companies.
"We've tried to reach out into different areas in seeking new drivers," explains Zollars. "We're working with former members of the military as well as those coming out of trade schools and so forth. We do a fair amount of advertising, particularlyin cities that might be a little bit more challenging."
FedEx Freight doesn't hire a great number of drivers from outside its walls, preferring to train from within, taking an 18- or 19-year-old dockworker that shows a good work ethic. By the time that person reaches 21, the company helps them get their Commercial Driver License, and when a driver position opens, that person is in line for a promotion. "If we can get an employee to last through the first year," claims Duncan, "and get used to the outdoor elements and nighttime work and all the crazy things about the trucking industry — we tend to keep them for a career."
While ownership of an oil field along with a refinery might seem the only way to keep control of escalating fuel costs, carriers are taking steps to hold down diesel usage as much as possible — the costs are taken from their bottom lines as much as they are from those of the shipping community.
While noting that fuel surcharges have been a part of the industry since 1996 and that costs can get passed on, Zollars points out that YRC is constantly working on getting better fuel mileage. "All of our trucks are governed at 62 miles per hour, which is the optimum speed for fuel consumption," he says.
FedEx Freight looks at more fuel-efficient diesel engines and more efficient networks as keys to burning less fuel for every unit of transportation provided.
"When we went to the 2002 engines, we initially had a drop in fuel mileage," Duncan notes. "But in working with the engineers to get settings and software positioned exactly right for the way we use these vehicles, we came close to where we were before."
FedEx Freight is testing a wide range of fuel supplements, as well as the use of wide tires instead of tandem tires. The wide tires reportedly have much less resistance and produce an improvement in fuel mileage.
Werner's fuel economy focus, according to Leathers, "is on minimizing idle time and any loss of production in fuel use or consumption. We are constantly working on the aerodynamics of our trucks, and have recently implemented a new fueldriver bonus program that emphasizes lower idle times. We do anything we can to try to improve our fleet miles per gallon (MPG)."
The fact that Schneider is running more miles during congestion-plagued daylight hours exacerbates the fuel consumption problem. "The thing we continue to work on is reducing empty miles," Arves says. "Tightening our network is the single best thing we can do."
Schneider also continues to examine new technology and new tires. In order to reduce idle time, the carrier has invested in cab heaters so that in cold weather drivers don't need to idle their engines in order to stay warm. Schneider is currently testing technology to see if it can accomplish the same goal with cooling the cab in warm weather.
New EPA-compliant engines
The 2007 diesel engines must not only meet more stringent emissions standards but they'll also have to run on fuel with lower sulfur content. Beginning next year, carriers must start incorporating this new technology into their fleets. And looking down the road just a few years hence, the standards for 2010 will be even more stringent.
Schneider began pre-buying engines last year to meet the new regulations and will continue to pre-buy throughout this year. Arves is disappointed the technology to be implemented in 2007 was not widely available for testing since the engines have to be broken in before they can be tested for performance. "Ideally we'd like a couple hundred thousand miles on them before making a lot of purchases," he says. "We don't know what the cost differential or the MPG differential will be, and we don't know if the engine life will be altered at all. The one thing no engine manufacturer is claiming is that MPG will improve."
Werner has actively worked with engine suppliers and tractor manufacturers to be involved in the development of the new engines and to make sure they understand the implications of them. The carrier has tried to purchase as many trucks as it can in order to get its fleet as new as possible. "We ended 2005 with the average age of our fleet at 1.23 years," explains Leathers. "We want to continue to do that through 2006 so that we can mitigate the impact of the 2007 engines as much as possible."
Duncan feels the cleaner-burning engines are a very positive story and the environmental side isn't getting told much. He reflects that when the Environmental Protection Agency (EPA) requirements for the 2002 engines were published, "Our industry tended to fight them. But since then, we've had a task force working at the American Trucking Associations (ATA) getting engine and truck manufacturers, fuel distributors and carriers working together so that we can not only meet the 2007 engine requirements, but meet them with proven and tested engines. I have every confidence in the world we will execute the 2007 engines on time and I think they will be great engines."
"We had pretty good luck with our testing of the 2002 batch of trucks and engines," Zollars remembers, "and we'll tend to do the same thing with the 2007 variety — buy a few hundred, test them and make sure we don't have any major issues. I think the result of the last technology was a slight increase in maintenance costs and a little bit lower fuel mileage, but other than that there were no major issues."
There is scarcely a shipper using commercial carriers who hasn't felt a pinch — or a bite — from lack of truck capacity at one time or another over the past couple years. From a peak season crunch through a shortage of drivers to move the freight, there are a number of reasons for the inability to consistently move cargo from one point to another. Although there may be times during a year when there seems extra capacity is available, these periods seem to disappear as quickly as they arise.
Looking at capacity on a macro basis, Zollars sees some real challenges. He notes that the ports — particularly Long Beach — are seriously stressed, the railroads are seemingly unable to handle the amount of business they have, and the truck driver shortage in many parts of the industry are constraining productivity. "In our particular case," he says, "I don't think capacity is going to be a big issue. We've got the ability to expand with the volume of business. But the macro trends are concerning."
The most recent peak season for FedEx Freight went very well, claims Duncan; however, the carrier has taken a very long-term view about capacity because it's getting more difficult to build the size facilities where they are needed. "We can't be just six months ahead of time," he says. "We're working on facilities today that we probably won't use for three to four years. We've projected what our growth rates are going to be, and what our needs are going to be, and we've been investing in the business all along in equipment, facilities and people."
Werner's Leathers agrees that capacity is going to continue to be constrained. " Shippers that are not aligned with their carriers and carriers that aren't approaching their shippers in a collaborative way are really going to suffer," he notes. "It's a difficult marketplace."
One solution for Werner is to approach its shipping community with multi-tiered solutions. "We've got a set of blue assets that we provide on our own fleet, but then we've got more than 3,600 partner carriers as well as an intermodal offering. The traditional way of saying, 'I'll haul it all on my own' is a thing of the past with the capacity constraints we see."
Arves notes that financial services firm Morgan Stanley said that the end of 2004 was the worst ever seen for capacity. He points out that some customers got a reprieve in the first six or seven months of 2005 because freight volumes were flat and declining. Although there was the perception that the driver shortage had eased, reality was that it hadn't — volumes had just slowed temporarily.
"We are going to be in the midst of a continued driver shortage for the next seven, eight or nine years," says Arves. "There will be temporary reprieves when freight slows down or the economy softens, but the demographic information from the ATA is that freight volumes will move up 3% to 4% a year. The demographic population for drivers will be flat, and they project a shortage of about 110,000 drivers by 2012."
If there is one thing on which all carriers agree, it is the dire state of the country's roads and ports in an economy that is increasingly global and so under more competitive pressure than ever (see cover story, "Ports face a budget crisis").
Leathers is concerned about "perimeter pressure" on the transportation network, with the necessity to move greater numbers of Asian imports added to those from Canada and Mexico. "Our networks are all being stressed on the perimeter with a lot of inbound transportation from the outside toward the middle," he says.
Arves doesn't envision much improvement at this point, believing that the highways will become even more congested. In his view, the highway bill doesn't really address the issue of more freight moving on the roads to any great extent — the bill basically just keeps everything current. "Over the road is going to be much more congested," he suspects. "In fact, we are seeing that already."
Looking at alternatives, Arves sees the rail industry retiring more track than is being added. "There doesn't seem to be much that the railroads can do, at least not in the short term," he admits, "and most people are projecting U.S. ports to be full by 2012."
Duncan looks at the U.S. as still the biggest consuming economy in the world. "It's likely that a majority of freight containers will be coming to the U.S.," he points out.
"I'm not sure we're looking at port capacity to handle it, much less the road and rail connections required to handle that volume coming from the edges of the country."
He doesn't feel that solving these problems can be done by individual modes. "The ports can't just worry about the ports, and nobody worry about roads and rail," says Duncan. "We need to have a comprehensive strategy that figures out the best way to accommodate needs. We have to begin to work with government and across transportation modes to make sure we've got the infrastructure to continue to be a value added to the supply chain."
"It took a long time for the infrastructure to deteriorate to the point that it has," Zollars observes, "and it will take a long time for it to get back to where is should be. That's one of the reasons that the ATA and others are so focused on making sure we spend the right amount of investment because roads and bridges in many parts of the country are really starting to fall apart."
It's still a carrier's world
Count on it: rates will climb. If they haven't already, carriers will soon be announcing their increases for the year. They believe that the economy is in a recovery mode and the need for expeditious movement of freight will not diminish. Zollars expects a good economy to continue through the end of 2006, with a 3% to 31/2% GDP growth. At the same time, he explains, YRC is working with customers to take links out of the supply chain. "There are some customers," he says, "that would really love for us to have the opportunity to do some preloading in China and allow us to skip some steps in the supply chain." That's why the carrier has put so much emphasis on developing its global network, in particular focusing on becoming a more robust presence in China.
The economist group within FedEx helps forecast what's coming. Duncan notes that they're convinced the economy is in a good mid-cycle expansion. He sees that logistics professionals have done a marvelous job of taking cost out of the supply chain, predominantly by cutting inventory costs.
"If you look at logistics costs as a percent of GDP or inventory-sales ratios, they have been dropping for 10 years," Duncan notes. "I don't think logistics professionals feel they've reached the end of that. They're going to continue to squeeze and push the envelope on the supply chains. It's exciting because it creates a real market where we can offer a differentiated service and not get viewed as a commodity."
In meeting current trends, Leathers explains-that Werner is continuously trying to understand the effects of all the additional imports, to make sure its network is set up the way it should be — with terminals in the right locations based on what it sees as future trends. "We are excited about the opportunities out there for 2006," he says. "We have to continue to focus on being a low cost provider and a quality provider. But we feel with the diversification of our product lines that we are well positioned."
Schneider projects 2006 to be more of what it has seen in the last couple of years. "Most projections are that truckload tonnage will move up 3% to 5% this year," Arves says, "so we would expect that for most of the year demand will exceed capacity." The company has added cross-docking capabilities at most port locations through the acquisition of American Port Services last year and American Overseas last month.
Arves issues a note of caution for the logistics community. Increasing productivity levels will continue to be a vexing problem for shippers, he notes. "It's something shippers are going to have to get behind very aggressively because I'm not sure most of the people who run trucking companies are necessarily that concerned about driving greater productivity. They like the market the way it is now. It's incumbent on shippers to try to drive productivity benefits in the industry."
If FedEx Freight can keep an employee through their first year, they tend to remain for their entire career, says Doug Duncan.
Werner is doing all it can to improve its fleet's fuel efficiency, says Derek Leathers.
It's going to take a long time and a lot of effort to get the nation's infrastructure back to where it ought to be, says Bill Zollars of YRC Worldwide.
It's incumbent on shippers to drive productivity benefits themselves because many carriers like the way things are now, says Schneider National's Scott Arves.