LTL buyers face an uphill battle
Some signs show LTL pricing and capacity will improve in 2006, but buyers and shippers are a long way from happy about their LTL service.
By David Hannon -- Purchasing, 4/6/2006 6:00:00 AM
Logistics buyers, in general, are not happy lately and less-than-truckload (LTL) buyers may be the grumpiest in the bunch. Some surveys show shippers expect slight improvements in LTL rates or capacity this year, but overall buyers and shippers are not happy with their LTL service levels and rate structures. Carriers, on the other hand, seem to be happy with the state of the market and report few concerns when it comes to shippers' requirements.
What's wrong with this picture?
There seems to be a major disconnect between the issues that LTL shippers and buyers see in the market and the state of the industry from the carrier perspective. Purchasing recently polled a group of LTL buyers to get their views of the market-their concerns boil down to rates, capacity and service.
Shippers speak
For example, when asked in the Purchasing survey what advice he would give to LTL carriers, one buyer says: "Don't gouge. LTL is so expensive and you can be replaced. And buyers have long memories when the pendulum swings the other way." (For more survey responses, see the sidebar on page 45).
According to a year-end 2005 shipper survey by Bear Stearns, shippers were expecting an average increase of 2.4% for their LTL services, which was a decline from the 2.7% increase they were expecting in mid-2005. But the current pricing environment has many shippers questioning the approach carriers have taken.
Jeff Carter is assistant general manager of purchasing at automotive supplier SW Manufacturing in Smithville, Tenn. SW spends about 20% of its logistics budget on inbound LTL shipments to its manufacturing sites. While the move to gain control of inbound shipments is usually a strategic cost advantage, in today's market, Carter is having trouble seeing any positives. He says his LTL rates are 15% above normal right now and freight claims due to misplaced or damaged freight in 2005 were five times higher than in 2004.
"In addition to rising energy costs, there have also been a few [LTL] carriers that ceased operations, which tightened capacity further," Carter says. "There also seems to be a shortage of quality drivers making capacity even tighter. Our strategy has been to put contracts out to bid, but also to reevaluate our supply chain and look for ways to establish dedicated or milk run routes and eliminate the need for LTL loads where feasible."
Note to LTL carriers: He said, "Eliminate the need for LTL where feasible" adding that the lack of consistent on-time delivery limits the amount of LTL SW uses. In general, shippers are unhappy with LTL service levels. According to the Purchasing survey, 77% of those polled said they saw service levels decline or stay the same in 2005, with only 23% saying they saw an increase in service from their LTL carriers.
Carter continues: "When a two-day shipment takes 10 days to arrive, we want accountability and corrective action. We may get accountability in such a case, but we see a real weakness in the LTL companies when it comes to corrective action for lost or damaged freight. The LTL carriers need to change their mindset and not focus so much on increasing rates."
Other shippers also told Purchasing they are working on reducing their LTL shipments and carrier base as a method of managing costs. Larry Faitz is a transportation consultant in the global transportation organization at Hallmark Inc. in Kansas City, Mo. Hallmark spends $24 million a year on LTL.
"We have been working on reducing our current LTL carrier base by more than 25%, and changing our shipment characteristics to make our freight more attractive to the carriers," Faitz says. "We have reduced the number of minimum size shipments that are shipped in the LTL mode by pushing the smaller shipments into the parcel network. We are leaving the LTL carriers with larger and heavier shipments and a bigger coverage area to better utilize their equipment."
"We have seen some rates creeping up over the last year or two on our LTL shipments," Faitz says. "We are using more formalizing bidding processes to help bring our rates down." As part of that process, Hallmark began using e-sourcing tools to put LTL contracts out to bid more frequently. Faitz says the tools help organize the bid project data and make it simpler for the carriers to analyze.
"It lets us use the system to rate the responses, view the progress of the carriers and make sure that all carriers are receiving the same information in a timely fashion," he says. To date, Faitz says no carrier has refused to participate in an e-sourcing event, although there is pushback when he proposes an online reverse auction for LTL.
Surcharges fuel frustration
Fuel surcharges are a particular area of debate among LTL shippers and buyers. The Purchasing poll found little commonality between the types and levels of fuel surcharges being paid by LTL shippers, which is frustrating shippers almost as much as the surcharges themselves. Responses ranged from "fixed fee" to "percentage of bill" to "any way they want" and even "some obscure index I don't understand."
"I say they are obscure because they all use different ones and some are hard to find on a web search," the survey respondent says, sounding a bit perturbed.
"We track several carriers' fuel surcharges and all of them have fluctuated differently," says another LTL buyer in the survey.
Another said "I have seen surcharges ranging from $5 to $150 in the past year."
Some shippers/buyers negotiate their own fuel surcharges with carriers, some accept the ones carriers put forward and others meet in the middle by tying the surcharge to a fuel index.
Faitz has leveraged Hallmark's volumes to negotiate a more favorable surcharge on his LTL buy: "I have my own fuel surcharge table that I require all carries to be part of. It is still based on the [Energy Department's] average, but it starts it at a different point and uses larger increments before a percentage change is made and changes are at a smaller percentage than a carrier's fuel surcharge table would be. We feel it reflects more of what the real market costs are. Carriers' pricing calculations should already know fuel is not at $1.10 anymore and they need to reflect a true picture of were we are today."
Carrier response
Purchasing also recently interviewed executives from several LTL carriers to get their feedback on some of the concerns expressed by shippers in the survey. For example, when asked for his view on LTL capacity today, Rick O'Dell, CEO of Saia Motor Freight in Atlanta, says, "We see the demand as strong and we're having some success. We're seeing that kind of growth continuing. Some of the markets are tighter than others in terms of capacity and individual carriers have pressure points, but overall demand is still strong."
O'Dell says LTL buyers and shippers need to evaluate carriers not solely on price and service levels, but on their interest in expanding capacity. For example, part of the bidding process should involve questioning carriers on: their investments in new equipment, their strategy for hiring drivers, and how many new terminals they've opened in the past year.
Douglas Duncan, CEO of FedEx Freight, was surprised to find the majority of shippers in the Purchasing survey reported capacity concerns. He says FedEx Freight has a long-term plan for increasing capacity that includes building new facilities, hiring new employees and continuing to update their fleet of trucks.
"The age of the fleet is a good metric for shippers to track if they want to evaluate a carrier's commitment to capacity expansion," he says.
The increase in tonnage levels in late 2005 impacted many carriers' service levels, including Saia, which publishes its service levels on its web site. And in addition to those tonnage increases, "Most truckers had a series of service disruptions during the hurricanes last year in the Southeast," O'Dell says. "We went from 10% growth in the third quarter to 15% in the fourth quarter. That's a big jump during a seasonal peak. As a result, our service dipped from above 97% to 96.2% on-time delivery. But given the volume surge, we were okay with that. We didn't get many complaints from that one-point dip."
Duncan's advice to shippers not happy with carriers' service levels is to work with a carrier that has a money-back guarantee on its service.
When it comes to rate hikes, O'Dell points out that some of the more extreme rate increases may be examples of carriers correcting contracts that were "mispriced" in a pervious market environment. During times of low demand, some carriers may quote a rate that is not really feasible just to win the business. And during times of higher demand and tighter capacity, the carrier will hit that shipper with extra-high rate hikes to correct that contract. Saia uses a detailed costing model to avoid these kind of issues, O'Dell says, and shippers should ask carriers about their own models during contract negotiations.
Duncan says FedEx's rates are individualized based on a customer's needs and don't fluctuate based on demand or capacity trends. "We ask customers what they want, we give it to them and apply our costs with an appropriate profit margin," he says. "That doesn't go up or down based on demand. We're in the business to make a profit and that's what we do."
Duncan said shippers' frustration with lack of a consistent fuel surcharge from LTL carriers was an extension of the "inconsistency in pricing in this market since deregulation in 1980. Every customer has a different idea of pricing in their base rates and surcharges."
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