Global Logistics and Supply Chain Strategies - April 2008 - (Page 62)

The ‘Good-Freight’ and ‘Bad-Freight’ Trucking Customers BY NOEL PERRY Noel Perry, formerly with Schneider National, Cummins Engine and CSX, is a principal with Transport Fundamentals. T here used to be an unwritten rule in logistics: “If you want my good freight, you have to move my bad freight.” The “good” freight (often called “optimal” freight) is a load that moves efficiently. The freight has a regular, predictable pattern, with backhauls. The “bad” or suboptimal freight fluctuates in volume, is unpredictable and has few backhauls. Put simply, freight is “good” when productivity is high and “bad” when truck productivity is low. In a perfect market, the two kinds of freight move at different prices. In the traditional truckload contract market, under the “unwritten rule,” they moved at similar prices. Shippers liked that. It enabled them to lump a lot of freight into a few transactions, and it allowed the bad freight to move at predictable prices. The alternative, the spot market, has big swings in prices and capacity. The unwritten rule’s certainty was important because the bad freight is good for the shipper. It is the high-priority freight that supplies critical promotions, serves lucrative, unbalanced consumer markets and solves emergencies. Importantly, the unwritten rule produced a cross-subsidy: the shipper paid above-market rates for good freight, offset by below-market rates for bad freight. That imbalance inevitably initiated a market reaction that has had profound implications for supply chain costs. Beginning in the late 1990s, a new class of carriers approached customers as specialists in good freight. They promised high service levels and attractive rates based on superior equipment utilization. Although these solutions have, by definition, limited scope, for the appropriate business, they produce unprecedented levels of performance. They are the trucking equivalent to Southwest Airlines’ invasion of the hub-based airline market, where airlines blended the few-destinations, longhaul, “good” passengers with the many-destinations, short-haul, “bad” passengers. Southwest specializes in simple “out and back” good lanes that link large markets with popular vacation spots. Note, again, the limited scope of this solution. Southwest doesn’t go everywhere, but where it goes, it excels. On the trucking side, this trend accelerated rapidly when large customers discovered that their size was often sufficient to generate a chunk of good freight by themselves. The shipper’s ownership of the good freight enabled them to capture the value of superior productivity through low prices. The boom in “dedicated” or “engineered” freight was born. This segmentation of a previously generalized market has been accelerated by an accident of fleet management. The incumbent generalist carriers have been slow to react to the loss of their crosssubsidy. They have not raised rates on their bad freight even though their customers have withdrawn the high-margin, good freight. As a result, shippers get rate reductions on their good freight and pay the same historically low rates on their bad freight. Of course, they have converted to the new, segmented approach as rapidly as possible. This market imperfection is the result of three factors. First, the generalized carriers were slow to recognize what was happening. Both costing systems and management habits obscured the change. Second, 50 years of productivity-induced price reductions left the industry shy to ask for price increases, even for hard-to-move freight. Third, the strong business cycles of the past eight years have clouded the data. The big cyclical swings in prices obscured the growing gap between the generalists and specialists. In the end, however, markets work. The generalists are beginning to adapt by partially or fully exiting the bad-freight market. You can see it in the frequent reports of carriers reducing their capacity in “long-haul” segments. That is code for, “I want out of the low-margin, bad-freight segments.” As yet, carriers have not widely adopted a second solution: raising rates on bad freight. This is in part 62 APRIL 2008

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Global Logistics and Supply Chain Strategies - April 2008 Contents Editorial GL & SCS Exclusive Fast Forward Up Front Cover Story: Continuing to Add Ever More to Their Offerings, 3PLs Are - At Your Service Over the Long Haul Opinion: Freight Audit Bill Can't Show All Mistakes that Hurt the Bottom Line Opinion: The ‘Good-Freight’ and ‘Bad-Freight’ Trucking Customers Industry Voices

Global Logistics and Supply Chain Strategies - April 2008

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