Don’t look down. Shipping freight these days can seem more like walking a tightrope than driving a highway or following an air route. In the second half of 2002 shippers will continue to face many challenges: increased security concerns, an expected rise in fuel prices, higher insurance premiums, and carrier consolidation. While these trends are sure to affect operational stability and the bottom line, there are some bright spots, too, such as Internet-based collaborative logistics opportunities that can save shippers millions of dollars annually.
Since 9/11, domestic transportation infrastructure, especially air cargo and trucking, has come under close governmental scrutiny. Shippers are scrambling to keep up with new regulations resulting from the passage of the U.S. Patriot Act on Oct. 26, 2001. The main Patriot Act issue for shippers is the provision that commercial drivers with hazmat endorsements must undergo a federal background check. The Department of Transportation has yet to figure out exactly what will be in these new rules. More nebulous provisions of the act call for the DOT to secure “our nation’s infrastructure,” which has truck carriers worried about background checks for all drivers, a national driver’s license (licenses are currently issued by states), possible technical requirements such as biometric identifiers, and mandatory driver training standards. The DOT has also begun visual inspections of carrier facilities that house and haul hazmat products, including biomedical goods. This spring, the agency is scheduled to produce a master security plan for transportation infrastructure.
“September 11 has forced shippers to focus on blocking and tackling instead of on strategic initiatives,” says Debra Phillips, executive director of the Washington, DC-based National Small Shipments Traffic Conference (NASSTRAC), a shippers’ association focused on transportation and supply chain activities. NASSTRAC members deal mainly with less-than-truckload (LTL) carriers and small parcel carriers. “Almost all I hear from members is security-related,” says Phillips. “Shippers used to have little contact with their security staffs, but that’s all changed.” Phillips, who is also executive director of the Health and Personal Care Distribution Conference, says that group’s spring conference will be devoted entirely to security matters.
Because it has taken so long for the U.S. Department of Transportation to come up with a nationwide plan for handling background checks, several states have set up investigative programs on their own, using state police or other agencies for background checks. At the moment, because each state issues its own commercial driver’s licenses with hazmat endorsements, licenses must be submitted for verification by the FBI or other federal agencies. “The driver regulations are becoming very confusing,” says Matt Ehlinger, director of corporate transportation for Irving, TX-based NCH Corp., a company that transports industrial chemicals. “There are concerns about who will be doing the background checking, renewals, and the timeliness of all this,” Ehlinger says. “Then we’ll also have some customers who may require extra security measures.”
Some shippers are concerned that criminal background checks may eliminate competent and experienced drivers because of their past records. Others worry that the level of security will become so high at certain facilities like ports, military bases, and government buildings that some drivers won’t be able to pass through the gates with their loads. Still others fret that drivers may end up with a fistful of identity cards for various facilities that they serve. In Florida, for example, many ports are issuing their own ID cards to drivers, and each requires a different background check and level of clearance. Again, the DOT is trying to alleviate the problem with a national port and rail yard entry card, but as of May 2002, regulations have not been issued.
Terri Ferraro, manager of transportation operations at Fiskars Brands Inc., in Madison, WI, says that even though the cargoes her trucks carry are not high security risks, she’s seeing wariness on the part of customers to let trucks enter their property. “Our emphasis is on using core [widely known] carriers. Our customers don’t want anybody showing up that they don’t know or recognize.”
Hazmat carriers were the first to be singled out for increased security, but those in the food industry are also being targeted: The Food and Drug Administration is proposing its own set of rules for food and pharmaceutical shippers and carriers.
“The biggest issue for the food industry is security,” says Gary Strausbaugh, vice president of transportation for the Mennel Milling Company in Fostoria, OH, whose primary fleet is composed of dry bulk carriers, mostly of grains and flours. Mennel has always had seals on loaded trucks, but now it is placing seals on empty trailers to prevent intentional contamination and tampering. “We’ve also begun sealing hose tubes and blower tubes. We’re seeing increased security in some plants, and we’ve installed magnetic key systems to limit access to our plants,” says Strausbaugh.
Time after time
As the economy begins to pick up from recessionary levels, carriers worry about security waits cutting into their promise of timely deliveries. “Delays of truck transportation in major metropolitan areas will become a drag on profits,” says Gary Petty, president and CEO of the National Private Truck Council in Alexandria, VA. “I hope we’ll see some sort of pre-qualified truck pass-through system — otherwise you can never count on a delivery being on time,” Petty says. He adds that many shipments are delayed because they’re being turned back by the recipient. “In the past a cracked seal on a shipment was accepted. Now it’s rejected.”
Who will pay for the extra costs resulting from increased security measures and delays? Many shippers expect to see a “security surcharge” levied either across the board or on shipments to particular areas such as government facilities, airports, through border crossings, or into metropolitan areas like New York City that search trucks before they’re allowed to traverse bridges and tunnels into the city. Some smaller LTLs have already instituted such surcharges.
Nickels and dimes
Even though shippers are distracted by security concerns, they cannot neglect other pressing issues. Some of the most important are creeping fuel prices, a rise in insurance costs, and a shrinking pool of LTL carriers. For example, A-P-A Transport of North Bergen, NJ, closed its doors in February after more than 50 years in business. (Ironically, after 9/11, A-P-A Transport instituted a security surcharge to deliveries to New York City.) During the last ten years, three of the largest LTLs in the Northeast, St. Johnsbury, Preston Trucking, and A-P-A, have closed, leaving just three major carriers in the region: New England Motor Freight, New Penn, and USF Red Star.
Shippers are concerned not only about rising prices due to decreased competition, but about a lack of capacity as well. “We’re definitely worried about consolidation in the transportation industry,” says Phillips. “It’s something we keep a close watch on.”
As the economy recovers, fuel prices are expected to increase. In late February this year, the Department of Energy announced a diesel price rise of almost two cents a gallon, out of a narrow trading range, due to the higher demand that normally accompanies a more robust economy. Gasoline prices rose, too, and the DOE warned that gas prices may increase even faster than diesel costs this spring and summer as more people take to the highways. Fuel prices may experience an extra jump if Middle East hostilities escalate.
To combat rising fuel costs, many shippers are instituting fuel management systems, but they are taking other measures as well. For large companies like Fiskars that use third-party carriers, internal reorganization is an option. “We are going to centralize our contracts with other company divisions to get some pricing power,” says Ferraro. Although the pool of LTLs is shrinking, she hopes to offset any potential fuel price hike by centralizing shipping.
The insurance situation will get worse before it gets better. Rising insurance premiums are putting some smaller carriers out of business, but even large shippers are feeling the pinch. When public companies such as Covenant Transport Inc. and Smithway Motor Xpress Corp. announced their 2001 year-end results, insurance costs were at the top of the list of reasons for lowered earnings.
Officials at the American Trucking Associations in Alexandria, VA, are still compiling statistics on rising insurance premiums, but anecdotally they’re hearing about increases of 300% to 400%, says Bob Costello, ATA’s chief economist. During the boom of the 1990s, many companies were attracted to the truck insurance business because these vehicles are required by law to buy insurance. Underwriting seemed like an easy way to make some fast money from a captive audience. However, it wasn’t as simple as it seemed, and underwriters didn’t realize their losses for several years — it takes a few years to know if you’re making money. Once they understood the situation, underwriters exited the market in droves, leaving far fewer companies to underwrite loans, a condition known as “hardening.” The remaining companies took the opportunity to raise prices. Now some shippers are countering by turning to higher deductibles, and larger companies are self-insuring and upping their driver training to prevent crashes.
Now for some good news: One of the fastest-growing trends on the profit horizon is that of collaborative logistics using the Internet. “It’s one of the biggest things I’ve seen in years,” says Petty, “and it keeps growing.” In its simplest form, private fleets collaborate with other private fleets to fill empty lanes, especially backhauls.
Using software from Nistevo Corp. in Eden Prairie, MN, food and dairy products manufacturer Land O’ Lakes Inc., headquartered in Arden Hills, MN, saves about a half million dollars out of a $40 million annual budget by setting up collaborations with other shippers to keep its third-party carrier’s trucks filled. “I help to create continuous movement for my carriers,” says Fernando Palacios, Land O’ Lakes’ vice president for operations and supply chain. “What used to take four trucks can now be done with two trucks.”
Palacios pays Nistevo an annual license fee of about $250,000 for its software, which he uses to create extensions of his backhaul with companies of his own choosing. Says Palacios: “We handle a lot of butter, so we have to be careful who uses our trucks. We have to watch temperature and smells — no garlic, chicken, fish, or meat that could get into our butter. The more opportunities I can make for our carriers, the better it is for me. If I create value for our carriers, that’s a better value for me.”
The idea is catching on. Nistevo represents about 25 shippers and 300 carriers who use its software and Internet network. “Some companies choose a partner themselves, and we look for ways for them to collaborate and save money,” says Dave Alampi, vice president of marketing and business development for Nistevo. “Others use our network to help find partners.”
General Mills and Georgia-Pacific Corp., for example, formed an 1,800-mile route that involved shipping General Mills products from the Midwest to the East Coast; then Georgia-Pacific used the same truck to ship its products from the East Coast back to the Midwest. That one route saves both companies a combined $730,000 annually.
Nistevo offers its network for contract assistance, shipment execution, and collaboration, and Alampi says that customers choose which module they need and pay a la carte. “Sometimes we just help companies with their contracts, saving them money with compliance issues, and in other instances, we help companies negotiate the rules of engagement for collaborations,” says Alampi. Shippers need an Internet connection to access Nistevo’s system. Nistevo is not the only game in town; competitors include i2 Technologies in Dallas and Rockville, MD-based Manugistics, each offering different services.
“These are not simply alliances that you jump in and out of,” says Petty. “They’re long-term arrangements with high-performance peers, and it’s something we’re going to see a lot more of in coming years.”
Larry Kahaner is a business writer based in Washington, DC. He can be reached at firstname.lastname@example.org.