Transportation plus

National LTL carriers are adding services and using their physical scale and geographic coverage to offer more than just commodity services.

By Peter Bradley -- Logistics Management, 1/1/1999

For a long time now, Wall Street analysts have held a grim view of the future of the unionized national less-than-truckload (LTL) carriers. As they see it, the Big Four carriers--ABF Freight System, Consolidated Freightways, Roadway Express, and Yellow Freight System--are burdened by overly high costs and labor agreements that place too many restrictions on flexibility. The lower-cost and more nimble regional carriers, the analysts believe, are in a better position to respond to shippers' demands for speed, flexibility, reliability, and efficiency. It's a commodity business, in which costs are key, they argue, and the unionized carriers cannot compete on price or service.

Certainly, a number of LTL carriers have failed over the years. And the remaining Big Four confront market forces that the carriers' management teams admit can be daunting. The national carriers face the long-term problems of operating in a hostile commodity marketplace. They operate on narrow margins that make recapitalizing their businesses a perpetual challenge. And although those national carriers take in the majority of LTL revenues, they earn less than a quarter of LTL operating income.

Nonetheless, the national carriers are addressing these challenges aggressively. They have responded to market demands by adjusting their networks, improving their basic transportation services, and developing new value-added services. They are both focusing on costs and improving speed of service and reliability. Though they have rationalized their U.S. operations, they are extending operations throughout North America. Both CF and Roadway, for instance, recently announced expansions in Mexico. In addition, they are working harder to integrate their operations into customers' supply chains.

The unionized carriers took a major step toward bolstering customer confidence last spring, when they reached agreement with the Teamsters union on a new national contract several weeks before the previous contract expired. The five-year pact provides the carriers with relatively long-term labor peace. That enables the carriers to recast a workforce often portrayed as a liability as one that is experienced, stable, and well paid--a marketing asset. In addition, the strong economy has forced at least a few of their non-union competitors to boost pay to their own employees, narrowing the gap in costs borne by non-unionized vs. unionized truckers.

Primed for Change

There's no question that the top management teams of the big LTL players recognize the importance of staying ahead of the game. Says Robert A. Davidson, vice president of marketing and pricing for ABF Freight System, "Competing on rates is a zero-sum game. We're looking for ways to take fat out of the system. We need to do things faster and better without a lot of administrative cost."

William Zollars, president of Yellow Freight System, says, "From the beginning, we've been broadening our capabilities to be of more value to the customer. We're getting away from being an LTL provider to being a transportation services provider."

Adds Ken Olsen, vice president of marketing for Roadway, "The overriding theme is that we've put a lot of effort into developing reliability door to door in North America. ... As our customers get more global, they are literally coming to us and asking us to put more infrastructure in place."

Pat Blake, executive vice president of Consolidated Freightways, says that the LTL carriers, like other logistics providers, see customers making efforts to reduce cycle times and to manage supply chains that are expanding globally. "There were too many handoffs and costs," he says. "We had to figure out how to take advantage of that."

Blake says that one of the first areas outside traditional service targeted by CF was expedited transportation. That's an area in which all the major LTL carriers now have some operations. "Our goal was not to become a Federal Express or a UPS," Blake says, "but to attract business based on the value we could offer."

New Services Abound

To that end, all of the carriers have developed new programs that provide either faster or time-specific service. Roadway Express recently launched its Precision Delivery service. Unlike expedited service, which is a premium-priced service for emergency shipments, the Precision Delivery service offers customers pickup and delivery appointments within a one-hour window through the regular Roadway network. The appointments are available between 6 a.m. and 10 p.m.

The service is a direct response to marketplace pressures. Olsen says, "We're offering more and more guarantees. The customers need 100-percent reliability." Adds Cornell Howard, Roadway's market manager for market and product development, "We have 56,000 bills of lading a day; 25,000 of those have specific [delivery] requirements."

Another example is the Exact Express service that Yellow launched mid-year. Exact Express offers an integrated ground and air service, managed by Yellow and using both the motor carrier's assets and the services of airfreight forwarders. That meets what Zollars and others see as customers' demands for more services from fewer providers. Zollars says one customer told him that he wanted to spend "more time managing the business and less time managing relationships."

ABF now offers what it calls its TimeKeeper service, a guaranteed expedited service that provides customers with transit-time options. Davidson says that is the fastest-growing portion of ABF's business. Although much of that freight moves over the road in ABF's system, the carrier also will move goods by air if necessary to meet a delivery deadline.

Another extension of traditional LTL service is ABF's Turnkey service, which provides such options as inside delivery, equipment setup, and even some training. For example, a driver might install and demonstrate how to use office equipment. That allows some manufacturers to alter their traditional distribution patterns, Davidson explains. "A lot of times, distribution exists to handle the last piece: It doesn't sell or provide a value-add. Turnkey allows manufacturers to leapfrog that."

Olsen and Davidson see their companies' Internet capabilities as becoming more important to more customers. (All of the Big Four have state-of-the-art Web pages.) Olsen says the Internet is making it easier for a greater variety of customers to do business with Roadway.

Davidson says the growth of electronic commerce has significant implications for transportation, among them the ability to reduce transaction and administrative costs sharply. ABF's Internet site, he says, provides customers with nearly all of the information available through a telephone call. "We know a lot about customers' shipments and we're working on ways to push that information to them--just the information they want. The Internet is a fabulous way to do that."

Zollars also stresses the importance of information management. He says the business must offer customers a single flow of usable information. He cites the information capabilities offered by Federal Express in the express-package market. "We'll be the Federal Express for anything over 70 pounds," he says.

Beyond Transportation

Providing fast and reliable transportation is essential for the LTL carriers, but some are making efforts to work with customers and developing supply chain relationships that go well beyond transportation services. An example of that is a service that CF developed for Hewlett-Packard called the x-day program.

H-P has struggled with how to compete in the personal computer market against Internet sales specialists like Dell Computers. The company determined that in that fast-changing marketplace, its computers lost value every day. Prior to establishing the new program with CF, H-P tracking statistics showed that on average it took nine days for a computer to move from the shipping dock to the reseller's shelf. Yet transportation wasn't the problem: CF was providing transit times anywhere in the country of four days or less. The hangup was that the resellers were not accepting delivery.

Initially, CF proposed managing a second-day air program under which computers would ship only as they were sold. The problem, says Blake, was that insufficient lift was available for that program. The solution was the x-day program, under which CF provides delivery to the reseller on the third day before noon. The carrier makes a pre-appointment with the reseller as soon as the order comes in. In the meantime, H-P logistics managers work with the carrier and H-P customers. Essentially, the resellers must take delivery of their orders or risk losing their allocations. CF's deal with H-P provides incentives for meeting or exceeding 98.5-percent on-time delivery and penalties for falling behind that.

The other carriers have similar relationships with customers. Zollars cites programs that Yellow has in place with Wal-Mart and with Office Max focused on supply chain issues. As part of one arrangement, Yellow has stationed full-time employees in Wal-Mart's headquarters in Bentonville, Ark. Those programs are different from outsourcing, he says, in that Yellow is not seeking to replace internal operations, but to provide capabilities that the customer does not have internally.

More Than a Commodity Business

What's important here from the LTL perspective is that the carrier's customer is looking to the trucker to become a partner in reducing supply chain costs, not just transportation costs. Inventory velocity in this case is more important than the freight rate.

Zollars says, "Most of our customers have done a good job of taking a lot of unit costs out. There is big money in taking inventory out of the supply chain." He believes that manufacturers' efforts to make smaller, more frequent shipments as a way to control inventories offer LTL carriers a great opportunity.

In that respect, the motor carriers are beginning to emulate in some ways third-party logistics providers. It makes for a more complex and lengthier selling process, but it's one that may be essential. Says Blake, "If we try to exist as a commodity business, we might as well shut the doors and move out of Dodge."