Pool hauls

It may not be new, but it's definitely hot. Pool distribution service is rapidly becoming the service of choice for shippers like Square D that are looking to save money.

By James A. Cooke, Senior Technology Editor -- Logistics Management, 2/1/2002

Like many companies nowadays, Square D uses its regional less-than-truckload (LTL) carriers for much more than just hauling freight from Point A to Point B. The Palatine, Ill.-based company, which makes electrical distribution, industrial control and automation products, has also contracted with its nine regional carriers for pool distribution service. Under that arrangement, Square D uses its own dedicated contract fleet to move a truckload of products to a regional LTL carrier's terminal. There, the regional carrier breaks down the shipment into less-than-truckload shipments for local delivery.

Pool distribution has enabled the company to cut shipping costs while maintaining delivery schedules. "We've done pool distribution for 15 years, but [the volume has] increased significantly in the past few years," says Tim Kent, transportation manager for Square D's North American division. "As we have reduced our distribution network over the years through the closure of [distribution] facilities, pool distribution has allowed us to keep our service commitment to the market."

Square D is not alone. In recent years, there's been an upsurge of interest in this type of freight-handling service as a way to reduce logistics costs. "It's an old concept that progressive shippers have been using for years," says Jim McCallie, senior vice president of sales and marketing for Southeastern Freight Lines, a regional carrier based in Columbia, S.C. "We see more competition for distribution and consolidation services from other carriers than we did a year ago."

Beyond Point-to-Point Moves

Historically, regional LTLs have concentrated on hauling partial trailerloads 500 to 1,000 miles within a designated geographic region. But because they already operate networks of terminals to serve their customers, they are also well positioned to provide distribution service and its counterpart, assembly service. Under a pool distribution arrangement, a shipper sends a full trailerload of product to a regional LTL carrier's terminal, where the trucker breaks down the truckload into smaller lots, cross-docks the pallets or cases from one side of the terminal to the other, and places the individual smaller shipments on waiting trucks going to the final destination. Truckers that provide assembly service, by contrast, receive a series of less-than-truckload shipments and combine them into a full trailerload for delivery.

In either situation, the regional trucker performs work that would otherwise have to be done by the manufacturer or retailer in its distribution center. "It takes a lot of planning to marry the loads," says Ned Moritz, a vice president at Con-Way Transportation, whose regional carriers have offered these types of services since 1998. "It's all about organizing freight and looking at the repetitive patterns."

Most regional LTLs have been providing some form of distribution and assembly service for years whenever the need arose. "This kind of activity happens periodically based on the retailers' need," says Stephen J. Ginter, vice president of marketing for New Penn Motor Express in Lebanon, N.J. "We act as their backup when we have the capacity and they don't." Adds Chip Overbeys, vice president of national accounts and marketing at Old Dominion Freight Lines of High Point, N.C.: "We've been doing assembly and distribution for several years. It's more prevalent with national accounts that want ... next-day service. We'll pull the linehaul to our terminal and handle the distribution of the LTL shipments."

Something Old, Something New

Interest in freight-handling services, especially local distribution, has picked up recently as retailers look for ways to control their logistics costs. "Every year the CEOs and boards of directors at big corporations ask the distribution department to cut the budget," says Andy Carpenter, director of the assembly and distribution program for Overnite Transportation in Richmond, Va. "These guys are coming to us. This is the next phase of their cost-cutting programs."

Ironically, many shippers used pool distribution as a way to curb freight expenses back in the '70s. "Prior to deregulation of the trucking industry in 1980, shifting modes from less-than-truckload to truckload, followed by regional distribution [or the reverse for inbound shipments] was the most common method of reducing costs," recalls Robert D. White, director of Global Transportation for Emerson Electric Co. in St. Louis. "But with the advent of point-to-point discounting in the mid-80s, these programs lost their effectiveness."

As motor carrier rates have risen in the past decade, however, shippers' interest in freight-handling programs has resurfaced. "Now we have come full circle," says White. "Present-day market forces are driving up LTL rates and other costs to the extent that making that mode shift once again is a very effective cost-management tool. We are experiencing savings of over 10 percent."

Retailers in particular like these freight-handling services because they minimize the points of contact for a given movement. Instead of using several LTL carriers to deliver freight, a retailer can simply use one truckload carrier for the linehaul and one regional carrier for the local delivery. Minimizing the number of service providers used for freight movements can also cut transit times. If a shipper is moving large quantities of LTL freight cross country, says McCallie of Southeastern Freight, then moving freight in a consolidated truckload for the long haul and handing it off to the regional specialist for the next-day delivery will cut a day or two off the cycle time.

Handing over the responsibility for breaking down trailer loads into store shipments does create challenges for the trucker, however. "It took us time to learn the retailers' expectations," says Tony Albanese, senior vice president of operations and sales for Saia, which began offering freight-handling services in 1995. "We will sort out the product and build store deliveries. Depending on the retailer, we have delivery time windows established for each store."

In a new twist on an old practice, shippers have even begun using assembly and pool distribution services for short-haul movements. Tilton G. Gore, chief executive officer of the regional carrier Viking Freight based in San Jose, Calif., says in the old days retailers would engage a regional LTL to handle the local delivery of cross-country freight. Now, however, retailers are asking for distribution service for goods traveling short distances, for example, from Los Angeles to Sacramento. "Distribution and assembly has been proven to be both economical and [efficient] in long hauls. The new part is that it's now being used in short hauls."

Both Sides Benefit

Although shippers certainly find these services advantageous, they aren't the only beneficiaries. The regional carriers also gain from the wider adoption of distribution and assembly practices. "The motor carriers are driving this just as much as the shippers are," says Carpenter of Overnite Transportation. "Our biggest cost is linehaul in certain lanes. If we can outsource the linehaul, we do better as well."

Because both shippers and carrier have something to gain, many trucking executives expect to provide more assembly and distribution services in the future. "As an alternative to longhaul LTL," notes Gore, "it's growing and growing and growing."

Life Saver

As Square D has cut back its distribution-center network, pool distribution has saved the day, allowing the company to maintain cycle times and hold down freight costs. Part of the French concern Schneider Electric, Square D, based in Palatine, Ill., manufactures electrical distribution equipment. The company records $3 billion in sales each year to electrical contractors or distributors.

In the mid-80s, Square D had a distribution network composed of six regional distribution centers and one central facility. During the late '80s and into the early '90s, however, it consolidated its distribution operations into two facilities, one in California and another in Pennsylvania. "As we closed facilities," says Tim Kent, transportation manager for Square D's North American division, "our use of pool distribution expanded."

The closure of local facilities often increased the distance Square D's products had to travel to reach customers. Pool distribution—under which Square D hauls a truckload of products to a regional LTL carrier's terminal for shipment breakout and local delivery—has emerged as a good way for Square D to maintain its service standard of five days from the time the customer places an order to the time it's delivered to that customer's dock. "Each time we took a distribution center out of a given market," Kent notes, "we used pool distribution along with direct LTL to make those changes as transparent as possible."

Square D has made some alterations to its distribution operation to facilitate pool distribution. Kent reports that the company has added a third shift at its warehouses "to get a jump on orders." As customers call in orders throughout the day, those orders are batched together and made available to the order selectors between 10 and 11 p.m. Pickers then can load up a linehaul trailer by 6 a.m.

To increase efficiency, Kent says, Square D has coordinated its freight movements to create round trips for its 30-tractor, 110-trailer dedicated fleet so that the contract carrier can handle inbound and interplant deliveries as well as transport truck loads to regional LTL terminals. "The same truck dropping off finished goods [at a regional LTL terminal] will pick up materials and components inbound to a plant and then bring the finished goods from a plant to a warehouse," he explains. "It's all continuous movements."

Pool distribution has also minimized freight handling, thus reducing the chances that damage will occur. "Every time we can eliminate a freight-handling step," says Kent, "there's less opportunity for the goods to be damaged."

Today Square D works with nine regional LTL carriers across the country. On average, it sends out 12 linehaul loads a day. Each linehaul trailer contains between 25 and 30 individual LTL shipments, which add up to about 35,000 pounds per trailer.

As Square D trimmed its network, it reduced inventories and distribution costs. Yet pool distribution enabled it to continue to meet its customers' delivery requirements despite the cutbacks. "To sum up the value of pool distribution for my company," Kent says, "I'd say it helps us to reduce leadtime to our customers, reduce transportation costs and minimize the number of times our freight is handled before reaching our customers."

Truck rates expected to hold steady this spring

Recessions generally doom any attempt to raise rates. And with an economy wallowing in recession, shippers need not worry that regional less-than-truckload (LTL) carriers will push for a rate increase early this year. There are simply too many empty trailers and idle trucks in the market to drive up rates for short-haul, time-definite freight. "As the economy continues to slump, price increases will be harder and harder to [push through]," says Jason Seidl, an analyst with ABN Amro in New York City.

During the summer and early fall of 2001, most regional LTLs attempted to raise their rates. But industry analysts believe that many shippers resisted across-the-board hikes and negotiated discounts off the posted tariffs. "Some of the carriers are out there discounting," confirms Seidl.

Regional LTL motor carrier executives acknowledge that it's been difficult for them to make last year's rate increases stick. "Until recently, the industry had done a better job than in past downturns of exhibiting price discipline in a softening environment," says Rick O'Dell, president and CEO of Saia, which is based in Duluth, Ga. "But the additional weakness caused by the events of Sept. 11, both in volumes and in customer profits, has put additional pressure on rates."

At the same time, truckers are facing added cost pressures. Although diesel fuel prices have dropped significantly, truckers are being hit by hefty price increases from their insurance carriers, whose own costs have risen in the wake of the Sept. 11 terrorist attacks. "There's insurance cost pressure," admits Jim McCallie of regional LTL carrier Southeastern Freight Lines.

If they are unable to cover costs or can't obtain liability insurance as required by federal law, some truckers will fall by the wayside, tipping freight load demand so that it's more in line with truck trailer capacity. "Key factors will be whether most companies foresee a second-quarter turnaround and whether there are consolidations or business failures in the trucking industry that would take capacity out of the market," says O'Dell. "If that happens, the pricing environment will improve [for the truckers]."