PurchasingB2B

Purchasing Trucking Services – What You Need to Know


December 15, 2010
by Gary Breininger

PURCHASINGB2B MAGAZINE, NOVEMBER/DECEMBER 2010: If you’re responsible for purchasing trucking services at your company, your job is probably more challenging than ever.

Everywhere you turn you’re receiving different messages about a new trend or key piece of information that you should consider when sitting down with your carrier or carriers to negotiate a service agreement for the coming year. To make matters worse, information from different sources can seem contradictory at best, and outright confusing at worst.

And then there’s the economy and the pervasive impact it has on all of our lives as business professionals. While Canada emerged from the recession in late 2009, recent and forecast growth rates are, and will continue to be, sluggish at best. This is placing a huge amount of pressure on business professionals of all types to do more with less, and continually review and reduce costs.

Against this backdrop one fact remains clear–your ultimate responsibility is to ensure you receive the best value possible for every dollar spent, and at the end of the day, this is how your contribution to your company’s success and performance as a purchasing professional will be measured.

To help make sense of the interesting times we currently find ourselves in, senior executives from several of Canada’s leading trucking firms were contacted to answer one simple question–what are the most important pieces of information professional purchasers need to know and keep in mind as they work with trucking companies for the balance of 2010, and into 2011.

Capacity will become more of an issue
All six executives unanimously agreed purchasers need to realize that capacity will become more of an issue when dealing with trucking companies in the future. A key driver underlying this trend is the available labour pool of drivers.

As Norm Sneyd, vice-president of business development at Bison Transport indicates, “In addition to the fact that a significant portion of professional truck drivers in Canada are over the age of 50, many owner-operators left the industry over the past two years due to the economy and their inability to either find work, or earn an acceptable level of income.”

John Geertsema, managing director of freight sales at FedEx Freight, adds, “finding qualified and truly professional drivers is a major issue.”

While the driver shortage has been discussed for many years, it has typically been more future-oriented. This is no longer the case–we are now starting to see the effects of this issue on a real-time basis.

As Sneyd went on to comment, “the driver issue will only become greater as the economy starts to pick up.”

Mark Seymour, president and CEO of Kriska, believes that “within the next five to 10 years the lack of available drivers will emerge as one of the biggest issues facing the trucking industry.”

Equipment availability is another key component in the capacity issue. “Many carriers have divested themselves of equipment since the recession began,” Geertsma says.  “To make matters worse, many have also have scaled back on orders for new trucks.”

Dan Goodwill, president of Dan Goodwill & Associates, adds, “a significant amount of capacity has left the market (over the past two years) and won’t be back any time soon. Given the high degree of continued economic uncertainty, carriers are understandably reluctant to buy new equipment.”

Expect rates to increase
All six executives also agreed that purchasers need to realize the price levels that have characterized the market over the past one or two years are not sustainable, and as a result, rates will be increasing.

As Peter DiTecco, president of Armbro Transport, says, the practice of some trucking firms of “hauling freight at prices just to meet interest payments on equipment is not sustainable.”

Gerry Arsenault, president of Nimble Transportation & Warehousing, adds, “a big part of the pricing and profitability equation for trucking firms is the high fixed-cost nature of the business.”

And, as Goodwill says, “In situations where costs must go down, shippers need to realize that service levels can’t stay the same”.

The accuracy of the executives’ price increase predictions is supported by recent data from the Nulogx Canadian General Freight Index, which shows that July (2010) marked the third consecutive month in a row in which trucking rates in Canada increased.

Higher rates = more drivers
Many of the executives also commented on the link between market price levels, driver compensation and the driver shortage issue. Higher prices allow for higher compensation levels, which in turn will help keep existing drivers and also to attract new, younger people to the profession (which will in turn help mitigate capacity concerns).

As Geertsema of FedEx Freight comments, being able to provide service to customers on a consistent and reliable basis also requires firms to “continually re-invest in everything from safety factors to border security compliance.”

The concept of consistent, reliable service was also highlighted in a comment from Mark Seymour from Kriska: “A primarily price-motivated carrier is a house of cards that could collapse at any time.”

Be careful what you ask for
Here’s another sobering thought—while it’s possible a hard-negotiating purchasing professional could secure significant price concessions from a carrier during a difficult operating period (such as the recession we just went through), carrier yield improvement initiatives often result in these types of customers being targeted first for the most aggressive rate increases.

Given an extremely tight capacity situation, it is also within the realm of possibility that customers who negotiate for their advantage only (instead of on a more fair, win-win basis) would also be the first to have their service cut off or reduced.

The future still looks bright
While one could argue that a future defined by tight capacity and increasing rates is not necessarily desirable for those purchasing trucking services, countless opportunities still exist for purchasing professionals to identify, select and work with trucking suppliers on a mutually beneficial basis.

Below is a consolidated list of tips offered by the six executives.

  • Select and use trucking companies who are financially sound, and will be around over the long term.
  • Align yourself with trucking firms with driver recruitment/retention and business re-investment strategies to best ensure you have the capacity you need, when it’s needed.
  • Be sure to fully investigate the culture of your trucking company suppliers and ensure they align with yours.
  • Ensure your carrier has the IT infrastructure necessary to provide you with the level of operational efficiency and visibility you need.
  • Assign a value to trust, commitment and respect, and always work together in a spirit of partnership.
  • Recognize the strategic importance of the shiper-carrier relationship on your company’s overall success and act accordingly—whether through sharing complete information when asking for prices or collaboratively planning for the future.
  • Find out if your carrier has a formal environmental policy, and determine if and how it aligns with yours.
  • Be willing to establish longer term contracts as a way for your suppliers to confidently invest in new equipment and facilities.
  • Be knowledgeable about, and internally compliant with, all regulatory/security programs (and ensure all suppliers you select are as well).
  • Ensure your dock staff treat drivers with courtesy and respect.
  • Use fair and formal scorecards to measure performance, and be sure to share and review the results on a regular basis.
  • Familiarize yourself with the actual profitability of trucking firms. Annual reports of publicly traded firms are readily available on their web sites, and the Transportation Division of Statistics Canada provides overall industry quarterly reports for free.
  • If a carrier offers you rates that are significantly lower than others, ask why. If something is too good to be true it usually is (and you could be exposing yourself and your company to undue risk in terms of safety, insurance coverage, security compliance, etc.)
  • Recognize that “value” includes many elements such as service consistency and reliability, flexibility, professionalism, compliance (security/regulatory), safety and price.
  • Always base your decision about which trucking company to use on the concept of “value”, and not just price alone.

Value for your money
Your ultimate responsibility as a purchasing professional when buying any good or service is to ensure they will be available when your company needs them, and that you receive the best value possible for every dollar spent.

While there are some very real and serious issues you need to be aware of when working with trucking company suppliers into 2011, by adopting a relationship and win-win method of negotiation and ongoing communication, this important mode of transportation can continue to play a strategic role in the overall success of your company.

Gary Breininger is president of Breininger & Associates Inc, a strategic business advisory and marketing services firm specializing in the transportation/logistics sector. Contact him at 416-819-2638 or at gbreininger@breiningerassociates.com.