Every day transportation and logistics professionals are inundated with more bad news regarding the current economic conditions and the prospects for a quick recovery. The road to recovery will apparently be a long one.

To support these contentions, the Council of Supply Chain Management Professionals recently released its State of Logistics Report which unfortunately does not paint a very rosy picture. In addition, one needs to only look at the financial reports of the major parcel carriers, UPS and FedEx, as well as motor carriers and ocean carriers.

While the report documents supply chain performance in 2008, it is clear that not much has happened in the first half of 2009 to make anyone believe this recession will be over soon. There is one bright spot, however, and that is Logistics costs overall have dropped to 9.4% of GDP, the lowest percentage since 2004.

Here are some of the key points of the report that are worth noting:

· Most improvements came from reductions in interest rates which reduced the cost of maintaining inventories.

· Inventory to sales ratios for 2008 increased from 1.25 to 1 in June to 1 to 1.46 in December. The sharpest jump since 1982.

· Retailers and manufactures are finding it virtually impossible to draw down their inventories.

· Despite weak demand, the report contends that transportation costs rose 2%. Most of this increase came from increased fuel costs and not from higher base rates. No surprise here!

The prospects for 2009:

· Many economists believe that we are in the early stages of recovery. Do you believe this?

· Unemployment will certainly get worse before it gets better. Can anyone say “Stimulus?”

· In the first quarter of 2009, GDP contracted by 5.7% and is expected to drop another 2% in the second quarter.

· Since transportation is the largest slice of the supply chain pie, the buyers market should continue. However, we warn you once capacity starts to dry up the carriers will be at the shippers’ doorstep looking to make up lost revenues in the shortest time possible. We believe this will be especially true with the parcel carriers. Remember the transportation industry has been shrinking for some time now and demand will probably outweigh supply.

· For those companies that have not prepared for the economic recovery by solidifying their relationships with their freight carriers and logistics service providers, watch out you will be far behind the eight ball.

One of the major inefficiencies facing companies today is the underutilization of technology. This can occur for a number of reasons. First, because the company does not have the necessary technology it needs to operate more efficiently; two, it does not have the technological expertise on staff to provide the services required; or three, it is so bogged down with IT projects from all areas of the business that many departments get left in the dust. In addition, many companies operate by the seat of their pants because they lack consistent and logical business rules in their everyday business dealings.

Nowhere is this truer than in the area of transportation and logistics. For some reason, the transportation and logistics department is often at the bottom of the ladder when it comes to implementing IT solutions. Don’t ask us why but we have seen it happen over and over again throughout corporate America. Then, when it comes to establishing business rules to protect the companies’ interest, there is often a lack of understanding when it comes to shipping, receiving, claims, routing controls, audit controls, etc. Millions of dollars fall through the cracks each year never to be recovered.

Here are some examples we came across recently in analyzing several different companies’ transportation and logistics operations:

1. Failure to provide suppliers with comprehensive routing instructions – Many companies control the routing of their outbound shipments but fail to control inbound supplier shipments and customer returns. The net result is much higher freight costs. Many companies get hit with shipping and handling charges because they allow their suppliers to invoice the freight charges on a merchandise invoice with no way of discerning the actual cost of the freight versus the shipping and handling charges. This process also depletes revenue from their core carriers that could be used to further drive down their freight costs.

1. Failure to electronically audit freight invoices – Companies that maintain a manual audit process are missing the boat when it comes to performing a comprehensive audit to capture all potential overcharges and duplicate billings. Nowhere is this more prevalent than in the area of auditing parcel carrier invoices. For one thing many companies process these freight bills at the invoice level rather than at the tracking number level because they want to limit the amount of data entry. What they fail to realize is that they have no duplicate payment controls if the parcel carrier sends the same airway bill in on another invoice. It happens more times than you can imagine. For some parcel carriers, the weekly invoice contains summary information so the invoice cannot be audited for accuracy. The only true way is to maintain a comprehensive electronic audit function by a third party that maintains the technology and the expertise to generate significant refunds through the audit process.

1. Understanding Terms of Sales – Many companies sell their goods FOB (Free on Board) their shipping location. In those cases, as soon as the goods are placed on the carrier’s vehicle and the bill of lading is signed by the carrier, title passes from the shipper to the consignee. If the product is lost or damaged in transit, the consignee is legally responsible to file the claim for recovery. While this is the legal definition, many consignees because of their size “force” the claim back on the shipper to file. Note: The freight charges can be prepaid or collect but that does not change the terms of sale. The FOB designation determines ownership of goods. Make sure you understand your company’s sale and purchase terms.

If you ship parcels via the major parcel carriers, you need to be aware that if you ship your product on a freight collect basis, which means your customer is responsible for paying the freight costs but for some reason the customer fails to pay, the freight charges will be billed back to you and you are responsible. While we have no problem with the spirit of this shipping regulation, we do have a problem with how one of the major parcel carriers handled this process for a US company shipping into Canada.

The shipper tendered dozens of shipments to dozens of different customers in Canada on a freight collect basis. Several months after the original shipments were made, past due freight bills were issued by the parcel carrier demanding payment by the US company. The initial problem was that the Parcel carrier did not identify who the original customer was and merely submitted these past due invoices showing the US company as the shipper as well as the consignee. Well, that makes no sense. Meetings were held with the shipper and the parcel carrier seeking additional information from the parcel carrier indicating who the customer was and proof that they invoiced them for the original freight charges. This way the US shipper would have been able to contact all of the customers and tell them the invoices must be paid or they will not receive any additional product from them.

Well, the final outcome is that the multi billion dollar parcel carrier says they cannot provide any of this documentation so the shipper would be responsible for paying these charges even though it does not know if the customers also paid these charges. The carrier was gracious enough, however, to supply a formal dispute form for the shipper to use … How kind! Well, we have news for them, the shipper will file a formal dispute and the carrier will have to find another sucker to get freight from … Done!

Deregulation in the motor carrier industry has created a tremendous opportunity for shippers to negotiate rates with their motor carriers based on their own shipping volumes and annual revenues. This has created a vehicle for shippers to reduce their transportation costs and for carriers to lock in business for a stated period of time. Today many LTL motor carriers are offering discounts in excess of 70%. Sounds like quite a deal! Well, sometimes it is and sometimes it is not. Let us give you some insight into a recent freight rate negotiation we completed on behalf of a client with their primary motor carriers.

The client used a total of three different freight carriers with carrier “A” receiving over 95% of the annual business. The client had a long-standing relationship with this carrier who continued to increase its discount percentage to offset the annual General Rate Increases it was taking every year. At least that is what the client thought. When we approached this client to perform a “Free” freight cost analysis to see if we could save the client any money by negotiating contract rates with its current carriers, we were told by the client “we don’t think you will be able to save us any money because we are receiving a 78% discount from carrier “A”.

The reality is that until you can perform an analysis of the client’s shipping patterns, shipping volumes, product classifications, carrier base rate structures, accessorial fees and charges and the like you really do not know whether you have a good or a bad deal. Our client was intrigued by our “Free” analysis and thought it was certainly worth the challenge.

We analyzed the most recent six months of actual shipping data for this client and benchmarked the primary carrier’s rates with other carriers offering similar services and transit time service levels. We then submitted bid packages to all of the incumbent carriers. The data contained all of the pertinent information the carriers needed to assess the “value” of the business being offered. Our bid package indicated the client was amenable to single sourcing all of their LTL volume to one carrier. The results were astonishing. The incumbent carrier offered a proposal to reduce its current rates by 30%. That alone would bring significant savings to the client’s bottom line at a time when it is sorely needed. The best offer, however, came from a competing carrier who was only receiving a small portion of this client’s business. This carrier offered rates which would lower the client’s current freight expense by over 61%. Now that is a remarkable savings to put on our client’s bottom line.

The reality is discounts are offered by the motor carriers as a way of enticing shippers to tender their business to the carrier. The real question that needs to be asked, however, is this. How does this 78% discount stack up against the competition? The problem is that most shippers do not have the capability of measuring one carrier’s base rates and discounts against another. It is important to point out that you do not necessarily have to switch from one carrier to another to drive costs down. Carriers are looking for long-term commitments and our client was agreeable to a two year contract which certainly benefits both parties. It’s all in the presentation of the data which will provide the carrier with all the details they will need to make an informed decision about the rate levels it is willing to publish. And remember, “Knowledge is power” and it takes someone with knowledge of carrier costing models and freight rate structures to really determine if a company is overpaying.

If you would like a “Free” analysis of your current freight cost structures to ascertain potential savings opportunities, please contact Tony Nuzio at (516) 822- 1183, ext 312.

A bill was recently sent to the House Transportation and Infrastructure Committee which could have a profound impact on shippers by mandating they move more of their freight utilizing intermodal transportation services compared to over-the-road highway traffic. The bill is entitled “The National Transportation Objectives Act of 2009″. The bill promotes six policy objectives including:

• Energy Efficiency and Security

• Environmental Security

• Environmental Protection

• Economic Competitiveness

• Safety

• Connectivity and Accessibility

The bill seeks to increase by twenty percent by the year 2030 freight traffic provided by railroad and intermodal services over highway movements. It also mandates a 40% cut in transportation generated CO2 and seeks to triple walking, biking and public transportation use, again by the year 2030. The bill also seeks to reduce by 50% the number of traffic crashes, “zero percent population exposure” to at risk levels of air pollution and a 25% reduction in the average household transportation costs. The bill orders the Department of Transportation to meet its transportation objectives, ensure that current programs are consistent with these goals and align funding to meet these goals.

While this is a very aggressive proposal and one that is truly needed, we do not see how the Federal Government could possibly monitor the success, or for that matter, failure to achieve the desired results. Perhaps Washington is looking to improve the employment picture by adding more jobs and assigning each household a “Transportation Czar” to make sure we triple our walking, biking and use of public transportation. Again, it’s a great idea but we believe it has very little chance of passage in its current form.

We have all seen the competition heat up between FedEx and UPS over the past year or so especially with DHL out of the domestic market. Well, FedEx is taking on Big Brown in a very aggressive new campaign against legislation that would make FedEx a target for unionization. FedEx termed recent legislation a “bailout” of UPS and FedEx is trying to tie UPS to the federal bailout of the auto and banking industry. They even set up a new website to bolster their case, BrownBailout.com.

In the campaign FedEx calls itself the “creator of the overnight delivery”. It portrays UPS as the company that faced a strike by the Teamsters Union back in 1997 that crippled businesses and commerce. FedEx claims this new legislation is attempting to expose FedEx to those same risks.

The Federal Aviation Administration reauthorization bill which recently passed the House would shift FedEx’s labor status from the Railway Labor Act and place it under The National Labor Relations Act. Under the RLA, express workers MUST be organized under a national union drive, whereas the NLRA provisions allow unions to organize one terminal at a time. This is a huge difference and would certainly place a greater financial burden on FedEx. Stay tuned folks as this fight will go on for some time.

A few facts you might be interested in:

• Mexican truckers are suing the US for $6 Billion in damages because the US is not moving fast enough to re-establish cross border trucking.

• Diesel Fuel prices are at their highest point in 7 months, rising 14.6% during the week of June 8, 2009.

• Global air cargo revenue fell by more than 35% in the first quarter of 2009.

The Department of Defense, Coast Guard, Senate and House committees have been meeting with industry leaders to discuss what should be done to protect US shipping interests in the Gulf of Aden. It appears the Coast Guard is just about ready to craft a new security directive for the US Fleet. The Coast Guard wants these practices to become mandatory for ships in dangerous waters.

According to Dana Goward, the Coast Guard’s Anti piracy expert, “nothing is off the table, however there is a general consensus that arming the ship’s crew is not a good idea”. Mr. Goward also stated that the Coast Guard is working through more complex issues involving the International Maritime Organization and the Contact Group on Piracy Off the Coast of Somalia, an international ad hoc group.

These attacks by pirates have been costly for many ocean carriers like Maersk Lines who has seen their insurance premiums increase 25% since the pirates stepped up their attacks. And you can be sure more surcharges are on the way. Spokesmen for the Maritime Administration of the US Department of Transportation recently reported that a surcharge would be imposed to reflect the heightened risk of doing business in dangerous waters.

The current cost of the war risk binder is estimated at $20,000 per shipper voyage compared to only $500 a year ago. The total impact is expected to reach in excess of $400 Million. Guess who gets to pay these premium increases?

It’s another case of good news and bad news depending on what side of the fence you sit. The good news for shippers is that trucking rates appear to be stable for the immediate future, but the bad news for carriers is that the uptick in business they were expecting in the second quarter just did not materialize.

A recent survey by Avondale Partners indicated a 49% drop in motor carrie r b ankruptcies between the first quarters of 2009 vs. 2008. Here again we see another example of the good news/bad news comparison. For those carriers who were able to weather the storm they continue to hope for a strengthening in the economy for their survival. And for their competitors hoping they would shut their doors and provide additional tonnage to help improve load factors and enhance their bottom line, no such luck.

So where does this leave the industry as a whole? In our opinion the motor carrier industry in both the LTL and Truckload sector should be doing everything in their power to strengthen their current relationships with their shipper customers. Remember, this economy will turn around, although no one really knows when. So the key here is building strong relationships to weather the current storm while at the same time building on the future. Are there opportunities for the carriers to reduce their shipper customer’s rates now? If so, it may be a good idea for the carriers to bring those savings to the table before their competition brings them up. On the other side of the coin, are there additional business opportunities with the customer that will aid the carrier in reducing its cost to serve? What efforts are being made to understand these opportunities?

We are keenly aware in this very competitive marketplace that carriers may be really struggling financially with certain shipper rate structures that continue to erode thei r b ottom line. Does it make sense for them to continue operating at these huge losses? What efforts are being made to work with the shipper customer to stop the bleeding? We can tell you that we have seen a new wave of creativity from several motor carriers in both the LTL and Truckload sector. These carriers are dropping their “normal” business standards to be as creative as they can to generate new revenue from their shipper customers. It’s time fo r b oth shippers and carriers to step outside the box of traditional business practices and be as creative as possible to strengthen business relationships for the future benefit of BOTH PARTIES.

One thing is very clear in this economy and that is every company whether large or small must do everything in their power to reduce as many expenses as possible to enhance thei r b ottom line. For some businesses it will be a matter of survival. It is clear that most companies cannot improve their bottom line by generating increased sales because there are no additional sales to be had. So the only way to make a positive impact on the bottom line is to reduce as many expenses as possible.

Due to the severity of our current economic situation, we believe the culture of cost cutting will be here to stay long after this economy turns around. In the future companies will have “C” level executives involved in Security and Cost Cutting which will be major focuses fo r b usinesses moving forward. Most companies cannot continue the status quo. As Albert Einstein once said “the definition of insanity is doing the same thing over and over again and expecting the same results”.

So companies will have to step outside the box of traditional approaches to cost cutting. In the area of transportation and logistics, this should involve the greater use of Third Party Transportation and Logistics companies that have the expertise to drive millions of dollars to the bottom line when their services are utilized. These firms work in several areas of cost cutting including Parcel Carrier Rate Negotiations, Motor Carrier Rate Negotiations, International Transportation Cost Reductions, Freight Auditing Services and various Technology Enhancement Services.

The benefits to working with these third party firms are many. First of all they are experts in their field. They understand the various carrier rate structures as well as how to strengthen the relationship between the carriers and their shipper customers. And best of all is the fact that these companies usually work on a Gain Share arrangement where there are no up front fees. They get paid from the savings they generate for the shippers. Therefore there is no risk on the part of the shipper in engaging these Third Party service providers.

Why is it then that many shippers are fearful of looking into utilizing these companies to enhance their bottom lines? The reason is simple; most companies do not even realize these opportunities exist. Secondly, some carrier sales representatives put the fear of God into the shipper if they even think about utilizing a Third Party for these negotiation services. We find this point very revealing. Do they resist because they know the value these firms can bring to the bottom line? The proof is in the results they achieve for their shipper customers.

While there are some carrier’s who do not want these Third party’s involved, we have witnessed hundreds of very successful negotiations that have not only benefited the shippe r b y reducing their costs, but have benefited the carrier as well in long term business commitments and additional revenue opportunities that enhanced the carriers’ bottom line as well. As in any business arrangement, both parties must be comfortable with each others approach as to how the business will be conducted. Our advice to shippers is to do their due diligence but do not let a great opportunity pass you by especially now when there is such a great need for cost reductions.