Well it’s that time of year again when the transportation industry announces their General Rate Increases for the upcoming year. The major parcel carriers, UPS and FedEx, have announced increases to become effective on January 4, 2010. Here is a brief overview of the projected increases. In our December 2009 issue of “Logistics Strategies, ” Jack Mitchell, President of Parcel Appraisal and Negotiations Consulting Group, will provide us with an in-depth analysis of each carrier’s General Rate Increase. You won’t want to miss next month’s issue of “Logistics Strategies.”

UPS General Rate Increases:

UPS’ small package Daily and Retail rates will change as follows:

UPS Ground Service will increase 4.9%.

UPS Air and International Services will increase a net 4.9% through a combination of a 6.9% increase in the base rates and a 2% reduction in the fuel surcharge.

UPS will also re-align their fuel surcharge calculations to provide for a more stable surcharge structure when fuel prices fluctuate.

FEDEX General Rate Increases:

FedEx Express package and freight rates will increase 5.9%, however the rate increase will be partially offset by adjusting the fuel surcharge calculation.

FedEx will also change the following rate categories:

· FedEx Express US Import Rates

· FedEx Express US Rates to Puerto Rico

· FedEx International Premium Rates

· FedEx International Priority and International Economy Rates

As always these rate increases will require a comprehensive analysis by each shipper to ascertain the impact to the individual shipper. It is also critical to point out that the major motor carriers, including UPS Freight and FedEx Freight, will also increase their rates in January, 2010. We will provide more details as they become available.

Tony Nuzio

One of the nation’s most visionary leaders, Warren Buffet, of Berkshire Hathaway is planning a $26.3 billion buyout of the BNSF Railway. Some analysts see this move as an “all in wager” on the American economy by bringing the nation’s second largest railroad under his control. Many experts believe this move will allow the BNSF Railway to reshape its network and make the other major railroads envious of its leadership. Investors believe the BNSF will be challenged to generate larger than normal profits for the privately held Berkshire Hathaway organization. You can be sure if Buffet is involved, small profits will be a thing of the past.

Many industry leaders believe BNSF will change the face of shipping for the future by taking more aggressive actions to move freight off the highways and onto the rails, strike longer contract deals with major shippers and ocean carriers and convince new shippers to open up plants and distribution centers along the BNFS tracks.

Buffet stated in a recent Journal of Commerce article, “Our country’s future prosperity depends on its having an efficient and well maintained rail system. Conversely, America must grow and prosper for railroads to do well.” This purchase is Berkshire’s largest ever investment.

Tony Nuzio

In today’s world of transportation contracts and pricing agreements all freight carriers including parcel, trucking, international ocean and domestic air carriers have varying provisions regarding the length of the contract term, rates, charges, liability and penalties. It is incumbent on the shipper to have a thorough knowledge of these contract terms preferably BEFORE they sign on the dotted line. Here are some examples you should be aware of:

· Most parcel carriers will issue contract agreements for a two or three year period. During the term of the agreement the parcel carrier agrees to maintain the provisions as it relates to discounts and incentives. However, the parcel carriers are free to increase the base rates each year as part of their general rate increases. What most shippers do not know is that while the contract agreement is for a 104 or 156 week period, the contract can be voided in 30 days by either party giving written notice to the other party. This provision is critical for a shipper to know since their volume might increase during the contract term and the incentive revenue bands may no longer provide the pricing incentives the shipper deserves based on its shipping characteristics. By the same token, if their volume decreases it will also want to “Re-Negotiate” the agreement to lower the tiered incentive levels. The important issue here is knowing you have an option.

· Most motor carrier pricing agreements will base their rates on the carriers “list” rate and then discounts are deducted to reduce the net rate. Shippers should be aware that rates vary greatly from carrier to carrier. Therefore, no two carriers can be measured from a pricing standpoint based on the discount they have published. Most shippers do not know they can have all of their LTL carriers publish a standard base rate and then have them discount from that base rate. This would allow a shipper to clearly discern which carrier has the lowest net rate based on the discount percentage published. To give an example of this, we recently completed a negotiation for a shipper that had a 79% discount with its primary LTL carrier. We negotiated a new contract for our client using a different base rate scale and the same carrier has now offered a 55% discount. The net result is that the new rates are 43% lower than the carrier’s prior net rates. Before signing what looks like a good deal make sure the net rates are appropriate and do not be fooled by the discount game.

· Most ocean contracts provide pricing based on the number of TEU’s (Transportation Equivalent Units) the shipper agrees to tender to the steamship company. What most shippers do not know is that if the shipper does not fulfill that commitment it can be charged a “penalty” fee for each unit it is short within the contract period. This is important because many shippers will embellish the number of containers it actually ships to obtain a lower rate form the carrier but, as you can see, this can come back to bite the shipper, you know where, if it does not meet its commitment.

· Most domestic air freight forwarders have provisions which drastically reduce their limits of liability in cases of loss or damage. In most cases these domestic air forwarders will limit their liability to $0.50 per pound if the freight is lost or damaged in transit. The sad fact is that most shippers do not know this until there is a claim and they find out they are left holding the bag. These liability provisions, by the way, are usually clearly spelled out on the back of the forwarder’s air waybill which the shipper fills out, but very rarely reads. It is also important to point out that by signing the air waybill the shipper is agreeing to ALL the contract terms and conditions.

The list of these contract and pricing agreement terms and conditions goes on and on. The clear message here is “Caveat Emptor” … Let the buyer beware!

Tony Nuzio

According to a recent survey conducted by the Supply Chain Leadership Forum, a majority of Supply Chain Executives are of the opinion that the economy will “officially turn around” in either the second quarter of 2010 or the fourth quarter of 2009. Approximately 41 percent of respondents voted for second quarter 2010 recovery while 30% opted for the last quarter of 2009. Bruce Tompkins, Executive Director of the Supply Chain Consortium stated the recovery depends on the industry in question. For example, he stated that the food and beverage industry is already seeing signs of a recovery while the high tech and retail sector will have to wait for a while to see any signs of improvement. If you listen to the “official” word out of Washington, the Federal Reserve Chairman has already declared an end of the recession. The reality is most everyone agrees the end of the recession is in sight. So what did we learn from this recession?

The savviest companies used this economic downturn to position their companies ahead of their competition. “The smartest companies shifted to recovery mode before their rivals by developing and implementing a strategic plan that anticipates the end of the recession and positions them for future growth,” Tompkins says. “But even companies that were not significantly impacted by the downturn are pursuing aggressive supply chain improvements to strengthen their competitive positions.” The companies that were and probably still are in a holding pattern will fall farther behind their competition as we come out of this recession. The paralysis that has plagued many companies during this economic crisis must come to an end. Let’s hope it’s not too late for those companies to compete as we move onto firmer economic ground. 2009 has been pegged as the year of survival. What has your company done to jump ahead of the competition! We would like to know.

On another note, The Business Optimism Index, Grant Thornton’s quarterly confidence measure of U.S. business leaders increased again to 60.9 in August, 2009 compared to 54.5 in May. 58% of these respondents believe the recession will be over by the first half of 2010. The Business Optimization Index takes into account three measures.

1. The U.S. Economy: Business leaders’ perceptions of whether the U.S. economy will improve, remain the same or deteriorate in the next six months.

2. Business Growth: Business leaders’ perception about the growth of their own business over the next six months.

3. Hiring Expectations: Whether business leaders expect the number of people their companies employ to increase, remain the same or decrease in the next six months.

Tony Nuzio

The Westchester Business League will hold a seminar and panel discussions on Tuesday, October 27, 2009 at Pace University in Westchester County, New York from 8:00 AM to 11:30 AM. There will be time to network and time to learn what your company can do to take advantage of the current economic environment to benefit your business.

Tony Nuzio, President of ICC Logistics Services, Inc. will be a presenter during the conference and will speak on the subject of “Improving your Supply Chain’s Bottom Line”. For more information, please contact Pat Kober at 516-822-1183, ext. 314, or you can register on line at the Westchester Business League’s website at www.westchesterbl.org. We look forward to seeing you there.

Tony Nuzio

Many companies are taking advantage of the current economic conditions to ensure they not only survive 2009, but prosper mightily in 2010 and beyond. How are they doing this? Well, there are a number of areas they are looking at including maintaining a lean workforce for the foreseeable future. There are no major signs on the employment front indicating corporations are going to increase headcount in the near future. Companies have also been aggressively reducing operating expenses to keep those expenses at the barest minimum. Unfortunately many companies do not have a handle on all of their expenses so cutting them to the bone is a major challenge. This is especially true in the area of the company’s Supply Chain expenses where very few companies have a complete handle on their total costs. And, some companies are even aggressively looking at mergers and acquisitions as a way to grow their businesses and put them in a much stronger competitive position when this current recession ends. On the other hand, there are thousands of companies who believe in the status quo and will just ride out the storm and hope everything will be just fine.

Wherever a company falls in the above descriptions, there is a concept that many corporations overlook that can have a profound impact on the company’s Supply Chain operations and ultimately its bottom line. That concept is utilizing Centralized Procurement systems to manage a company’s risk as well as obtaining for those companies the lowest Supply Chain costs possible. Centralized Procurement involves the most effective utilization of the buying power of the entire corporation to yield these benefits. Sounds pretty simple doesn’t it but you would be amazed at how many companies do not know what their current risks are or what their total Supply Chain costs are. If they do not know their risk how can they manage it? If they do not know their total Supply Chain costs how can they possibly implement processes and procedures to control those expenses?

The first step in the Centralized Procurement process is to identify whether the corporation has the necessary skill sets to thoroughly understand a company’s risk due to lack of knowledge in many areas. If the company does not have the in-house expertise to solve these major issues it is incumbent on them to seek outside help from knowledgeable consultants that have the expertise and staff levels to solve these problems with little involvement from their in-house staff. One of the major areas where companies are vulnerable is the area of computer security. If you read the trade journals and listen to the news you know that corporate executives including the CEO will not only receive stiff fines for violations of security measures, they can also serve jail time for not complying with the latest security mandates. With these stiff penalties what CEO does not want to pull out all the stops to ensure he does not trade in his pinstriped suit for an orange suit with numbers on it?

In the Supply Chain area let’s explore some examples of companies that would like to get their arms around their costs so they can control them, but just do not have a clue on how to go about it. In a recent consulting assignment we were contracted to analyze a company’s transportation expenses to determine what potential savings might be available if their current transportation contracts were re-negotiated by our team of Supply Chain Contract Negotiators. During the initial phase of our assignment it was determined that the company did not know who was routing and bearing the expense of their inbound supplier shipments. Nor did they know what their total inbound freight cost liability was. Sounds impossible but we see this all the time. The result of our study indicated that the company was certainly paying for the inbound freight costs either through a freight bill issued by the freight carrier, as an added charge on the merchandise invoice, which by the way also included an arbitrary shipping and handling cost, or the freight costs were “buried” in the product cost. In each case the company bore the expense but did not control it and had no idea what the total liability should be.

In another case we recently re-negotiated our client’s parcel carrier contract and found out that for the past 10 years several of their shipping facilities were not included in the contract and therefore never received any discounts or pricing incentives from the carrier for shipments made from those facilities. In another case a client refused to audit its parcel carrier’s invoice claiming it was receiving huge incentives based on the company’s multi million dollar annual spend with the parcel carrier. We convinced them to perform an audit even though the company had given up their right to file claims for recoveries of late delivered shipments. The initial audit which covered a 60-day period resulted in refunds from the parcel carrier in excess of $40,000. What company can afford to leave these dollars on the table in today’s economic environment?

These are but a few examples where Centralized Procurement initiatives would have paid off greatly. In each of these cases there was no central control over the costs, how they were allocated and reported. Therefore, how could they possibly be controlled? Very often in today’s corporate environment there are many independent empires where the right hand does not know what the left hand is doing. Someone at the “C” level has to take ownership over these situations before it’s too late. Many companies will not survive 2009 unless they get their arms around these uncontrolled and spiraling costs. The “C” level executive has a fiduciary responsibility to make sure the company is as profitable as it can be. How can this be done if the middle management team does not know some of the most fundamental terms of sale and or purchase terms of its raw materials and finished goods? Why would any corporate executive refuse to audit the invoices it receives from ANY carrier? This is however very prevalent in the area of parcel carrier invoice auditing.

This is a real call to action for all “C” level executives. Now is the time to act. Make sure everyone in your organization understands their job to the fullest and knows what the company’s risks are. Ask questions, probe, set up teams to look under every stone to make sure your company knows what its true costs of operations are. Make sure those costs are the lowest costs based on the services offered. Make sure your company is not exposed to lawsuits, fines and most importantly that the CEO won’t be spending time in jail because he or she failed to understand what the law provides. Ignorance is no excuse! Bring in those outside consultants to help you get where you need to go immediately and without hesitation. Stand strong when employees put up roadblocks for their own personal benefit. What are they hiding from? You need to know or you may be the one to take the fall.

Tony Nuzio

A recent study conducted by the Virginia Tech Transport Institute on behalf of the Federal Motor Carrier Safety Administration has found that truckers that text while driving are about 23 times more likely to have a crash, or at least a close encounter, than drivers who are watching the road.

The study took place between 2005 and 2007 and monitored 203 drivers operating 55 trucks. The data covered over three million miles of actual driving time. The study indicated that the risk of crashes or near crash events were 5.9 times higher for truck drivers that were dialing cell phones as compared to a non- distracted driver. When those drivers were using or reaching for an electronic device the risk of a crash was 6.7 times higher. When those drivers were texting the risk of crash increased to 23.2 times higher than the non-distracted driver.

Another study conducted in June by Car and Driver Magazine indicated that texting while driving was more dangerous than driving while intoxicated.

Currently 14 states and the District of Columbia have laws that ban texting while driving. Look for additional states to follow. There is a Senate bill that would force states to enact these laws to ban texting or risk the loss of a big chunk of their highway appropriations funding.

Technology is a wonderful thing but as a society we are getting to the point where we are so involved in this technology we are losing sight of all logic. For those of us who fall into this category, lets use our heads while we are driving to drastically reduce the risk that we will endanger ourselves, our family and those innocent folks driving in the vehicle next to us.

Tony Nuzio

 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.

Tony Nuzio

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.
2. 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.
3. 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.

Tony Nuzio

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!

Tony Nuzio