Rethinking The Core Carrier Strategy - Too Many Eggs in One Basket?

There are two sides of a continuum in procurement strategies for transportation.  On one end is full "auction" type purchasing where you put everything out to bid, almost constantly, and let the market adjust the prices.  On the other end is single sourcing where you don't bid anything and you partner with a core company.

Close to sole sourcing is a strategy called "core carrier".  This strategy has you limit your carriers to a "vital few" and then you work with them.  Sounds great however lately I have seen this degenerate to what is virtually a sole source strategy.  So, what is wrong with this and is it time to rethink it?  It appears Amazon thinks so.

As I wrote on Monday, Amazon is teaming up with the United States Postal Service (USPS) to execute Sunday deliveries.  Sounds great and the possibility of this occurring I wrote about back in 2012 but there may be more to this.   In The Wall Street Journal's "Heard on the Street" column (subscription required) they mention how this may actually be a strategic decision to ensure they have options beyond FEDEX and UPS.

In conjunction with their private fleet for grocery deliveries, Amazon appears to be diversifying and growing their options.  A real strategic risk for Amazon is they become so beholden to Fedex and UPS that they are controlled by them.  This strategy appears to be their attempt to counter that risk.

For the average shipper you should be thinking about this strategy as well.  Initially the idea of sole sourcing or core carrier sounds great - low administrative costs, one point of contact, easy to do business with.  Long term, however, you have to ask yourselves if you are turning the keys to the kingdom over to someone who many not have your best interest in mind.  No fault of their own but their interest will always be in the profitability of their company.   So, here are some actions you should be thinking about to protect the long term ability of your company to execute their strategy:

1. Be careful on too much concentration in one carrier - especially intermodal
2. Ensure suppliers know (and it is believable) that you have options in the market place.
3. Be careful of tying systems together which are core to your business.  Beyond EDI, once their are unique systems integrations you are married (sometimes for life).
4. Think about strategically propping some carriers up to ensure they are competitive.  Think about Amazon and the USPS.  Why go with what is essentially a bankrupt carrier?  Amazon wants to keep them in business and is going to help them.  You may have to do that with some smaller carriers yourself. 
5. Keep options open with private fleet.  By running a private fleet you will know as much or more about running a fleet than your suppliers.  Keep that as a competitive advantage. 

As always, there is a lot to learn from Amazon.  

Where is The Freight? - Cass Reports a Slowdown

The Cass Freight Index report for July 2012 was somewhat anti-climatic for those of us who follow freight and knew we were in the depth of the great slowdown of 2012.  The "phone bank" report (which measures the direction of phone calls from a fictional transportation manager's desk) reported far more incoming calls from carriers looking for freight than outbound calls searching for trucks and this has been true for at least two months now.

OK, I admit that is not a scientific index however if you are close to the business and have a grasp on that general topic it is a highly effective predictor of freight.

Cass Freight Index - July 2012

We see from this index that essentially expenditures have leveled off really since June of 2011 with just a little bump at the beginning of Q2 in 2012.  I attribute both years' early bumps as price / volume "hype" and not reality.  Each of the last two years has begun with a "great hope" of where rates and the economy is going only to become disappointing by summer and a steadying of rates.  A good and experienced transportation manager will see this trend and ensure they do not buy into the early year hype every year.

At the beginning of every year the transportation company sales people will show up with all sorts of data to tell you "this is the year" where we will hit a massive capacity crunch so you better "pay up now" to be taken care of later.  A great story which makes for great industry journalism however the empirical evidence suggests it is, in fact, all hype and those who remain calm in the face of the story will be better off.

A key question though is how can all these companies (shippers) report great earnings, the market is very high ( Dow at 13,175.64 as of this writing) and yet the shipments and movement of goods is stagnant?  I have a few theories (I freely admit these are theories however the data is showing this to be more and more true).

First, the economy is a more services and financial economy than it is a "things" economy.  While we still consume the manufactured goods we generally do not make them.  This means an entire portion of the former economy shipments is gone and that is inbound to manufacturing.  The outbound is still there however the inbound is gone.  The inbound freight is in China and Mexico and other low cost countries.  Those who say they love being in trucking because their jobs cannot move overseas are wrong.  The inbound jobs have moved overseas along with the inbound freight.

This of course follows the manufacturing base so if manufacturing truly does return to the United States (the jury is out on this) then the inbound will follow back.

Second, the great work on sustainability, minimizing packaging, routing efficiencies etc have all led to being able to move the same amount of goods with lesser number of vehicles.  This movement is good for all of us in the world however it does decrease the raw demand for trucks.  Just think of televisions. If the economy sells a million T.V.s this year (a made up number just to illustrate the point) they are all about 1" thick.  10 years ago if 1 million T.V's were sold they all were about 3 feet deep (packaged).  That is a lot of trucks.  

There is not only minimization of the product size but there is also the elimination of the physical product (think e-books. iTunes for CDs etc.).

So, my conclusion is you cannot compare the GDP numbers of today relative to prior year GDP numbers as if there is a straight correlation between the level of GDP and the amount of goods moving in terms of cube size (which is the driver of number of boxes needed). Clearly there is some kind of correlation but it is not as direct as it would have been 10 - 15 years ago.  The economy can grow with less physical product moving.

Finally, the lesson learned of the last two years is clear: "Be Not Afraid"! at the beginning of the year.  Don't buy the hype, be patient, watch the data and let the economy play out.  You get no credit  (regardless of what the sales person tells you) for being an early mover on rate increases.