Logistics Quarterly Magazine - Volume 15, Issue 3, 2009 - LQ Archives
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LQ’s Executive Interview Series:  Excellence in 3PL Technology
Dan Dershem

A Conversation with Dan Dershem President and CEO, LeanLogistics

LQ: What are significant value generators that 3PLs’ services and IT capabilities provide that may be especially magnified during economic downturns? (Joe Gallick, Vice President, Penske Logistics)

Dan Dershem: The current economic market is proving to be a challenge for most organizations’ supply chains. The economic slowdown has dropped shipper demand faster than what carriers have been able to cut their truck capacity. The decline in overall freight demand has resulted in significant macroeconomic pressures for carriers to cut their rates. Most major shippers have conducted either formal or informal RFPs in the first half of 2009, resulting in 12 to 18 percent rate reductions for most carriers. As a result, almost all carriers are in a fight for survival, hoping that the economy will pick back up before more drastic measures are considered.

These unfavorable business conditions are causing carriers to aggressively cut capacity. Since 2007, TL capacity has shrunk by 10 percent (~235,000 trucks) and this contraction is expected to continue. Large carriers are voluntarily scaling back their fleets by as much as 30 to 40 percent because profit margins are non existent. Reductions have also has been an involuntary phenomenon, as 3,900 carriers (~175,000 trucks) exited the market due to bankruptcy in 2008 alone.

The economic issues that carriers are facing are creating significant implications for shippers. The concern is that carriers will be reluctant to expand with market growth because margins during strong demand periods are no longer sufficient to compensate for the down cycles. This presents significant long-term implications for shippers:

  • Capacity could be harder to secure, especially during periods of peak demand
  • Shipping rates could rise significantly from where they are today—in some sub-markets, this could be substantial
  • Service levels could erode
  • Propensity for delays and disruptions in shipper supply chains could increase
  • Fundamentally, managing supply chains is becoming more difficult

As a result of the volatile marketplace that we all live in today, third party logistic companies can bring significant value to their clients to help them weather the economic storms. Third-party logistics companies bring their clients a broader view of the marketplace through their networks, and have the technology, tools and resources to help the client drive better supply chain decisions.

The first value generator that third party logistics companies offer is their optimization capabilities. As market conditions change, 3PLs can work with the client to re-optimize their network. In an economic downturn like we are currently experiencing, as an example, organizations have seen their sales order volumes decline, their suppliers experiencing economic stress, and a significant reduction in their transportation rates. All of these market changes can cause organizations to re-think their supply chain strategies, in terms of suppliers, days of inventory on hand, distribution locations and transportation modes. Third party logistics companies not only have the tools and resources to work closely with their clients on these issues, they also bring a broader market perspective that helps provide the “sanity check” to their decisions

The second area that third party logistics companies can drive value for their clients is in the area of benchmarking. Since many third party logistics companies utilize On-Demand technology that provides access to large networks or at a minimum, aggregate statistics across all of their clients, they can benchmark a client’s supply chain against the aggregated view of multiple supply chains, both from a cost and service perspective. The results of the benchmarking study allow clients to focus their resources in the areas that will have the biggest impact on service levels and costs.

The final area that third party logistics companies can add value for their clients is in the area of collaboration. This includes not only identifying areas of collaboration across multiple customers, but also executing on those areas of opportunity once they have been identified. Economic cycles as of recently have become more volatile, both in terms of time and severity. I believe that this volatility, along with many organizations’ environmental initiatives, will be the engine that drives greater collaboration across supply chains, including suppliers, customers as well as other shippers in complementary industries.

LQ: In what areas are customers seeking innovation? Is it in the typical regards of cost and service, or are the parameters expanding to issues like energy consumption, carbon footprint, and security? (Thomas J. Goldsby, Ph.D., Associate Professor of Supply Chain Management, Gatton College of Business and Economics, University of Kentucky)

Dan Dershem: The big areas of innovation that we see right now is how to leverage networks to drive empty miles out of the system, which in turn reduce energy consumption as well as a company’s carbon footprint. If you look at national transportation statistics in the United States, as an example, typical long haul carriers average 13 to15 percent empty miles, regional carriers 18 to20 percent empty miles, and private dedicated fleets typically experience 35 to 40 percent empty miles. These empty miles are built into everybody’s cost of transportation today. By reducing empty miles in the network, true costs are removed, which in turn reduce overall energy consumption as well as carbon footprint. The additional benefit is creating more sustainable transportation solutions between shippers and carriers. LeanLogistics network today, as an example, is now approaching 25 million annual shipments across 4,000 customers, 7,000 carriers and 21,000 locations. The customers in this network are very interested in how to work more collaboratively with other shippers as well as carriers to take empty miles out of the system. LeanLogistics is launching a whole GreenLanes™ initiative by working with shippers and carriers who want to get to that next level of network optimization.

Innovations related to security tend to be around chain of custody, and the ability to track not only shipments and what has happened to those shipments while in transit, but to also be able to have detailed lot tracking within shipments.

Cost and service is an area of focus, as always. Customers continue to focus on tightly managing inventory levels, while at the same time maintaining or increasing service levels to their customers. This has driven a need for clients to have greater upstream visibility into their inventory from their suppliers, as well as more and more focus on freight terms conversion on inbound shipments.

LQ: It seems that all major companies are trying to better understand supply chain risks and strategies for mitigating risks. How can IT provide you and your customers with greater awareness of risks and the means for their mitigation? (Thomas J. Goldsby, PhD)

Dan Dershem: Where LeanLogistics is focusing our efforts related to mitigating risks for our customers is to leverage our network to be a more predictive tool for our clients. As mentioned earlier, LeanLogistics network size is now approaching 25 million annual shipments across 4,000 customers, 7,000 carriers and 21,000 locations. One of our goals with leveraging the data from this network is to utilize it as a more predictive tool as to where market conditions may be changing in the future based on tight correlations of past data to known market conditions at that time.

For example, a year ago, diesel fuel hit an all time high in July 2008. Transportation capacity was extremely tight across all modes, and shippers were doing everything they could to manage spiralling increases in transportation costs. A year later, diesel fuel is at 2005 levels, excess capacity exists in all modes, and transportation rates are 12 to18 percent lower than what they were last year at this time. Most shippers were caught off guard last year as well as this year in terms of market conditions, and the subsequent impact to their businesses. Our goal is to leverage the data that we have into a more predictive tool that allows customers to understand market dynamics, and then take actions to mitigate appropriate risks.

LQ: A recent survey found that shippers are not satisfied with their LSPs innovation. Interestingly, they expected the higher the prices, the more innovation the LSP should be bringing to the table. How do you use IT to bring innovation to the relationship, and is it true that “more gets you more,” or is it a question of “necessity is the mother of invention” and if the job requires a new approach, human creativity will find a way to do what has to be done within the means available? (Nicholas Seiersen, Senior Manager, KPMG)

Dan Dershem: We are seeing two forces in the marketplace coming together that we believe will ultimately accelerate innovation. The first is a better and more sophisticated understanding on the customer’s part that they don’t necessarily want to be unique if they are going to look at an outsourcing model. The second is the customer’s understanding of the fast models and the way that they’re deployed.

Many customers who decide to outsource understand the strategic benefits of outsourcing. But as the customer goes through the decision cycle to narrow it down to the last two or three providers, they spend a lot of time focused on how they’re different than all the other customers that the 3PL is doing business with today. So it ends up being, “We want a different result, but you need to give us the same process.” Many times the customer is reluctant to apply new technologies and processes to drive a different result for their organization. Even though they’re looking at outsourcing they are reluctant to accept the broad change management often required to truly optimize across the entire supply chain. So in the end, the discussion evolves to: “Can you customize your solution back to meet our current process?” The minute you do that, you lose the innovative capabilities of the service provider and the value that their technology can bring to the client’s organization. Through the 1990s and early 2000s, many of the technologies that were at the core of the Logistics Service Providers (LSP) were the same, and then the drive was to see who could customize the core technology to meet the client’s requests. What I think most LSPs ultimately learned, however, was that your technology platform became very expensive to maintain, and that you ultimately lost flexibility when you customized the technology to meet the needs of each client. As a result, what you thought was going to bring you flexibility, ultimately locked the organization into a technology platform that lagged behind the demands of the marketplace.

We have learned, as an industry, that there is a difference between customization and configuration. We don’t want to be unique in the areas of our business that don’t necessarily drive value or that the customers aren’t going to assign value to at the store shelf.

LQ: What is the role of 3PLs and carriers in working with firms to identify and mitigate potential sources of risk and enhance overall firm sustainability? (Dave Closs, PhD, Professor of Supply Chain Management, Michigan State University and LQ Executive Editor)

Dan Dershem: We are seeing broadly, across our entire network, substantial rate reduction that exceeds the operating ratios of the carriers prior to the downturn. If you look at the economics, you realize that we are in a unsustainable position. The carriers are bearing the brunt of this, and haven’t been able to fundamentally change their business model to accommodate the lower rates. As a result, you are seeing drastic cuts into the muscle and the bone, so to speak, of these organizations. If you look at the publicly traded carriers, you see dramatic things such as divesture of assets, leveraging of real estate, reduction in benefits and salaries. All of those have the ability to reduce rates in the short run, but aren’t sustainable long term.

Carriers didn’t ask for a 12 to18 percent percent rate reduction. They made the cost cuts they needed to sustain themselves in the short run, but I don’t think anyone believes that the manufacturers or retailers will accept a 12 to 18 percent rate increase, so what will give? I think that’s where we start to move toward the model of sustainability. Ultimately, are we going to arrive at a place where many of the collaborative models that we’ve talked about in the past that received a tremendous amount of press and investment from a technology perspective, will actually be implemented? Carriers can’t take any more cuts and you can’t come out on the back side of a recessionary period and start to have your costs escalate in double digits. The only remaining option is we have to change the way we do business together.

LQ: Do you believe the recession has made carriers more efficient or less so? (Cliff Lynch, Executive Vice President, CTSI)

Dan Dershem: I don’t believe any of the changes the carriers are making right now are about efficiency, but more about sustainability and survivability. With the slowdown in the economy, most major shippers have put their business out for bid in either formal or informal RFPs in the first half of 2009. The net result of this RFP activity is that transportation rates for carriers has dropped by 12% - 18%, resulting in most carriers operating at a loss. As a result of the results of the heavy RFP activity, most carriers are aggressively cutting costs as much as possible across the Board, just to survive in the new reality of the marketplace. Many of these cost-cutting measures are in areas that are unsustainable long term. The other unintended by-product of the heavy RFP activity is that most carriers’ networks are in significant disarray, in terms of lane and asset balancing, which has resulted in more chaos. On the positive side, the new reality is going to open us all up to the opportunity to look at how we hyper utilize transportation assets. For example, if I have a dedicated fleet moving one direction, does it make sense for me to work with somebody else, possibly even an indirect competitor to move that fleet back in the opposite direction? I think carriers ultimately have to look at technologies and start to adopt some of the same things the shippers have been using in the past. Carriers have a greater need to access data beyond their own network. So, for example, when I am responding to an RFP as a carrier, is that the right market or region to be operating my own assets? If I am operating in that region, what are the characteristics of it versus another part of the country and how do I get access to that data?

LQ: What carrier innovations have you seen that will make them more likely to survive the recession? (Cliff Lynch)

Dan Dershem: Ultimately, I think the carriers that will survive will be more willing to apply technologies or change the way in which they do business. This recession has been so deep and so quick, that their survival is dependent upon their willingness to change the way they do business. There is only one option: how do we become better at what we do? Historically, carriers coming out of a period like this overreact. We think there is going to be a shortage and then for a number of reasons over the course of the last three cycles, whether it’s government regulation, engine changes or hours of service, equipment is flowing back into the market. The credit facilities aren’t going to be there to flow the equipment back to the market, even if the manufacturers are in a position where they would be capable of making the equipment. Look at what has happened in the automotive industry. Finance leasing is no longer an option. Now, as a carrier, if you’re trying to line up any credit to rapidly expand into a market, I don’t think the credit is going to exist.

LQ: Do you believe carriers are becoming more relationship-driven (as opposed to transactional)? (Cliff Lynch)

Dan Dershem: From a carrier’s perspective, there is going to be more and more of a need to help their customers, the shippers, understand what role the shipper’s freight plays within the carrier’s network, and vice versa. Historically, I think there has been a fear around sharing that level of network detail, because it might be used against you. But going forward, the relationship structure that is going to need to exist between carriers and their customers is going to be one of having more disclosure and each having a better understanding of the importance of the other. Ultimately, we do need to arrive at market rates for transportation services that allow the carrier to sustain a reasonable profit margin and the shipper to not be at a cost disadvantage to somebody in a similar industry. To get there, I envision that we are going to use technology and share data in ways that we haven’t historically done, to arrive at that destination.

Questions for this Executive Interview have been prepared by members of LQ’s Board: Dave Closs, PhD, Professor of Supply Chain Management, Michigan State University and LQ Executive Editor; Joseph Gallick, Vice President, Penske Logistics; Thomas Goldsby, PhD, Associate Professor of Supply Chain Management, University of Kentucky; Cliff Lynch, Executive Vice President, CTSI; Nicholas Seiersen, Senior Manager, KPMG

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