PRIVATE FLEETS? - Logistics Quarterly

32
PM40032602 IDEAS FOR LEADERSHIP IN LOGISTICS AND TRANSPORTATION © The Official Magazine of The Logistics Institute Volume 13, Issue 3, June/July 2007 David J. Closs, Ph.D., LQ Executive Editor Professor, Department of Marketing and Supply Chain Management, Michigan State University Jim Davidson, President, iWheels Dedicated Logistics Bill Graves, President and CEO, American Trucking Associations (ATA) John Langley Jr., Ph.D., M.B.A. Professor, Supply Chain Management and Director of Supply Chain Executive programs, Georgia Institute of Technology Clifford F. Lynch, President, C.F. Lynch & Associates Robert Martichenko, President, LeanCor LLC Christopher D. Norek, Ph.D. Senior Partner, Chain Connectors, Inc. Gail Rutkowski, Director of Operations, AIMS Logistics Nicholas Seiersen, B.Sc.(Hons.), M.B.A., P.Log, LQ Executive Editor Senior Manager, KPMG Phillip C. Yeager, Founder & Chairman of the Board, The Hub Group, Inc. Why are more companies outsourcing their PRIVATE FLEETS? Is the investment too much to manage?

Transcript of PRIVATE FLEETS? - Logistics Quarterly

Page 1: PRIVATE FLEETS? - Logistics Quarterly

PM

400

3260

2IDEAS FOR LEADERSHIP IN LOGISTICS AND TRANSPORTATION©

The Official Magazine of The Logistics Institute

Volume 13, Issue 3, June/July 2007

David J. Closs, Ph.D.,LQ Executive Editor Professor, Department of Marketing and Supply Chain Management, Michigan State University

Jim Davidson,President, iWheels Dedicated Logistics

Bill Graves,President and CEO, American Trucking Associations (ATA)

John Langley Jr., Ph.D., M.B.A.Professor, Supply Chain Management and Director of Supply Chain Executive programs, Georgia Institute of Technology

Clifford F. Lynch,President, C.F. Lynch & Associates

Robert Martichenko,President, LeanCor LLC

Christopher D. Norek, Ph.D.Senior Partner, Chain Connectors, Inc.

Gail Rutkowski,Director of Operations, AIMS Logistics

Nicholas Seiersen,B.Sc.(Hons.), M.B.A., P.Log, LQ Executive Editor Senior Manager, KPMG

Phillip C. Yeager,Founder & Chairman of the Board, The Hub Group, Inc.

Why are more companies outsourcing their

PRIVATE FLEETS?Is the investment

too much to manage?

Page 2: PRIVATE FLEETS? - Logistics Quarterly
Page 3: PRIVATE FLEETS? - Logistics Quarterly

6 Announcements 7 Contributors

9 Be Careful What You Ask ForOutsourcing logistics processes is all therage today. However, some firms are electingto outsource significant portions of their supply chain without completing all of theproper preparation. It is rarely good business

practice to follow others just because it is trendy.

10 Questioning the Global Supply — The Power of Lead TimeGlobalization has become a major focus formany supply chain professionals. However,moving manufacturing to low cost countriesreduces flexibility, increases lead times

and makes build to order manufacturing (which should without question be the goal of any supply chain professional) difficult to impossible. Since the supply chain infrastructure you are building now may be difficult to dismantle down the road, as supply chain professionals,we need to take global sourcing very seriously.

12 Why Shippers Can’t Afford NOT to Convert Their Private FleetsPrivate fleet operations might initially seem like a good freight management solution for companies concerned about cost,capacity and control. However, for many —

particularly mid-sized companies — that simply isn’t the case. This article takes a look at six popular myths aroundthe supposed benefits of maintaining private fleets

15 Piorities in Supply Chain DesignMany executives operating regionally andglobally are shifting their priorities to drive supply chain design.

18 A Conversation with Phillip C. YeagerIt’s difficult to find a better exemplar for innovation than Phillip Yeager. Here’s an instructive look at what differentiates leadership in logistics and transportation.

23 Congestion Pricing Not the Solution to U.S. Transportation WoesCongestion pricing is touted as the cure forgridlock and pollution. But it comes at a costto motorists, businesses and the economy.And the cost is disproportionately high when

compared with the benefits gained. Adding capacity withnew infrastructure funded by fuel taxes is a better solution.

26 Outsourcing Your Way to CompetitiveAdvantageThis story provides a powerful illustration ofhow outsourcing supply chain managementcan not only lower transportation costs butalso improve service, build on customer and

supplier relations and drive competitive advantage — in some cases actually resulting in a significant increase in market share. Being willing to discard old, asset-basedmodels and consider the advantages of new approaches can lead to tremendous opportunity and growth.

28 Leveraging Technology: A Strategy to Help 3PLs Add ValueThe development and implementation ofvalue-added, information technology-basedservices and solutions is the best way for3PLs to differentiate themselves from the

competition and reduce downward pressure on margins and profitability. However, the 2006 Eleventh Annual ThirdParty Logistics Study shows a significant gap between expectations and performance. 3PLs have to invest more in their systems and educate their customers on their IT capabilities to capitalize on the IT value-added services.

CONTENTSLQ™

1

3LQ™ July 2007LogisticsQuarterly.com

Page 4: PRIVATE FLEETS? - Logistics Quarterly
Page 5: PRIVATE FLEETS? - Logistics Quarterly

5LQ™ July 2007LogisticsQuarterly.com

David J. Closs, Ph.D.Department of Marketing and Supply Chain Management,Michigan State UniversityExecutive Editor, LQKaren CooperSenior Media Relations Specialist,FedEx Canada Ltd.Jim DavidsonPresident,iWheels Dedicated LogisticsBruce DanielsonExecutive Communications Manager, UPS Richard Dawe, Ph.D.Associate Professor,Golden Gate UniversityRuss DixonSenior Manager,CEVA LogisticsRuss J. DoakDirector, Global Logistics, Kodak Graphics & CommunicationsDavid FaoroDirector, Supply Chain The International Group, Inc.Sue Gadsby, C.P.P. C.P.M., Director, Procurement, Apotex Inc.Thomas J. Goldsby, Ph.D.Associate Professor,University of KentuckyMelissa GraceyPresident, DTA Services Ltd.David GriffithVP Global Supply Chain Management, BAX GlobalJoe GrubicSenior Manager, Alliance/Network Management, Nortel Networks Global LogisticsEd KearnsPresident, Kearns Transportation ServicesArun KumarDirector of Americas Logistics, Dell Inc.John C. Langley Jr., Ph.D.

Director of Supply Chain Executive Programs,The Logistics Institute (TLI), Georgia Institute of TechnologyRobert MartichenkoPresident, LeanCor

James MahoneyVice President of the Supply Chain Excellent Practice,Auxis, Inc.Diane Mollenkopf, Ph.D.Assistant Professor, University of TennesseeJeff MooreManaging Director,Lakeside Logistics Inc.Mark Morrison, Senior Vice President of Business Development, CEVA LogisticsTom NightingaleVP Communications and Chief Marketing Officer,Con-way Inc.Christopher Norek, Ph.D.Senior Partner, Chain Connectors, Inc.NASSTRAC Contributing EditorRobert Novack, Ph.D.Associate Professor,Business Logistics,Penn StatePeruvemba S. Ravi, Ph.D.Associate Professor,Wilfrid Laurier UniversityKurt M. RitceyPartner, Deloitte ConsultingMichael RubinfeldDirector, Customer Logistics, Ryder Logistics & TransportationSolutions Worldwide Nicholas SeiersenSenior Manager, KPMGExecutive Editor, LQAllan SmithPresident & CEO, BCG Logistics GroupMichael SneddenManager of Distribution Operations, IBM-Canada Ltd. Donald Tham, Ph.D., P.Eng.,Ryerson UniversityWalter Zinn, Ph.D.Professor,Ohio State University

LQ™ ADVISORY BOARD EMERITIBenjamin GordonManaging Director, BG Strategic AdvisorsGeorge KuhnJean Létourneau

PUBLISHER & EDITOR

Fred [email protected]

CPLI PRESIDENT & EDITORIAL DIRECTORVictor [email protected]

CREATIVE DIRECTORCraig [email protected]

WEB DESIGNER Beylah [email protected]

COPY EDITORSTrish O’[email protected] Speers [email protected]

CIRCULATION MANAGER

Bill [email protected]

ACCOUNTINGChristine Raffan, CGA Independent [email protected]

ADVERTISING SALESGerry JenningsSales Director, [email protected]

Mike SkinnerNational Sales Manager, [email protected]

Fred MoodyPublisher, [email protected]

WHAT'S AHEAD:

September/OctoberNew Frontiers in TechnologyAdvertising Closing August 10

NovemberNorth America'sTop 3PLsAdvertising Closing October 5

DecemberExpedited Transportation TrendsAdvertising Closing November 9

LQ's Fall SymposiumNovember 8, 2007

LQ™ Inc.2 Bloor Street W., Suite 100, Box 473, Toronto, Ontario, M4W 3E2,Telephone: (416) 461-8355Toll Free: 1-800-843-1687Fax: (416) 465-7832 Email: [email protected]

Logistics Quarterly (LQ™) (ISSN 1488-3309) is published sixtimes annually by LQ™ Inc. LQ™ iswritten for professionals in logistics.

Subscription Services at: www.LogisticsQuarterly.comCanada Post Publications Mail Sales Agreement Number: 40032602. CANADIAN POSTMASTER: send subscription orders, address change notices and undeliverable copies to LQ™, 2 Bloor Street West, Suite 100, Box 473, Toronto, Ontario, Canada M4W 3E2

EDITORIAL POLICYThe opinions expressed in this publication do not necessarily reflect the policy of LQ™ Inc. The editorsreserve the right to select and edit material submitted for publication. Not responsible for unsolicited material. LQ™ Inc. is a Toronto-basedcorporation and publisher. All rightsreserved © by LQ™ Inc. 2007.Reproduction without written permission of the publisher is forbidden. LQ™ welcomes your comments, letters to the editor, or written submissions for consideration.(LQ™ is available on-line at:www.LogisticsQuarterly.com)

LQ MAGAZINE’S STATEMENT OF OWNERSHIP The trademark LQ™, LQ Magazine (ISSN 1488-3309), LQ Newsletters andthe LQ Conference, including the“Executive Exchange,” its trade marksand published material are wholly ownedby LQ Inc., private-owned and operatedcorporation. LQ’s valued sponsors areindependent of LQ Inc., and LQ’s editorsdo their utmost to uphold independentand impartial views in all of their publishing initiatives.

LQ is honored to have the status of the “official magazine” of The LogisticsInstitute. The Logistics Institute and LQ are independently owned and operated organizations.

Volume 13 Issue 3

LQ™ ADVISORY BOARD

Page 6: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com6 LQ™ July 2007

ANNOUNCEMENTS

FedEx Freight Canada UnveilsNew Facility in TorontoCarrier Also Plans to Open Seven NewFacilities Throughout Canada

FedEx Freight Canada, the newlyformed subsidiary of FedEx Freight that provides intra-Canada and trans-border less-than-truckload (LTL) serv-ice, recently unveiled its new combinednational headquarters and 48 dock-door service center in Toronto.

Formerly Watkins Canada Express,FedEx Freight Canada officially beganoperations in February this year. Thecompany provides all-points coverageto more than 7,000 cities in 10 of thecountry’s provinces, as well as transbor-der service for shipments to and fromthe United States.

“This new facility establishes a strongbase from which FedEx Freight Canadawill quickly expand its operationsacross the country,” said Grant Crawford,Vice President and General Manager,FedEx Freight Canada, in a press release.

In addition to the Toronto facility,FedEx Freight Canada offers pickup anddelivery service through a growing net-work of facilities that includesVancouver, Winnipeg, London, Calgaryand Montreal.

With an aggressive growth planunder way, FedEx Freight Canada alsoplans to add service centers in Ottawa,Cambridge, Edmonton, Halifax andQuebec City and open expanded facili-ties in Winnipeg and Calgary during thenext several months.

“When you combine FedEx FreightCanada with FedEx Freight and FedExNational LTL, we provide a full range ofcomplementary LTL solutions through-

out North America,” said DougDuncan, President and CEO of FedEx Freight. “We’re com-mitted to continuing theenhancement of our opera-tions in Canada to betterserve our customers.”

Women in Logistics Initiative Launched The Logistics Institute’s Womenin Logistics Task Force recentlylaunched a series of eventsacross Canada.

More than 600 participants— the vast majority female —participated at six launchevents across Canada.The mes-sage from featured keynote

speaker Angela Mondou, P.Log., “TakeAction” and “Be Accountable” wasenthusiastically endorsed by this audi-ence of logistics and supply chain prac-titioners, who enjoyed listening toAngela’s insights from her new book Hitthe Ground Leading.

In addition to the motivational lead-ership portion of the events, partici-pants were asked to contribute theirexperiences and insights in facilitatedfeedback group discussions. Discus-sions highlighted career opportunitiesand roadblocks, as well as delegates’issues and concerns. Participants wereasked to share information on theskills, knowledge and education theyfelt were needed to succeed in today’ssupply chain logistics industry sector.

Two of the principal objectives of

the Women in Logistics initiative are tobuild community and profile womenin our industry. The national launchevents certainly held to those princi-ples.“The building of this communitywill also lead to a stronger voice for allwomen in logistics,” noted RuthSnowden, P.Log., Managing Director ofthe Logistics Institute, in a pressrelease.

As an initiative of the LogisticsInstitute, this Task Force is mandated toexplore options and create opportuni-ties to highlight and publicize the con-tributions of women currently in thesupply chain logistics profession. It isalso charged with developing a strate-gy to support the recruitment ofwomen into supply chain logistics andassist women to develop themselvesas supply chain logistics professionals.

The Logistics Institute is the interna-tional certifying organization for theProfessional Logistician (P.Log.) desig-nation. Founded in 1990, the Institute isthe industry’s leading source of logisticstraining and certification in Canada. In1995, 52 logisticians and supply chainmanagers had earned their P.Log.designation. Today, that number hasincreased to nearly 2,000.

Larry Miller, President and CEO, FedEx Freight East (left), andDoug Duncan, President and CEO, FedEx Freight (right), joinGrant Crawford, Vice President and General Manager, FedExFreight Canada (center), to unveil FedEx Freight Canada’s newnational headquarters and service center in Toronto.

Angela Mondou, author of Hit the Ground Leading,speaking at the Logistics Institute’s Women in Logisticsnational program. Photograph provided courtesy of theLogistics Institute.

Page 7: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com 7LQ™ July 2007

JULY CONTRIBUTORS

LQ’s mandate to provide “Ideas for Leadership in Logistics” is clearly evidenced thisissue, with articles written by professionals and logisticiansfrom America and Canada who are leading and transforming

business by creating new roadmaps and definitions for leadership in this exciting field.

OUR CONTRIBUTORS

DAVID J. CLOSS, Ph.D., LQ Executive

Editor. Dr. Closs is the John H.

McConnell Chaired Professor of the Eli

Broad College of Business, Department

of Marketing and Supply Chain Man-

agement, Michigan State University. He

has consulted with more than 100 of

the world’s Fortune 500 corporations

regarding logistics strategies and sys-

tems. He is an active member of the

Council of Supply Chain Management

Professionals (CSCMP).

JIM DAVIDSON, President, iWheels

Dedicated Logistics, began his career in

logistics at the Ford Motor Company in

1963, working in all aspects of logistics

for 17 years. Mr. Davidson joined TNT in

1983, where he held various management

roles, including roles in operations,

staff, administration and general man-

agement for a number of different divi-

sions. He also served as the TNT board

member representing North America at

their European-based board meetings.

He has served on the executive of the

Canadian General Motors Supplier

Council and as the Executive Vice Presi-

dent of the ATA Council of Logistics

located in Alexandria, Virginia.

BILL GRAVES, a former governor of

Kansas, is President and CEO of the

American Trucking Associations in

Alexandria, Virginia.

JOHN LANGLEY JR., Ph.D., M.B.A., is

Professor of Supply Chain Manage-

ment and Director of Supply Chain

Executive programs at the Georgia

Institute of Technology in Atlanta,

Georgia. Dr. Langley is a former Presi-

dent of the Council of Logistics

Management and a recipient of the

Council’s Distinguished Service Award.

In 2004, he was honored as one of the

profession’s top f ive logistics executives

at the Richmond Events Logistics and

Supply Chain Forum. He received his

Ph.D. in Business Logistics from Penn

State University. Dr. Langley has co-

authored several books, including The

Management of Business Logistics, a

7th edition textbook published in 2003.

He also serves on the Boards of

Directors of UTi Worldwide, Inc.,

Averitt Express, Inc., and Forward Air

Corporation. He is also lead author of

the annual study on the 3PL industry.

CLIFFORD F. LYNCH of C.F. Lynch &

Associates has provided management

advisory services in logistics since 1993.

During the previous 35 years, he was Vice

President, Logistics, for the Quaker Oats

Company and President of Trammell Crow

Distribution Corporation.

Mr. Lynch holds an undergraduate

degree from the University of Tennessee

and an M.B.A. from the University of

Chicago. He is a Certif ied Member of

the American Society of Transportation

and Logistics and is a member the edi-

torial review boards of the Journal of

Business Logistics, the International

Journal of Physical Distribution and Logistics

Management, and Supply Chain Manage-

ment Review. He is also a member of the

Warehousing Education and Research

Council and the Advisory Council to

the Dean, College of Business Adminis-

tration, University of Tennessee.

Mr. Lynch is a member and past presi-

dent of the Council of Logistics

Management and has received numerous

awards in the field of logistics. Among

them are the CLM Distinguished Service

Award, the Traffic Management Maga-

zine Professional Achievement Award,

the University of Tennessee Department

of Marketing and Transportation Distin-

guished Alumnus and the President’s

Award for Outstanding Contribution to

the American Society of Transportation

and Logistics.

He is an adjunct professor at the

University of Memphis, a frequent lec-

turer at other colleges and universities,

an author of numerous articles on the

subject of logistics and has written two

books on logistics outsourcing.

ROBERT MARTICHENKO is President

of LeanCor LLC. Headquartered in

Florence, Kentucky, LeanCor delivers

dedicated third party logistics services

Page 8: PRIVATE FLEETS? - Logistics Quarterly

and training and education services to

companies embracing Lean manufac-

turing and Six Sigma. Mr. Martichenko

is a student of logistics, Lean and Six

Sigma; has published in several industry

journals; and has co-authored the book

Lean Sigma Logistics, published by

J.Ross Publishing. Mr. Martichenko

holds a Bachelor’s degree in Mathemat-

ics from the University of Windsor and

an M.B.A. in Finance from Baker

College. Mr. Martichenko is involved

with the Council of Supply Chain

Management Professionals (CSCMP),

the Lean Enterprise Institute, the Supply

Chain Consortium at Saint Louis

University and LQ magazine.

CHRISTOPHER D. NOREK, Ph.D., is a

founding Senior Partner with Chain

Connectors, Inc., an Atlanta-based sup-

ply chain consulting firm specializing in

strategy, technology, training, SMB sup-

ply chain transformation and returns

management. He has been in the logistics

field for over 15 years both in industry,

with Accenture, Kimberly-Clark, Apple

Computer and CSC, and in academia as

a professor at both Auburn University

and the University of Tennessee. Dr.

Norek has consulted for firms including

Lowe’s, SAP, Amazon.com, Accenture,

Off ice Depot, Schneider National,

Cingular Wireless, The Sports Authority,

Party City, Chatsworth Products Group,

Titan America and Aramark Uniform

Services. He has been active in publish-

ing for journals in the field including the

Journal of Business Logistics, the

International Journal of Logistics

Management, Supply Chain Management

Review, LQ (formerly Logistics Quarterly),

DC Velocity, and ASCET. Chris holds sup-

ply chain/logistics degrees from Penn

State, Tennessee and Ohio State.

GAIL RUTKOWSKI is Director of

Operations with AIMS Logistics and is a

veteran of more than 25 years in the

transportation industry. She has experi-

enced many sides of the industry, from

shipper to carrier, from small shipments

to truckloads, from domestic to inter-

national. Her experience runs the

gamut from private f leet management

with Quaker Oats and Belden Wire and

Cable to truckload sales with C.H.

Robinson to transportation manage-

ment with Thomas & Betts. Ms.

Rutkowski is a member of NASSTRAC

(otherwise known as the National Ship-

pers Strategic Transportation Council)

and is currently president of the organi-

zation. She was selected NASSTRAC

Member of the Year in 2003 and 2005.

She is also a member of the Council of

Supply Chain Management Profession-

als (CSCMP).

NICHOLAS SEIERSEN, B.Sc. (Hons.),

M.B.A., P.Log., LQ Executive Editor, is a

senior manager with KPMG, based in

Toronto, Ontario. He specializes in sup-

ply chain consulting, with particular

attention to strategic sourcing and sup-

ply chain planning and operations. Mr.

Seiersen is the Canadian service line lead

for Operations Cost Management at

KPMG. Mr. Seiersen holds a B.Sc.

(Hons.) in Biochemistry and an M.B.A. in

Industrial Management. He teaches exec-

utive development courses at top univer-

sities in Europe and North America. He

has written for numerous publications in

North America and Europe on

ePurchasing, logistics, supply chain man-

agement and cost-to-serve. He is the

Past President of the Toronto Round-

table of the Council of Logistics

Management (now CSCMP), Vice

President of the French Logistics

Association (ASLOG) and a member of

the European Logistics Association

Business Management Committee.

ROBERT L. SHAUNNESSEY has been

Executive Director of Warehousing

Education and Research Council

(WERC) since 2003 and in the distribu-

tion industry for more than 30 years. He

was a founder and partner of third

party logistics provider Sterling

Logistics Corporation. Earlier in his

career, he served as President and CEO

of Records Management Services,

President of Midwest Distribution for

ITEL-GATX Administration for DSC

Logistics.

PHILLIP C. YEAGER is founder of The

Hub Group, Inc., and has been

Chairman of the Board of that organiza-

tion since 1985; from 1971 to 1985, Mr.

Yeager served as President of Hub

Chicago. He became involved in inter-

modal transportation in 1959, five years

after the introduction of intermodal

transportation in the United States, as

an employee of the Pennsylvania and

Pennsylvania Central Railroads. He spent

19 years with the Pennsylvania and

Pennsylvania Central Railroads, 12 of

which involved intermodal transportation.

Over his many years in the transporta-

tion industry, he has been awarded many

honors, including being named Man of

the Year by the Intermodal Transporta-

tion Association (1991), receiving the

Salzburg Practitioners Award from

Syracuse University in recognition of his

lifetime achievements in the transporta-

tion industry (1995), being inducted into

the Chicago Area Entrepreneurship Hall

of Fame sponsored by the University of

Illinois at Chicago (1996), receiving the

Presidential Medal from Dowling College

for his achievements in transportation

services (1997), receiving the Silver

Kingpin award from the Intermodal

Association of North America (1998) and

being named Transportation Person of

the Year by the New York Traffic Club

(1999). Mr. Yeager graduated from the

University of Cincinnati in 1951 with a

Bachelor of Arts degree in Economics. He

is the father of David P. Yeager and Mark

A. Yeager.

LogisticsQuarterly.com8 LQ™ July 2007

Page 9: PRIVATE FLEETS? - Logistics Quarterly

9LQ™ July 2007LogisticsQuarterly.com

THERE IS AN ENTIRE RAINBOW oflogistics relationships — ranging fromthe simple transaction, such as a singlespot buy for a point-to-point truckloadmovement, to the pot of gold relation-ships needed for totally outsourcedsupply chains.The closer you intend toget to total outsourcing,the more prepa-ration is necessary to achieve long-termsuccess. The cost of errors in this type ofarrangement can lead to losses of bothcareers and millions.

There are several steps that we regu-larly see omitted.The first and most fre-quently omitted step is taking intoaccount self-knowledge regarding yourown firm. Not every partner is perfectfor you, and getting an appropriate onerequires that you know the culture ofyour own company.

Is yours an authoritarian culture,oneof command and control? If so, a serv-ice provider who prefers a consultativerelationship will have substantial over-head you do not require, and its man-agers are going to be disappointed andless than enthusiastic about the work-ing relationship. Your best bet is a com-mand and control partner.

How does your management respondto errors? What happens when a com-petitor launches a new service? If inno-vation and flexibility are importantissues for your firm, research suggeststhat mid-sized privately owned partnerswould best fit your needs.

The strategic direction of your firm isone of the major factors that must beconsidered. Is there an acquisition ordivestiture in your immediate future? Ifso, your partners must be able torespond to the changing requirements,and your contracts must allow for some

flexibility. The strategic direction dic-tates the tasks that must be done, andyour company culture combined withthat of your partners determine howsuccessful you will be in completingthose tasks.

A good analogy is to examine howwell you are suited for your job. Is yourpsychological makeup important? Youbet it is! My high school guidance coun-selor used my good math scores to directme to a career in mechanical engineer-ing.My ADHD-type personality made thata disaster. The continual drive for better,faster, cheaper in logistics is a better fit.But then who knew what logistics was inthe middle of the previous century?

The cafeteria list of services youreceive in response to your standardrequest for information is inadequatefor a complicated outsourcing project.You need to apply a business-typeMyers-Briggs personality indicator testto your partners if you expect to livehappily ever after. Well, at least for thethree to five years of the contract. Thepersonality fit between the two firms isa critical and often overlooked piece ofthe outsourcing program.Ethics,willing-ness to invest in relationships, attitudes

toward continuous improvement pro-grams and ability to act if the unexpect-ed happens are among the areas thatneed to be understood beforehand

This advice to examine your poten-tial partner applies to the serviceprovider side of the relationship as well.No matter how hard the capital partneris pushing for top line growth,not everyclient is a good client. While therequests for proposals are flowing andthe fever is high, it is easy to get carriedaway with visions of unending double-digit growth rates.However,a significantnumber of those potential clients donot fit your profile range of acceptableclients and are, therefore, disasters wait-ing to happen.

While we are waiting for a collabora-tion guru to develop the businessMyers-Briggs, we recommend the fol-lowing. Pick some of the critical thingsthat have happened or could happen inyour supply chain operations anddescribe your firm’s (likely) reaction tothem. Form those issues into questionsthat you ask potential partners as a partof your request for information processand then review how their responseswould be received in your company.

If the service provider’s responseswould not be acceptable in your envi-ronment, move on.You just saved bothfirms from the risk of a large lawsuit. Ifno one gives you acceptable answers,the problem may reside close tohome, or you may have a set of cir-cumstances where outsourcing willnot provide the appropriate solution. Ifyou do get responses you could workwith, then they need to be drafted intothe agreement you reach with theselected supplier.

EXECUTIVE’S CORNER

By Robert L. Shaunnessey

Be Careful What You Ask For Outsourcing logistics processes is all the rage today. However, some firms are electing to outsource significant portions of their supply chain without completing all of the proper preparation. It is rarely good business practice to follow others just because it is trendy.

Page 10: PRIVATE FLEETS? - Logistics Quarterly

THERE IS NO QUESTION that globaliza-tion has become a focus, if not the mainfocus, for many supply chain profession-als.The trend for moving manufacturingto low cost countries (LCC) has beenaccelerating over the last two decades.Companies that have high labor contentin their products can benefit from themove to LCCs; however, we should beasking whether all initiatives to globalizeactually produce results in bottom-linefinancial performance.

The decision to move to LCCs is typi-cally nothing more than a spreadsheetexercise. You load up your cost modeland see what the net unit price is domes-tically versus off shore. Ideally, your costmodel will not just look at unit price,butwill take into consideration all associat-ed costs including transportation, inven-tory carrying and risk costs such as airexpedites and parts shortages. However,even the most rigorous of cost models

cannot take into consideration whatmay be the most important dynamic ofthe global supply chain — that is, theimpact of increased lead times.

To begin, let’s review a few definitionsof lead time.1. Outbound Logistics Lead Time: Theamount of time it takes to stage,ship andtransport an order to the customer uponreceiving a customer order.2. Manufacturing Replenishment LeadTime:The amount of time it takes for youto manufacture your product after youreceive a customer order.3. Inbound Logistics Lead Time: Theamount of time it takes to order andreceive material from your supply basein order to manufacture your product.

With these definitions in mind,we candefine total lead time as the amount oftime it takes for us to order material fromour supply base through to when wedeliver product to our customer.(Note:A

more rigorous definition of lead timewould include the time it takes you toget paid from the customer after the cus-tomer receives the order.)

Building to Order and Eliminating Overproduction If you were to design the perfect manu-facturing process, there is no questionthat it would be a manufacturingprocess where you build to customerorder (BTO). In this perfect world, youcarry no inventories and only initiateyour inbound supply chain and manu-facturing processes after you receive acustomer order. The brilliance of BTOis that you eliminate overproductionbecause you don’t order material fromyour suppliers or manufacture finishedgoods until you have a firm order. Aswell, there is no need for warehousingor storage of any kind as you simplyflow product to the customer uponcompletion of the manufacturingprocess.In essence,this is the definitionof a pull system, where the customerorder triggers supply chain activities tofulfill the order, resulting in no overpro-duction. This drive to eliminate over-production must be on the minds of allsupply chain professionals, since over-production is without a doubt theworst organizational waste that exists.Defined as building (or buying) morethan you need or earlier than you needit, overproduction creates other seriouswastes such as excess inventory, excesswarehousing and excess transporta-tion. BTO also eliminates the need for

LogisticsQuarterly.com10 LQ™ July 2007

EDITORIAL

Questioning the Global Supply — The Power of Lead TimeGlobalization has become a major focus for many supply chain professionals. However, moving manufacturing to low cost countries reduces flexibility, increases lead times and makes build to order manufacturing (which should without question be the goal of any supply chain professional) difficult toimpossible. Since the supply chain infrastructure you are building now may be difficult to dismantle down the road, as supply chain professionals, we need to take global sourcing very seriously.

By Robert Martichenko

Page 11: PRIVATE FLEETS? - Logistics Quarterly

forecasting, which in turn results in theelimination of excess inventories dueto forecasting errors. Eliminating theneed for forecasting is another key areasupply chain professionals need to befocused on.

It’s clear that BTO is the perfect solu-tion to a waste-free supply chain.However,BTO requires a specific dynam-ic to be in place to succeed: Total leadtime must be less than customer order todelivery lead time expectations.

In other words,if the competitive envi-ronment states that customers expect toreceive a product 10 days after placingan order, a BTO process would requireyou to be able to order and receive material from your suppliers and thenmanufacture and ship the product to thecustomer in less than 10 days. Althoughmany of us will never reach the state ofperfect BTO, this needs to be the stretchgoal for the lean supply chain.

Forecasting — Push and Lead TimeForecasting simply means that we needto guess what customers might orderand therefore what we need to build orbuy now in order to be prepared for thefuture customer order. Although thereare simple to extremely complex fore-casting models, no algorithm or softwarehas cured the number one law of fore-casting, which states that forecasts areguaranteed to be wrong. What is over-looked at times, though, is the secondlaw of forecasting, which states that thelonger out the forecast is, the morewrong it will be.Consequently,if our goalis to reduce our exposure to waste creat-ed by inaccurate forecasts, we need tofocus on lead time reduction.To under-stand this, we need to review why weforecast in the first place.

Building on our discussion aroundBTO, forecasting is required when wehave the opposite condition from what isrequired to build to order. Forecasting isrequired when: total lead time is greaterthan customer order to delivery leadtime expectations.

If we cannot order material, manu-facture and ship in less time than ourcustomers expect from the point theyorder, then we are forced to forecast(guess) what the customer may want.At

that point, we order material from oursupply base and pre-build product inanticipation of the customer order weforecasted. The result of this process isoverproduction (inventory with nodemand) or not having enough of whatthe customer wants. This is the quintes-sential push system. You pre-build to forecast and then push the product intothe market place. Unfortunately, this pushprocess will never lead to business excel-lence. Successfully moving from push topull requires a disciplined approach tolead time reduction.This means that as asupply chain professional,you absolutelyneed to be focusing on all aspects of leadtime reduction.This brings us full circle tothe global supply chain.

Inbound Logistics — Flexibility and Lead TimeOnce you understand that lead timereduction is at the root of implement-ing pull systems (which needs to bethe goal), you look at the elements oftotal lead time.The focus must then beto reduce each component of totallead time. Consequently, you need toreduce inbound logistics lead time. Infact, reductions in inbound logisticslead time will significantly contributeto creating flexibility in the supplychain. This flexibility will allow you toget closer to pull, which in turn willeliminate overproduction and improvecustomer fill rates.

Flexibility is a word that we hear a lotthese days relative to supply chain man-agement. Flexibility in the supply chaindefines our ability to react when marketconditions change. Market conditionscan be described as the changes thattake place in product and product quan-tity demand.For example,customers willchange what products they want and inwhat quantities they want them.Therefore, flexibility is our ability tochange with the market to meet cus-tomer demand as quickly as possiblewhen market conditions change. Themore flexible we are, the faster we canreact and the less obsolete inventory wewill carry when conditions change.Howdo you become more flexible? Reducelead times in inbound logistics.

Take an example where a manufac-turer (or distributor) has a domestic sup-

plier that is one day away from the manufacturer. Supplier order to deliverylead time is two days. This means themanufacturer orders material from thesupplier and it arrives at the manufactur-er two days later.With this arrangement,the manufacturer simply needs to knowwhat they are going to build two daysout in horizon.Therefore,you can definetheir flexibility level as being two days. Ifmarket conditions change, the manufac-turer can readjust on the third day.Usingthis same example, the manufacturermoves this supplier to a low cost country.Inbound logistics lead time becomesthirty days. Now the manufacturer isforced to determine what they will buildthirty days from now in order to deter-mine what to order from the supplier.Within these thirty days, if market condi-tion change, the manufacturer does nothave the flexibility to react. When daythirty arrives, they will build what theyhave material to build, even though itmay not be what the market is demand-ing. This results in wasteful overproduc-tion. Which leads us to ask, Why wouldyou do anything that is going to increaselead times and reduce flexibility?

The Future and Lead TimeThere are a lot of good reasons for somecompanies to globalize. Building prod-uct in a country to sell in that countrymakes perfect sense. Sourcing materialwhen it can support lead time reductionis a smart business move. However, donot fool yourself into thinking it is simplya matter of domestic or global pieceprice. There are significant implicationsfor the supply chain in moving to lowcost countries. Increased lead timesreduce flexibility, force increasedreliance on forecasting and result inoverproduction, which is the worst ofall organizational wastes.

While we may understand the impli-cations of lead time conceptually,we areclearly making business decisions thatignore lead time.The challenge is that itmay take years for us to realize the neteffect of some of these decisions. Thesupply chain infrastructure you arebuilding now may be very difficult to dis-mantle down the road. Consequently, assupply chain professionals, we need totake global sourcing very seriously.

11LQ™ July 2007LogisticsQuarterly.com

Page 12: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com12 LQ™ July 2007

Private fleet operations might initially seem like a good freight management solution

for companies concerned about cost, capacity and control. However, for many —

particularly mid-sized companies — that simply isn’t the case. This article takes a look

at six popular myths around the supposed benef its of maintaining private f leets.

Why Shippers Can’t Afford NOT to ConvertTheir Private Fleets

516 8

412 3

UNLESS YOU’VE GOT THE PURCHASING POWER of a Fortune500® company, the economics of private fleet ownership formedium-sized businesses do not justify the investment.Companies should focus on their core competencies and leavetransportation and supply chain management to the expertsrather than spreading resources thin and mismanaging thecomplex issues involved in moving freight.

Billion dollar businesses are developed using flexibleshipping and logistics solutions for a reason! The majorityof firms just don’t have the resources to manage costs andmeet fluctuating volume demands, particularly giventoday’s ever-shrinking capacity due to the near impossibil-ity of attracting and retaining qualified drivers.

Private fleet managers for these firms are simply trying

1By Clifford F. Lynch

Page 13: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com 13LQ™ July 2007

to figure out how to transport freightfrom point A to point B, never mindfocusing on customer service, liabil-ity, fuel costs, training, the capitalcosts associated with a trucking fleetand other expenses.

This article reviews some popu-lar myths regarding dedicatedtransportation services and dis-cusses why mid-sized companiesare tending toward outsourcingtheir transportation needs.

Myth #1: Running a private f leet makesmore economic senseFor some of the largest firms, thatmay be the case — the behemothswith the size to achieve economiesof scale on costs like fuel,equipment and insurance. But foreveryone else, especially mid-sizedbusinesses, the headaches andunpredictable costs of operating aprivate fleet can make it unpleasantand — worse — unprofitable. Mid-sized firms can’t match the buyingclout of the big guys, but they’re upagainst the same financial pressuresas the major carriers. Not a winningproposition.

There is also that not-insignificantissue known as the bottom line. Thecapital costs of carrying transporta-tion assets on the books loom largewhen there are better investmentswith better returns that can be madefor most firms. If the differencebetween the cost of the fleet and thecost of handing it to a dedicated car-rier is less than the shipper’s operat-ing margin, the private fleet makesno economic sense at all.Add in theincreasing challenges sparked bychanging hours of service (HOS)regulations and Environmental Pro-tection Agency (EPA) requirements and you have a strongargument for outsourcing to a dedicated carrier.

More threatening than most realize is the oft-overlookedissue of liability. Typical liability insurance is not onlydauntingly expensive but is rendered virtually irrelevantby sky-high deductibles. At the same time, vehicular acci-dents account for more than a third of all wrongful deathsuits, and juries in the United States frequently awardplaintiffs upwards of $10 million per verdict. With bothinsurance premiums and jury awards rising, businessesmust face the fact that one major accident could spellfinancial ruin.Why not transfer that burden to a major car-rier with the means to bear it?

Myth #2: Private fleets mean better customer service and greater visibilityAgain,not so fast.Yes,private-fleet drivers run familiar routes tofamiliar customers carrying familiar products, and in trucksbranded and designed to function as rolling billboards criss-crossing the continent. Drivers get to know the unique servicerequirements of their accounts and positive customer relation-ships develop accordingly. All that would give private fleets the upper hand over common carriers — if common carriersdidn’t share the exact same capabilities.

Dedicated carriers can also assign drivers to accounts exclu-sively, to function like regular employees of the hiring firms.Those drivers can run the familiar routes to the familiar cus-

focus on the core . . .

www.logikor.com519.622.8400

third party logistics management

Allow us to let you

focus on the core of

your business.

We manage your

Logistics needs from

start to finish. After all,

that is the core of

our business.

Page 14: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com14 LQ™ July 2007

tomers carrying the familiar productsjust like private carriers would, and it’sjust as easy to outfit one trailer withcompany-branded graphics as it isanother. In fact, many companies findthat service levels measurably improveafter a private fleet conversion…as doesthe company’s bottom line.

Myth #3: The driver shortage hardly affects private fleetsAs we are all painfully aware, a nationaldriver shortage is one of the top chal-lenges facing the trucking industry today.Given the variability of our economy andthe advanced average age of current driv-ers, the situation will only get worse.Thisis as true for private fleets as it is for ded-icated carriers. The solution? Aggressiveprograms to recruit and train new driversand retain the ones already on board.

In an industry that typically facesannual turnover rates of more than 100 percent,this is no easy task.Who bet-ter to take on the challenge than largenationwide carriers with the expertiseand infrastructure to develop and main-tain large-scale recruitment,training andretention programs? Common carriersare rising to the occasion with innova-tive programs aimed at enticing newdrivers to a life on the road. Advertisingcampaigns targeted to demographicgroups not commonly represented inthe industry are widespread, andeconomies of scale make them far lesscostly than any programs individualcompanies could launch.

The common carriers also have theadvantage of existing relationships withrailroad, freight brokerage and logisticscompanies,often lines of business of thecarriers themselves.If capacity becomesan issue, they can go to Plan B…andbeyond.A private fleet, in the same situ-ation, would face a more challengingand restricted set of options.

Myth #4: Common carriers offer nothing private fleetscan’t do for themselvesThis is a misconception that costs ship-pers money and opportunities to

improve service every day. New tech-nologies have opened up a brave newworld for the transportation industry.From satellite communications to trailertracking systems, shippers have optionsthat were unimaginable just a few yearsago. Better tracking and visibility cutscosts and increases customer satisfac-tion.Why take chances on lost or emptytrailers and frustrated customers when adedicated carrier can transform youinto a true twenty-first-century shipper?

However, investing in these tools for asmall private fleet would be cost-prohib-itive for most firms. The capital outlaywould outweigh any benefits — benefitsthat would accrue quickly under a ded-icated carrier with the size and scale tojustify the investment.

Common carriers also offer state-of-the-art supply chain engineering capabil-ities far beyond the reach of most privatefleets. With expertise in logistics, trans-portation management, industrial engi-neering, network optimization andprocess improvement, they are mastersof finding opportunities to reduce costs,improve service and minimize bothtrucks and miles. Vehicle routing andscheduling, inventory optimization andimproved operating margins are just aphone call away. In the competitive glob-al marketplace the transportation indus-try serves, topnotch engineering canmake a real difference in the bottom line.

Myth #5: Running a private fleet has no negative impact on the rest of the businessSome private fleet managers subscribeto the philosophy that if you want itdone right, you’d better do it yourself.That’s fine in theory, but it can be down-right dangerous in practice.After all,youwouldn’t say that if you needed a rootcanal — you wouldn’t go to dentalschool, get a license, buy all the equip-ment and hire a staff just to have controlover the procedure.

Like dental practices, private fleetsare complex operations with their ownunique set of requirements and regula-tions.They take time, energy and, above

all,money to run efficiently and at peakperformance.There is no way that levelof expenditure wouldn’t affect the restof the business — the physical assetsalone weigh down balance sheets anddetract from a firm’s overall financialhealth. Shippers wouldn’t become den-tists just to get a root canal and theyshouldn’t maintain private fleets just toship their freight.

There are several large carriers withdedicated shipping and logistics man-agement as their core competencies.Choosing one of them frees up assets soshippers can invest more in the compe-tencies of their own business.

Myth #6: Private fleet conversionmeans local drivers will lose jobs Some private fleet managers balk atconverting to dedicated carriersbecause they think local drivers maylose their jobs. Not so, according toindustry trends. Most carriers makeefforts to retain drivers already trainedand knowledgeable about routes andcustomers.And why wouldn’t they? Safe,reliable drivers are hard to find — andsafe, reliable drivers with institutionalknowledge are a precious resource.Dedicated carriers assuming shippingresponsibilities for private fleets are wellaware of that and are motivated to takeadvantage of it.

SummaryPrivate fleet operations might initiallyseem like a good freight managementsolution for companies concernedabout cost, capacity and control.However, for many — particularly mid-sized companies — that simply isn’t thecase. Converting to dedicated carriageresults in better customer service, moreflexible capacity, less risk exposure andimproved profits. Shippers must calcu-late the true cost and risk of operating aprivate fleet and weigh these against themany advantages and economies ofscale a large dedicated carrier can pro-vide. Once they do, they might be sur-prised to find that they can’t afford notto convert their private fleets.

516 8

412 3

Page 15: PRIVATE FLEETS? - Logistics Quarterly

15LQ™ July 2007LogisticsQuarterly.com

AT LAST YEAR’S COUNCIL of Supply ChainManagement Professionals (CSCMP) AnnualConference, an executive panel from the fastmoving consumer goods, electronics, and petro-leum industries reflected upon the challenges ofdesigning and optimizing a supply chain intoday’s dynamic environment. During executiveeducation sessions, I have reflected on thesechallenges and how they have changed overtime with executives from many firms aroundthe world. While they had often not organizedtheir decision criteria in the same format, mostexecutives operating regionally and globallyagreed with the general shift. After ending a week and a half in China with further discussions, I ameven more convinced about the nature, importance andimplications of the shift.

My comments this month review this shift and discussthe implications for today’s logistics and supply chainexecutive. The shift refers to the prioritization or impor-tance of the factors driving supply chain design. My train-ing and experience in supply chain design suggests thatthe major decision factors, in no particular order, include:1) Demand location; 2) Labor cost; 3) Material cost; and4) Transport cost.

Demand location refers to the geographic location andshipment profile (relative volume, size and characteristics)of the market. All other things being equal, firms wouldrather locate production and/or distribution centers near

the consumer markets. The fact that demand in Asia, India,South America, and Eastern Europe is growing at doubledigit rates strongly motivates global firms to shift supplychain activities to those regions. Labor cost refers to the rel-ative cost of production and distribution activities such asmanufacturing and handling. This factor is a driver of themove by many firms toward low-cost-country productionsuch as in China, India, and Eastern Europe. Labor costincludes direct labor rate as well as both benefits and

Piorities in Supply Chain DesignMany executives operating

regionally and globally are

shifting their priorities to

drive supply chain design.

By David J. Closs

Page 16: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com16 LQ™ July 2007

assigned overhead cost. Material cost refers to the total costof the raw material and components, including both thedirect and indirect cost. The direct cost represents the spe-cific purchase cost of the material as well as the duties andpackaging. The material indirect cost includes the transac-tion and risk related costs such as security, obsolescence,and potential intellectual property risks. Transportation costincludes the freight cost required for obtaining raw materi-al, moving material between plants and distribution facili-ties, and ultimate distribution to customers and consumers.

Tax structures and tax rates have always been design con-siderations, particularly when selecting between alternativesites within a local geography. These tax incentives haveoften been done through property tax allowances or holi-days. While such tax incentives have been used to attractfacilities to specific municipalities within a specific region,it was not typical that they could make enough difference tosubstantially change the region. Of late however, taxallowances have been extended to include holidays fromvalue-added, income, and duty payment terms. As a result,the location of production and other value added sites isnow often strongly influenced by regional and national taxstrategies. For example, Ireland’s use of reduced valueadded tax rates on manufacturing of electronics and phar-maceuticals has done much to return industry and jobs tothe Emerald Isle. Similarly, Singapore has established taxadvantages for goods that have value added activities com-pleted in Singapore. The value added activities couldinclude everything from physical manufacturing processesto inventory risk management. Major Chinese cities areemploying the same strategy to attract firms or industries totheir industrial parks, and their success is copied in othercountries, such as Vietnam and Cambodia. Even the U.S.haswitnessed increased interest in “Free Trade Zones” or “TaxFree Zones” as a motivator to attract jobs.

According to last year’s CSCMP panel, the result has beena shifting in the priorities for supply chain design. Whileproximity to market demand is still the primary factor(“Location, Location, Location”), the panel suggested thatthe order of importance (most to least important) for theremaining four factors is: 2) tax policy; 3) transportationcost; 4) production cost; and 5) raw material cost. In manycases, the differential due to tax policy often overwhelmsthe differences due to production or labor rates.

In many discussions with executives over the last year, Ihave witnessed substantial agreement regarding the veraci-ty of this shift. This shift in factor priority offers some inter-esting challenges for logistics and supply chain managers.

First, it is important that supply chain managers under-stand the various dimensions of local, state and federal taxpolicy and how that may impact supply chain design. Theuse of incentives for property, income, value added and cor-porate taxes and their relative impact on various supplychain activities need significant consideration for supplychain design. As an academic, I find these had not typicallybeen discussed in supply chain curricula and executiveeducation. Now they need to be significant considerations.

Second,use of tax policy as a strong consideration in sup-ply chain design introduces a number of issues for logisticsand supply chain management. These include infrastruc-ture concerns, tax policy dynamics and activity integration.Infrastructure concerns refer to the logistics and transporta-tion infrastructure that is in place to support supply chainactivities. For example, while both Ireland and China usedtax incentives to attract supply chain value added activitiesto their countries, the transportation infrastructure was notinitially able to handle the capacity required. While the Irishinfrastructure is beginning to catch up, it will be a whilebefore the Chinese infrastructure can accommodate thenew level of activity. Supply chain and logistics managersneed to understand the implications of these infrastructureproblems and be able to communicate them with the plan-ners evaluating the design strategy. Tax policy dynamicsrefers to the fact that such tax incentives may change quick-ly, resulting in a need to adapt the supply chain design.Specifically, the decisions based on the tax incentives areinherently long term while the tax incentives may sunsetafter a prescribed time or may change due to the politicalenvironment. Activity integration refers to the combinationof locations within the supply chain when specific valueadded activities take place. For example, the tax incentivemay motivate production or other value added operationsor inventory risk. For example,some firms manage global orregional inventory from Singapore by having a Singaporeanentity purchase product from global production operationat the standard production cost and then resell it to marketsaround the world, resulting in the profits being generated ina tax preferred environment. While there are certainly lim-its in a firm’s ability to manage the location of global profits,such strategies can make a significant impact.

Third, since tax incentives and transportation cost havean increasingly important role in supply chain design, logis-tics and supply chain managers need to develop a deepunderstanding and awareness regarding their dynamics andinteractions. Specifically, what is the relative impact ofvalue-added income, property, or income taxes on specific supply chain activities? Similarly, changing transportationcost resulting from capacity congestion, lane imbalances,and mode shifts can be an incentive for a change in the supply chain network design.

These challenges call for the enhancement of transportcost dynamics and inclusion of tax policy implications insupply chain academic and management education. Theseare two topics that not many supply chain managers havemuch knowledge about today. Individuals involved in sup-ply chain design need an in-depth understanding of the rel-ative impact of transportation and tax incentives and theirdynamics based on policy, fuel volatility, congestion andcapacity. In an era of increasing congestion and govern-ments looking for employment and growth, it is likely thatmore locales will consider these strategies as a means toattract jobs. It is important that supply chain and logisticsmanagers begin to develop this understanding to accurate-ly evaluate, compare, and explain the relative trade-offs.

Page 17: PRIVATE FLEETS? - Logistics Quarterly
Page 18: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com18 LQ™ July 2007

LQ: I believe you began your career atthe railway. What prompted you tobegin your career in the logistics fieldand what are some of the milestonesin your career?Phillip Yeager: The basic reason that Ileft the railroad, which was the PennCentral, (The Pennsylvania and NewYork Central Transportation Companywas formed by the merger of the Penn-sylvania Railroad and the New YorkCentral Railroad in 1968) was that I didn’t feel that I was getting positionsthat were sufficiently rewarding. I wasthe assistant director of the railway, invarious capacities. I felt I was second-best in terms of the level of these posi-tions or the roles I had at the railwayand I hated that. I wanted to getinvolved at a more senior level in acompany. When I decided to leave therailway in 1971, I had spent 19 yearsthere, 12 of which involved in intermodal transportation.

I decided that I would start a company and that it wouldbe the best company in the intermodal business. So mywife and I moved from New York to Chicago becauseChicago is the hub of transportation, and this is where mybig competitors worked.

This move made the situation much more difficult in retro-spect, but starting this company was something I thought Iwas capable of achieving. I had a wonderful wife.At the time,she was a legal secretary.She was a very efficient person,andI knew she and my family would back me in this endeavor.Wehad little money, and we were very cautious, as well as veryconservative. I guess that’s been a pattern throughout my life,to be conservative.This is a great advantage in some ways.Youmust also have discipline and follow it through.

However, being conservative can also it can impedeyour growth later in life, when your company develops toa point where this conservatism does not help the com-pany progress. In fact, this may have been the case whenwe reached a point where we were by far the largest

intermodal marketing company.In order to take the next step,we went

public — to help develop the compa-ny’s recognition and profile and to con-tribute to a dependable future for all ofthe people we had brought with us dur-ing our first years.That was in 1995, andwe recognized that there were manypeople in our company who deservedpart of the profits and the value derivedfrom the money that would be receivedfrom going public

My son David,who was 43 at the time,was ready to take over, and we madehim our company’s CEO. He had beenwith the company since he completedcollege and had done a great job; hehad opened our hub in Pittsburg andour hub in St.Louis.Clearly,he was ready,and our younger son, Mark, was gettingready to contribute to the company aswell. I could see that this was the time to

make the changes to take the company to the next level.There were distressing personal circumstances at the

time as well. I had lost my wife, and this was very difficultfor me and our sons. In this context, however, we took thecompany public. It was a very positive and importantevent.We had a network of 29 hubs when we went public.We also sold off some parts of the company before theyannounced the IPO.

We had an IPO and then a secondary offering a year and ahalf later. Both were very successful because we had had a 25-year record of moving up and improving our profits, plusthe business practices of the people we had with us.We triedto bring the best people with us, and we really had — andhave — in my mind, the best people in the intermodal busi-ness. Today, we're developing other phases of our business,which encompass the logistics and the brokerage parts of ourbusiness. So we’re a company that is very young, and strong,and it’s getting stronger.We are growing,and we feel there aremany things in addition to what we are doing today that wewill be able to do in the future.

A Conversation with Phillip C. YeagerChairman,The Hub Group, Inc.

It’s diff icult to f ind a better exemplar for innovation than Phillip Yeager. Here’s an instructive look at what differentiates leadership in logistics and transportation.

Page 19: PRIVATE FLEETS? - Logistics Quarterly

19LQ™ July 2007LogisticsQuarterly.com

LQ: What have been the most rewarding and inspiring thingsto you in this industry over the years?Phillip Yeager: Seeing the growth of our company and theyoung people that came into our business to start hubs, andtheir professional development.This has been very rewarding.Most of them had only sales experience, not overall businessacumen. But they joined us and built their own company.They were part owners; I think that was one of the best thingswe ever did with the company, to make it similar to a franchise, whereby the ownership was there, in the field.

As I look back, I realize this produced some interestingthings. We did not supervise the people who joined us. Weexpected them to be the best.This was the primary criterion.The second criterion was “make money,” because you mustmake money to grow a company. I think that’s the mostrewarding element — to see these young people grow in skill.Their ethics were very good. Not surprisingly, we also had afew little problems along the way.This is natural. But we tookcare of those things, and we always gave our customer thevery best we had, and I think that was one very importantcharacteristic common to all the young gentlemen whocame into this business.

LQ: As partial owners of your operations, these people werestakeholders. Could you elaborate on this point?Phillip Yeager: They were individual companies that weresubsidiaries of our company.They were shareholders and partowners,normally about 25 percent,with their investment in thecompany’s stock. We also tried to bring in people with inter-modal experience,not just good sales experience,and made apoint of emphasizing the value of good intermodal experiencein recruiting the right people.We had a lot of husband-and-wifeteams; of the first 20 hubs, 15 were husband-and-wife teams.Generally, the women did not have much knowledge of trans-portation,but they worked very hard in other areas and helpedtheir husbands to work hard because they wanted their busi-ness to be a success.These teams gave it everything they had.

LQ: Could you single out one or two elements of leadershipthat you consider of paramount importance in this business?Phillip Yeager: I think of value of the individual in this con-text;we called them principals,rather than presidents,becausethey owned part of the business.These principals were knownfor their hard work, their ethics, and the desire and passion tomake their company get better and better. A lot of times yousee people who are successful,and they get to a certain pointwhen they don’t have a desire to go further and to get better.These young men and women had that desire.I always used tosay,when we were talking to people and bringing these youngmen in, that this is the crucial thing: if you want to be success-ful, you must work harder than you’ve ever done in your life.And in the case of husband-and-wife teams, they’re going towork together harder than ever before. I emphasized from thestart that it’s important to never forget your family but that peo-ple must be dedicated to working hard.

And when you as part owner reached a point where youwould be hiring people, I recommended hiring people onthat basis — their desire to succeed, their work ethic andtheir desire to help the customer.These things will make you

successful. And we expected you to be successful; within ayear we expected you to be the second-largest and second-best intermodal marketing company in your area. The nextyear, we expected you to be the best.These are the things westrove for. We set these goals and expected you to achievethem. If you were not achieving them, I wanted you to talk tome about it. I think these were the golden rules.

LQ:You selected these teams and mentored them to performto very high standards. When they were measured againstthese baselines and they weren’t where you wanted them tobe, how did you proceed?Phillip Yeager: Naturally,there were challenges,but these sit-uations were corrected.When people couldn’t live up to whatwe considered our most important requirements, we simplydid not continue to work with them.We wanted people witha desire to succeed.They had to be successful.We had onlyone situation, with a Hub Group hub in Columbus, where wehad to close the operation down. I had picked the wrongman; my wife had even told me so when we first met him. Ifthere was a problem, we took care of the vendors, and wetook care of the shipper, no matter the circumstances.

On the other hand, we have had some wonderful people.There were young men who came into our company andmade and fulfilled some incredible commitments. For exam-ple,one fellow told me that he would eliminate all debt with-in a year. Amazingly, he achieved this objective. These werememorable things, the happy parts of the business. We alsohad our disappointments, but we took care of them.

LQ: At a symposium in Chicago last year, one of the keynotespeakers asked the delegates,“How many of you would put yourhands up and say you’ve made some mistakes over the lastyear?”Many of the executives in the room raised their hands.Thespeaker expressed the view that if you haven’t made some mis-takes,it’s likely your company has not been very innovative.Howhave you encouraged innovation and yet maintained your con-servative approach to business growth? Phillip Yeager: One of the most important lessons is learn-ing not to bite off more than you can chew. In other words, inbeing conservative when we were expanding, we didn’t startoff with 15 or 20 offices, or try to buy 15 or 20 companies.Westarted new offices at a rate of one to three each year. Withthis approach we could monitor the new companies andhelp them where they needed assistance to develop.

One of the most noteworthy things we learned was thatyou cannot substitute your knowledge for their knowledge;our principals had to make their own decisions in the field.We told them that if they had a problem, it was important totalk to us.Often I would answer our principals by asking themhow they might resolve the problem. Nine out of 10 timesthey came up with the exact same answer I’d have given. Onoccasion, we would caution them, normally in the case ofsomeone who was stepping out and was doing somethingthat we felt was unlikely to be successful.We did have to curbsome of that kind of energy. After all, all of these gentlemenwere young and very energetic,and few of them had businessexperience.We felt they would grow into these business posi-tions — and that’s what they did.

Page 20: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com20 LQ™ July 2007

LQ: There is a view that tumultuous circumstances are betterthan stable ones to drive innovation in the supply chain. If acompany has a supply chain that has been built on thousandsand thousands of sound and informed decisions, why wouldexecutives want to make any departure from the status quo inorder to change their supply chain or business? In the case ofThe Hub Group, what was the greatest impetus to transformyour business when you went public?Phillip Yeager: I can tell you that this is what happened to usand how we approached it.For the first 25 years of the compa-ny’s business, our company enjoyed prosperity and significantgrowth. Twenty-nine hubs were established, comprising a net-work of hubs that were completely independent. It was clearwe were the top intermodal company, andnobody doubted this point.Even my compe-tition couldn’t doubt it. Clearly, we were verysuccessful.We were all doing very well, bothpersonally and professionally. However, wefelt that we were not accepted by many largecompanies as a partner because of our busi-ness model. For example, they couldn’t tell ifwe were going down the tubes.

So what did we do? We decided to go pub-lic.This was the best way to bring our compa-ny to the public’s attention and gain the cor-porate recognition that we required.After wewent public,we found that there were a lot ofthings that we didn’t understand about themarket and the marketability of our company.

At that time,we found that we needed todevelop the ability to present ourselveswell before the public. As a result, we began to change thecompany. We bought out all of the hubs and, after a fewyears, we centralized our operation. There were some badfeelings surrounding this move to centralization. Theseyoung men were out in the field,and they wanted to contin-ue to make their own decisions.What we found, though,wasthat we were competing against huge companies,much big-ger than us. We were faced with companies the size of J.B.Hunt and Schneider, which are very aggressive and well-runcompanies. In this context, we had to adapt, and eventuallywe completely reorganized our company.

Prior to our company’s reorganization,we had the view thateveryone was an expert in everything.As we evolved,we foundthat logistics and transportation were becoming forces withnew levels of requirements and sophistication. In transporta-tion, for example, there were times back then when we couldhave taken even better care of our customer’s needs. All thepeople in our company who made decisions regarding logis-tics practices or brokerage decisions primarily knew the inter-modal business.That was very characteristic of our companyfor almost 25 years.

A few years ago we made some big changes.We started tobring in people from the trucking industry. Trucking was notthen a core competency.Later we became more international,and we had to bring in international people to teach us whatwas necessary to operate internationally. We made thesechanges and set up a department in international business andthen took the same kind of steps to develop our company’s

logistics expertise.We started to bring in people with logisticsknowledge.I think those were the big things,the big changes inour company.

We also centralized our financial resources and found thiswas every effective.We thought for many years that it was bestto administer our company’s financial resources locally. Forexample,our network of hubs had previously collected moniesowed to them locally. In any company,cash flow is very impor-tant, and if you’re not collecting your money in a timely way,you can get into big trouble quickly. I think the centralizationand reorganization of these resources, which took place onlytwo or three years ago,have been a tremendous success.

Instead of having the person in charge of a hub also be thehead of brokerage, logistics, intermodaland everything else, we centralized theseareas of expertise and reorganized. Forexample, if we had a person in St. Louiswho was a leader in logistics practices, orthere were others who specialized in truck-ing in other cities, they were now able tofocus on these specific areas of business.This was a big change in our company,andit happened only three years ago. We’vehad a tremendous overall improvement.We had a few people who left our companybecause of the scope of this transforma-tion.We didn’t want them to leave,but theyfelt it was necessary. I still talk to an awfullot of people in the field. I don’t travel like Iused to,but I still talk to many of them,andI could see their attitude changing. Initially,

many people appeared to be against this kind of change. Butthey have since changed their minds,and stayed with us.Withregard to those people who couldn’t make this change or did-n’t want to, we hated to lose them. Good people are whatmade this company a great company.

LQ: The next two questions were prepared for LQ by TomMenzer from the University of Tennessee and David Closs fromMichigan State University, about corporate performance.As you review your relationships with your customers whohave outsourced activities to your company, what do you think are the characteristics that differentiate the successful relationships from the less successful ones? Phillip Yeager: I think the most important aspect of growinga relationship with customers is, first and foremost, that theymust have confidence in you.Your reputation is so important,your ethics and your past record.When you sit down and talkwith people who are potential customers or existing ones, Ithink you have to show you have experience in the situationsthat they’re asking you to manage. I think experience and rep-utation are the two really big factors in getting a relationshipstarted.Then you must produce.If you can’t produce,you’re notgoing to be around very long.You must do what you say andsay what you do. I think that’s very important.

LQ: Of the major criteria used by your customers to evaluateoutsourced proposals, which criterion do you think they rankmost highly? Would it be service,price or technology?

“In this context,

we had to adapt,

and eventually

we completely

reorganized

our company.”

Page 21: PRIVATE FLEETS? - Logistics Quarterly

Increased Visibility...At Hub Group Canada, you'll receive web-based information technology that pushes exceptions and

status reports to you 24/7. This, along with a host of other on-line features provides you with increased visibility,

valuable management data and overall peace of mind.

Our North American network of local offices, qualified carriers and specialized services can help solve even your

toughest transportation problems. Clearly, you benefit by partnering with our team of professionals to optimize your

transportation dollar.

Please contact : Barry O’Neill, Vice PresidentHub Group Canada, [email protected] www.hubgroup.com

Page 22: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com22 LQ™ July 2007

Phillip Yeager: You know, they all meld together to work.Youmust have all three of those elements,and they must be at thelevel that the customer requires for that particular part of theirsupply chain. Each company has different needs, and that’swhat makes it so very complicated.You can’t promise the cus-tomer something that you can’t produce because,as I said ear-lier,you just won’t stay around very long.

We have attempted to take on some logistical programs thatwe found were too big.We weren’t ready for them.We are stilla young logistics company, but we’ve gained so much experi-ence in that area that we’ve been able to make the adjust-ments,and people today are doing excellent work in this field.In the first three or four years in logistics, we lost our tailsbecause we went in without a comprehensive understandingof what the shippers were asking us for.Perhaps this was due tothe fact the shipper was trying to gradually ease into a pro-gram. However, by the time we finished such a program, wewere pouring resources from our company into the programwithout remuneration from the customer that was necessary tocover our costs.Unfortunately,despite these extra resources,wewere not providing them what they needed.We lost those com-panies as customers,and this was just a few years ago.

Today,we’ve gained so many new companies in the logisticsfield. But size-wise, it’s so important that you know what youcan bite off.You have to know when the customer asks you todo something whether you can or cannot do it. Tell the cus-tomer if you can’t do it, so they can get other resources or youcan work toward alternative solutions. But you cannot fail todeliver on what you have promised a shipper.

LQ: This is a very profound point. What are some of yourinsights on service provider performance measurements? Ioften hear the comment that people in this industry don’t drawa baseline to create an alignment of expectations.Phillip Yeager: I believe we are fairly advanced in intermodal performance metrics. We monitor, I think,approximately 40 major lanes with the four major railroads.We generate statistics each month and give the shippers thebenefit of these reports.

LQ: If you had the ear of the government and you could makethree wishes that would most positively impact our industry,perhaps in terms of legislation,what would they be?Phillip Yeager: I think that my primary concern, whichrelates to a very important segment of our business, is that the intermodal sector and the railroads need help in theirinfrastructure. The United States, as a nation, must help therailroads.And I don’t mean give them the money. I mean givethem the opportunity through tax credits or low-cost loans torebuild their infrastructure.

A lot of people don’t realize that in 1975 we had almost 80Class A railroads. Now we have six. Before deregulation[through the Staggers Rail Act of 1980], the railroads were allgoing bankrupt.We were heading very dramatically toward thegovernment taking over the whole railway system, whichwould have been a total disaster.

But the deregulation in 1980 gave the railroads the opportu-nity to run themselves on their own instead of based on thegovernment’s expectations, which had compelled them to do

things that they knew were wrong or they knew were killingthem by needlessly heightening their costs.I would hate to see,more than anything else, a return to regulation. Reregulationwould destroy the railroads. But there’s a fairly large group ofshippers who are angling for this today, and I hope thatCongress will understand the needs of the railroads and helpthem to improve the railways’ infrastructure.

LQ: At the Council of Supply Chain Management Professionals(CSCMP) annual conference in San Antonio, in 2005(cscmp.org/wp/Events/ViewConference.asp?EventID=7909),Matthew Rose noted that the railways are still very regulated inmany places and that people fail to recognize this fact.Phillip Yeager: What happened during deregulation was thatthe railroads began to reduce their costs.They had to do this tosurvive; they either tore up track or they did not continue tospend the money on their infrastructure that they needed to.

Just to give you an example,when I started in the intermodalbusiness in 1959, we ran the trains between Chicago and NewYork in a 24-hour cycle.Today, the best trains run in that corri-dor on a 36-hour cycle. When I was with the Penn in thoseyears, they used to run it in a 15-hour cycle — ahead of theBroadway LTD, which had a 16-hour schedule.That’s how fastthey can run it. But to maintain this schedule, you can’t haveslow freight trains in front of you.What happened is the railwaytore up the sidings so that they could no longer put those slow-er freight trains over that corridor.

The railway companies are spending billions of dollarstoday to get back the sidings they need to run the freight trainsagain.And in intermodal,companies are getting some very bigchunks of money so that they can double-stack on all majorrail lines and get the clearances they need with regard to over-passes and so on. Recently, intermodal companies havereceived very substantial amounts of money from the states ofOhio,West Virginia and Virginia to enable the movement of fast,double-stack container trains between the east coast andMidwest markets, from Norfolk all the way to Chicago.

There are some very nice things happening with the govern-ment recognizing that the alameda corridor [a fast rail cargoline that links the ports of Long Beach and Los Angeles to thetranscontinental rail network] was a tremendous success.People were saying,“We didn’t have a peak,” but the alamedacorridor helped them avoid the peaks and congestion at theports. These two ports changed their methods and helpedavoid the peak-type situations that we had during the last fewyears there.Those ports were in terrible shape,but they workedout their agreements with their unions and provided 24-hourservice, which is what they really needed. Before, they had thecapacity, but they couldn’t work the terminal or provide thehours that were needed during the peak periods.

This goes to a very broad statement,which is that people arestarting to understand the needs of the various vendors andshippers who are supporting these things.You know, over theyears, I’ve seen a lot of negotiations between shippers and rail-roads and shippers and intermodal companies, which haveoften been contentious.This is not the case anymore.They’retalking, they’re asking good questions, and they’re workingtogether. I think that’s one of the most important things that ishappening today.

Page 23: PRIVATE FLEETS? - Logistics Quarterly

23LQ™ July 2007LogisticsQuarterly.com

YEARS AFTER EUROPEAN AND ASIANgovernments first imposed road pricingschemes as a means of reducing con-gestion and alleviating pollution, theUnited States appears poised for its ownmisguided attempt to utilize congestionpricing as a solution for growing trans-portation woes.

The premise is that congestion pric-ing will give motorists better roadaccess, for a price. In many instances,however, congestion pricing does notmarkedly reduce congestion; it merelyraises revenues — or taxes. Congestionpricing increases cargo transportationcosts and hurts the economy.And high-

er manufacturers’ and retailers’ operat-ing costs mean higher costs to con-sumers for everything from gasoline toclothing to food.

Adding capacity with new infrastruc-ture funded by fuel taxes is a bettersolution. Motorists have already paidtaxes to use the roadways. And fueltaxes are a much more efficient way tofund the new infrastructure that caneffectively reduce congestion.

Proponents of congestion pricing saythose who don’t want to pay or cannotafford to pay increased commutingcosts have other choices. Making alldrivers pay the same tax to receive the

same service, however, is only logical ifevery vehicle operator has the ability tochange his or her driving behavior. Formotor carriers, this simply isn’t the case.

Given the just-in-time delivery systemthat services a customer base expectinggoods to be on store shelves when con-sumers are ready to purchase them,truck drivers do not determine deliverytimes. Shippers do. If the trucking indus-try could avoid congestion by shiftingdelivery times and operating at night, itwould already have dove so withoutneeding any new incentive.

Congestion pricing merely stands asa new tax to further limit an industry

COMMENTARY

Congestion Pricing Not the Solution to U.S.Transportation WoesCongestion pricing is touted as the cure for gridlock and pollution. But it comes at a cost to motorists, businesses and the economy. And the cost is disproportionately high when compared with the benefits gained. Adding capacity with new infrastructure funded by fuel taxes is a better solution.

By Bill Graves

Page 24: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com24 LQ™ July 2007

that already operates with extremelylow profit margins.As a result, if conges-tion pricing were introduced, trucksundoubtedly would shift from tolledbridges and tunnels to un-tolled routesand other roadways outside of the con-gestion zone boundaries.

At its core, congestion pricing isdesigned to change driving behavior.However if there’s no change in drivingbehavior, the promised benefits of con-gestion reduction and pollution mitiga-tion will not materialize.

Even in London,home of the modelurban congestion pricing scheme,new reports show that congestion isjust eight percent below pre-programlevels and continues to rise — and thisis after spending nearly half of the $14per vehicle charged for entering thecity’s center on overhead. Motorists’right to travel freely is also curtailed.Motorists in London complain of aninvasion of privacy from video cam-eras and tracking devices, and resi-dents of neighborhoods near the city

complain of increased congestion.If London is anything to go by, then

U.S. cities that impose congestion pric-ing are doomed to repeat its mistakes,spending higher fees only to witness adismal return — in addition to potentialdeclines in commerce, manufacturingand retail sales.

The New York City proposal to chargemotorists for driving into Manhattan isbeing touted as a cure for gridlock andpollution. But in reality, such pricingschemes are unfair and ineffective andignore our real transportation needs.

Under New York’s recent proposal,trucks would be charged $21 per dayand cars would be charged $8 per dayto drive into Manhattan below 86thStreet.That’s on top of the city’s alreadyexpensive parking fees.

Ultimately, motorists would pay $400million for a mere 6.3 percent reduc-tion in traffic.The cost is disproportion-ately high when compared with thebenefits gained.Few would consider it agood rate of return for the investment.

New York City’s intentions are good.Like many parts of the United States, itstransportation networks are strained,and the state is searching for an innova-tive solution to its problem. Across theUnited States, travel on the nation’s high-ways has nearly doubled since 1980 asthe economy has grown.Yet the highwaysystem has only been expanded byabout three percent over the same peri-od. The outcome is wasted time andenergy.

Even the U.S. Environmental Protec-tion Agency has called congestion pric-ing “relatively risky to implement,”because people would have to pay for aservice they were previously getting forfree. Many people would rather havecongestion than pay more, and it’s hardto predict how much emissions wouldbe reduced.

Few would argue with the idea thatsomething must be done. But conges-tion pricing comes at a cost tomotorists, businesses and the economy.Moreover, the trucking industry believesthe federal government must take alead role in identifying systemic prob-lems and working with individual statesto fix them.

Ideas for leadership in Logistics & Transportation:

The new currency of competition.

Join leading thinkers and practitioners to explore questions that provide new perspectives and thinking to pressing challenges.

In LQ, Success reads Success: LQ affords peer-to-peer learning and inquiry to grow your career and business in a competitive world

where customers demand customized solutions at lower costs.

This summer sit back, take a deep breath, and let LQ review the best ideas to give you a get a leg up on the competition.

Subscribe online before August 31, 2007 and receive your subscription at $54.45 for a full year (six issues).

(45% discount off the regular subcription price.)

To subscribe visit: http://www.logisticsquarterly.com/subscriptions.html (Offer valid until August 31st)

Page 25: PRIVATE FLEETS? - Logistics Quarterly
Page 26: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com26 LQ™ July 2007

AS PRESIDENT OF A LOGISTICScompany, of course, you’d expectme to have a lot to say aboutoutsourcing. After all, I repre-sent the hired guns — thetransportation specialists thatcompanies such as yoursrecruit. But those whochoose to work with usknow we do more than justdeliver the goods; we partnerwith companies to improve theirperformance.

Outsourcing is the way of the future.It’s a growing business practice that isquickly separating the leaders fromthe followers. Those companies thatoutsource all or part of their supplychain management activities to a 3PL firm are able to reduce their transportation costs, operate moreprofitably and gain competitive advan-tage — often even stealing marketshare from the competition.

To prove my point, let me tell you a story.

In the late 1990s my firm (not the oneI’m with now) was invited by a Fortune100 company to develop a new strategyfor distribution of their product. Thiswas a top five global brand,a consumerproduct sold in every country of theworld in almost every retail settingimaginable.

The company was a logistic supplier’sdream candidate for outsourcing. Theywere heavily invested with assets and

employees. They had their own trafficdepartment and owned, on a globalscale, their own distribution centres,their own tractors and trailers and their own maintenance facilities andemployed their own drivers.Their distri-bution channel was completely inter-nalized. From their door to the retailer’sshelf, every stage of distribution wasinternally owned and controlled.Consequently, their distribution cost wasapproximately 24 percent of their grossrevenue, very high relative to the pro-duction cost of their product. The per-fect challenge lay before us.

Our champion within the companywas the CFO of the Canadian branch;the commitment to outsourcing wasmade at the highest levels. Middle man-agement knew we were there but didn’tknow why. And they weren’t going tofind out until the time was right. Allthose involved in our “plot” were sworn

to secrecy with a hidden agenda to initi-ate a new primary distribution chan-

nel. We went about settingup a pilot program and we

were instructed to begin inAtlantic Canada.My firm was given license tocompletely replace the exist-

ing supply chain, whichincluded employees,drivers, equipment, main-

tenance facilities and distri-bution centers, as well as inside sales,

outside sales, merchandising in thestores, installation and maintenance ofvending equipment (where applicable)and banking of monies collected.

To limit risk and minimize the initialimpact on the company, we were direct-ed to build and test the new model in a small geographic area, specifically,Prince Edward Island. Once in placeand generating the targeted results, theprogram could be expanded to otherareas of Atlantic Canada and,ultimately,the rest of the country.

You can imagine what a huge step thiswas for the company to take.As the pro-gram progressed,not only did they sell offassets,they severed union employees — adifficult and challenging undertakingand one that signaled the depth of theircommitment to our program.

Before long we were getting theresults that we knew were possible. Tostart with, we were able to execute alldistribution activities using only 12 peo-

COMMENTARY

Outsourcing Your Way to Competitive AdvantageThis story provides a powerful illustration of how outsourcing supply chain management can not only lower transportation costs but also improve service, build on customer and supplierrelations and drive competitive advantage — in some cases actually resulting in a significant increase in market share. Being willing to discard old, asset-based models and consider theadvantages of new approaches can lead to tremendous opportunity and growth.

By Jim Davidson

Page 27: PRIVATE FLEETS? - Logistics Quarterly

ple, compared to the previous 23employees.We cut the company’s distri-bution cost in half, a significant mone-tary gain in addition to shedding allassets associated with product distribu-tion. True victory was declared when a survey (conducted a year after ourprogram was launched) indicated a 12 percent increase in market share.That’s a 12 percent share taken directlyfrom their major competitor! Needlessto say our pilot program was a successand quickly expanded to include (instages) Halifax, southwestern NovaScotia and New Brunswick. Success was repeated in these districts as we rap-idly became much more efficient at dis-tributing this product than the companythat made it.

Two years into the program we hadproven our worth and were anticipat-ing a move westward into Quebec.Instead, everything came to an abrupthalt: In a surprise move, the Americanparent company bought controllinginterest in our Canadian client andwithin two weeks terminated our con-tract. Without even considering thegains that were made, the parent com-pany reversed all that had been accom-plished. With one huge step backwards.they bought back all the assets, hiredback their employees and went back tothe old business model.Might I say theyalso re-doubled their transportationcost and lost all efficiencies that hadbeen gained by outsourcing their sup-ply chain to our firm.

We were stunned.There was nothingwe could do, however. The parent com-pany had their reasons for reverting to their past. Their model needed to be asset dependent, regardless of theconsequences.

This story powerfully illustrates thepros and cons of outsourcing — allwithin the same company over a rela-tively short period of time.

Despite their unpredictable reversalof fortune,the Canadian company clear-ly had done everything right. The deci-sion and commitment to outsource wasmade at the highest levels of the compa-ny — in the boardroom, not in the ship-ping department. The decision wasstrategic not tactical and garnered

results that were universal not isolated.Our champion sensed that by partner-ing with us, a reputable 3PL supplier,they could go well beyond loweringtransportation costs. They could alsoimprove service, build on customer andsupplier relations and drive competitiveadvantage beyond the popularity oftheir product.

As this company’s experience indi-cates, working with a new model canlead to tremendous opportunity andgrowth. Clinging to an old-fashionedbusiness model often leads to increas-ing costs and diminishing returns. I’mreminded of Lee Iococca’s comment,“The most successful businessman isthe man who holds onto the old just as

long as it is good,and grabs the new justas soon as it is better.”

Outsourcing is about the realizationthat there’s someone outside your company who can manage your supplychain better than you can manage ityourself. Given my years of experienceand the dynamic nature of our business,my sage advice is to stick with your corebusiness and let the logistics expertsmanage your supply chain.Chances arethey will find a cheaper, more efficientway of delivering the goods. By lettingthe experts drive down your transporta-tion costs, you’ll gain distinct advantageover your competition — and maybeeven gain a percentage point or two ofmarket share at their expense.

27LQ™ July 2007LogisticsQuarterly.com

Page 28: PRIVATE FLEETS? - Logistics Quarterly

The Challenge to Provide Value Added ServicesTHROUGHOUT THE EVOLUTION ofthe third party logistics marketplace,3PL providers have provided greatvalue for their clients through the man-agement of asset-based logistics servic-es such as transportation,warehousing,shipment consolidation, cross-dockingand customs brokerage. While thesefundamental capabilities are availablefrom almost every 3PL, whether largeor small, how companies can differen-tiate themselves in the marketplace is aquestion that is of great relevance andconcern to all 3PL providers. Coupledwith the fact that many 3PLs areviewed by their customers as providing“execution-based operations,” the keyquestion is what kinds of value-addedservices they can develop to furthermeet the logistics and supply chainneeds of their customers.

Asset-based services such as thosereferred to above are frequently seenas a commodity. As with most servicesthat become commodities, it is diffi-cult for 3PLs to price these services tosufficiently enhance revenues andincrease margins. Alternatively, when3PLs are able to design and offer serv-ices that create value for their clientsand customers in unique and usefulways, customers are more willing topay for these services, and 3PLs areless likely to experience downwardpressure on margins and profitability.One effective way for 3PLs to accom-

plish this is through the developmentand implementation of value-added,information technology-based servicesand solutions.Through the develomentand leveraging of IT-based services,3PLs and 4PLs are able to differentiatethemselves from the competition. Thisapproach will become more prevalentas customers begin to view 3PLs and 4PLs as leaders in the area of IT-based services.

An Area of Value-AddedOpportunity for 3PLs: TechnologyEssentially, there are three ways inwhich IT-based services can be ofvalue to 3PLs and their customers:• Improve 3PL operations and planning –These IT-based services mostly impact

3PLs in ways that would be internal tothe 3PL and are largely/somewhattransparent to client organizations.Examples would include ERP systemsto support 3PL operations, workforceplanning and logistics optimization.• Facilitate 3PL relationship with clients –These services affect the activitiesbeing conducted by 3PLs that are indirect support of the relationship withits clients. Services of this type wouldinclude TMS and WMS, tracking/trac-ing and event management, yard man-agement and radio-frequency identifi-cation (RFID).• Integrate the business functioning of the3PL with the business functioning of clientsand customers – This category includesIT-based services that link the business

LogisticsQuarterly.com28 LQ™ July 2007

By Christopher D. Norek and C. John Langley Jr.

Leveraging Technology:A Strategy to Help 3PLs Add ValueThe development and implementation of value-added, information technology-based services and solutions is the best way for 3PLs to differentiate themselves from the competition and reduce downwardpressure on margins and profitability. However, the 2006 Eleventh Annual Third Party Logistics Study shows a significant gap between expectations and performance. 3PLs have to invest more in their systems and educate their customers on their IT capabilities to capitalize on the IT value-added services.

TECHNOLOGY TOOLBOX

Exhibit A1 Current-Future IT-Based Services (North America Results)

Functionality

Warehouse/Distribution Center Management 65% 17% 69% 13%Web-Enabled Communications (3PL-User) 61 28 57 30Visibility Tools (e.g., tracking/tracing; event management) 60 29 62 25 Transportation Management (Execution) 55 21 72 14Transportation Management (Planning) 31 32 44 26Supplier Relationship Management (e.g., procurement; payables) 30 26 21 27Customer Order Management 25 21 26 18Collaboration Tools (e.g., inventory levels; production schedules) 25 35 24 33Internet-Based Transportation/Logistics Exchanges 23 31 22 39Yard Management 22 16 22 9Supply Chain Planning (e.g., forecasting; inventory planning) 19 30 13 25Customer Relationship Management 17 25 16 21RFID (radio-frequency identification and asset tracking) 13 57 16 55

Source: 2006 Eleventh Annual Study, Georga Tech, Capgemini LLC, DHL, and SAP.

NorthAmerica

CurrentlyUsed

EuropeFutureNeeds

EuropeCurrently

Used

NorthAmericaFutureNeeds

Page 29: PRIVATE FLEETS? - Logistics Quarterly

processes of 3PLs and customers, andwhich facilitate true collaborationbetween the business activities andfunctions of 3PLs and customers.In addition to the compatibility of ERPsystems between 3PLs and customers,services of this type include collabora-tion tools (e.g., procurement; payables),customer order management, collabo-ration tools (e.g., inventory levels;production schedules), supply chainplanning (e.g., forecasting; inventoryplanning) and customer relationshipmanagement.

Based on data from the 2006Eleventh Annual Third Party LogisticsStudy sponsored by SAP,1 approximate-ly 20 percent of 3PL users identify IT-based services among the servicesthey receive from their 3PLs. ExhibitA1 indicates percentages of 3PL usersin North America and in Europe whocurrently receive specific IT-basedservices from their 3PLs. Also indicat-ed for each of these geographies arethe percentages of 3PL users who indi-cate that specific IT-based services willbe among “future needs.”

Based on the information con-tained in Exhibit A1, there is greatopportunity for 3PLs to more fullyserve their customers through the pro-vision of IT-based services relating tovisibility, collaboration and customerrelationship management.

Also based on findings from the2006 Eleventh Annual Third PartyLogistics Study, IT capabilities are seen

by customers as a neces-sary element of overall3PL provider expertise.In fact, over 90 percent of respondents who were3PL users felt IT capabili-ties are important. Inaddition, it was foundthat in 60 percent of the 3PL vendor selec-tion processes, a 3PLprovider’s IT capabilitiy-was a specific capabilityassessed in the provider’sselection process.

However, there is a sig-nificant and wideninggap between 3PL users’emphasis on the impor-tance of 3PL’s IT capabil-ities and their actual satisfaction with the pro-vision of those capabili-ties. Only about one outof three users reportedbeing satisfied with their3PL’s IT capabilities —reflecting a significantgap between expecta-tions and performance.The data presented inExhibit A4 suggest thatthe satisfaction level for3PL IT-based capabilitiesis deteriorating quickly.

What’s Next?It is up to the 3PLs to cre-ate the solutions thattheir customers want.The problem that has tobe overcome is the“chicken and egg” por-tion of the solutiondevelopment. The 3PLwants a customer to use the solution beforeinvesting too much in its developmentand the customer wants to see the via-bility of the solution before commit-ting to using it. This contradiction hasto be eliminated. Based on the studyresults, 3PLs have to invest more intheir systems and educate their cus-tomers on their IT capabilities to capi-talize on the IT value-added services.

Notes:12006 Eleventh Annual Third PartyLogistics Study,Georgia Tech,CapgeminiLLC, DHL, and SAP, 2006.This study pro-vides detailed information about the3PL relationships and services receivedby customer organizations in NorthAmerica, Europe, Asia-Pacific and LatinAmerica.

29LQ™ July 2007LogisticsQuarterly.com

0%

25%

50%

75%

100%

63% 59% 66%

39%

NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

GlobalAverage60%

3 PL Users Including IT Capability in Vendor Selection CriteriaIT’s Necessity as Element of Overall 3PL Expertise

0%

25%

50%

75%

100% 94% 96% 91%79%

NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

GlobalAverage92%

0%

25%

50%

75%

100%

63% 59% 66%

39%

NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

GlobalAverage60%

3 PL Users Including IT Capability in Vendor Selection CriteriaIT’s Necessity as Element of Overall 3PL Expertise

0%

25%

50%

75%

100% 94% 96% 91%79%

NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

GlobalAverage92%

Exhibit A2

Exhibit A3

Exhibit A4

Page 30: PRIVATE FLEETS? - Logistics Quarterly

LogisticsQuarterly.com30 LQ™ July 2007

WHO READS LOGISTICS QUARTERLY?NEW PROFESSIONAL LOGISTICIANS

Mr. Michael Aird P.Log. IKON Office Solutions Regional Inventory ControlManager (Equipment) Brampton ON

Mr. Abhay Bhale P.Log. Canadian Tire Corp. AJ Billes Warehouse PersonBrampton ON

Mr. Craig Carter P.Log. IKON Office Solutions Regional Inventory ControlManager Brampton ON

Mr. Jose Vicente Catilo P.Log.LCBO Operations Analyst Toronto ON

Mr. Donald Cooper P.Log. Apotex Inc. Manager, Supply ChainInternational Toronto ON

Mr. Redmond Curtis P.Log. EMS Technologies Canada Ltd.Contracts Manager Ottawa ON

Mr. Thomas Edward P.Log.Transpacific ContainerTerminals Director, Eastern Canada Brampton ON

Mr. Shayne Emerson P.Log. BC Hydro Store Keeper Surrey BC

Mr. Dean Evans P.Log. Steels Industrial ProductsLogistics Manager Surrey BC

Mr. Dominic Ferris P.Log.Apotex Inc.Manager, Supply PlanningToronto ON

Mr. Bruce Fraser P.Log. Lafarge North AmericaSupply Chain Manager Mississauga ON

Ms. Amanda Gooder P.Log. Labatt Breweries of CanadaNetwork TransportationStrategist London ON

Mr. Julian Grush P.Log. Wheels International Freight Systems BusinessAnalyst/Quality ManagerMississauga ON

Mr. Jason House P.Log. L.P. Services A/R Specialist Hamilton ON

Mr. David Hudson P.Log. Ontario Power GenerationManager of PickeringSupply ServicesPickering ON

Mr. Kesh Kaneshalingam P.Log.Altana Pharma Inc. Manager, Supply Chain Oakville ON

Mr. Joe Mallozzi P.Log. Scancode Systems Inc.Vice President, Sales Toronto ON

Mr. Serge Maltais P.Log. Sandoz Canada Inc.Vice President, LogisticsBoucherville PQ

Mr. Steve Manning P.Log. Levi Strauss & Co. (Canada) Inc.Process Leader Etobicoke ON

Mr. Godswill Mugambiwa P.Log. Forzani Group Ltd. (FitnessSource)Warehouse and DistributionSupervisor Mississauga ON

Mr. Jeff Perna P.Log. Nestle Purina Pet Care CanadaNational Customer ServiceManager Mississauga ON

Ms. Van Phan P.Log. Mattel Canada Inc. Customs ComplianceCoordinator Mississauga ON

Mr. Robert Pope P.Log. Russel A Farrow /Canadaplus.com Logistics Manager Delta BC

Mr. Bob Richardson P.Log. Parmalat CanadaManager, Distribution andSupply Chain DFG Toronto ON

Mr. Barry Roche P.Log. Canada Post CorporationDispatcher/ ReceiverMississauga ON

Ms. Balkiz Sarihan P.Log. ACROHELIPRO Global Services Inc.Vice President ofOrganizational DevelopmentRichmond BC

Ms. Sandi Shaw P.Log. Rogers Communications Inc.3PL/Channel Relations ManagerToronto ON

Mr. Richard Shields P.Log.Flowserve Canada Corp.Logistics Supervisor Brantford ON

Mr. Kevin Snobel P.Log. Caravan Logistics Inc. General Manager Oakville ON

Mr. Michael Weeks P.Log.Vancouver Coastal HealthVancouver BC (no photograph available)

Page 31: PRIVATE FLEETS? - Logistics Quarterly
Page 32: PRIVATE FLEETS? - Logistics Quarterly