LTL Industry Pricing Analysis

Presented by: Tim Lerchbacker

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Table of Contents

Section One LTL Pricing Analysis

Section Two Six Sigma Project – “Define”

List of Dependencies

1993 – 2006 Actual and Projected Rate Adjustments

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Section One - LTL Pricing Analysis

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“. . . shippers who weathered the logistics storm of the past 18 months aren’t

likely to enjoy a respite from rising rates any time soon.” 1

Clients, who have survived the last 18 months of rising cost, deteriorating service, and ever

increasing demands by senior management for increased efficiencies, will have to be even more

diligent and creative to be successful for the foreseeable future. This creativity must originate at

the strategic level and be pervasive at the tactical level - how we do business and how we meet /

exceed the expectations of our customer on a daily basis. A critical segment in this process lies in

supply chain enhancements. The largest single expenditure in the supply chain lies in the

transportation segment with trucking being the single largest subset.

The purpose of this document is three fold. First, to present a macro view of current industry and

economic conditions, specifically capacity and inflation, that will affect LTL rates for the reminder

of 2006 and beyond. Second, to present a historical review of industry wide rate adjustment

activity since 1993 and to correlate this data with specific economic data. Third, to suggest a

starting point for defining a high level Six Sigma project approach to leveraging Clients LTL spend,

with a focus on maximizing LTL service to Clients customers while providing the best possible LTL

rates across all business units.

Capacity issues.

US GDP projections for growth in 2006 range from 2.7% to 3.9% with the average approximating

3.3%2. Further, it is projected that any weakness in the US economy will likely come on the

consumer side. Projections are that spending on the industrial side will continue to grow at a 7.6%

growth rate thus picking up any slack created on the consumer side. US industrial inventory levels

were very lean at the start of 2006 and it is projected that “rebuilding these inventory levels will

be a significant contributor to GDP growth in 2006.3” As a result, the US trucking industry capacity

will likely be strained at best. The law of supply and demand applied simplistically, with

(industrial) demand approximating (carrier) supply, the result will be a propensity for carriers to

command higher rates and / or provide a reduced level of service.

Another significant factor in the Truck Load sector that will impact capacity is a shortage of drivers.

Bob Costello, chief economist of the American Trucking Association estimates currently there is

the need for up to 20,000 drivers. By 2015 that need could rise to 114,000.4 General industry

projections concur with Mr. Costello’s in the short-term, and project slightly less at 111,000 by

2015.5 Fortunately LTL carriers should not suffer from the same malady, with projections of driver

demand approximating supply, unless the truck load carriers make their employment proposition

so attractive as to start drawing drivers from the LTL carriers.

Inflation pressure.

The US has enjoyed a protracted period of economic stability and low inflation. Due to the effects

of 9/11, the current Iraq conflict, the price of fuel, (although noted the transportation industry, on

the supplier side, is able to offset some if not most of the higher fuel cost through fuel surcharges,)

to name just a couple contributors, inflation is on the rise. In the trucking industry, another

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significant factor that the truck load carriers particularly must calculate into their cost of doing

business is the higher cost of insurance and insurance deductibles. Thomas Albrecht, managing

director at investment analyst Stephens Inc., estimates the average bodily-injury and physical-

damage deductible among 12 publicly held carriers stood at only $443,000 per incident in 1999.

That figure jumped to $2.7 million in 2004 and $3.2 million in 2005.6

Below are three graphical representations, “Inflation Trends Since 1914,7” “Annual Inflation

Rate,8” and “Moore’s Inflation Predictor.9” The first graph clearly depicts the cyclical nature of

inflation. Since 1919 the US has experienced five inflation cycles, three downward for periods of

14, 16 and 20 years, and two upward of 14 and 19 years. Based on this historical data, it is

projected that in 2002 the US entered its sixth cycle, this one of increasing inflation that is

projected to peak in 2018.

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The next graph, “Annual Inflation Rate” depicts the fifth and (probable) sixth inflationary cycles

starting in 1990 and running through July 2006.

The third graph, “Moore Inflation Predictor,” shown below projects inflations trends through June

2007 offering five probable scenarios.

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Historical rate analysis.

In doing my research, I contacted Elizabeth Baatz, a principal in the economic forecasting firm

Think Cap Solutions and contributing editor to Logistics Management, to ask her some questions

regarding research she had done on transportation rates / pricing across all modes. Ms. Baatz

shared her database of truck, air, ocean, and rail rate data that she has compiled. Her trucking

data goes back to 1993 and uses 2001 as the baseline for future projections.10 From this data I

prepared two graphical representations below.

The first titled “Trucking Industry Rate Increase 1993 – 2006,” shows what the yearly rate

increases were for years 1993 through 2005 with a 2006 projected. Note, Ms. Baatz projections for

2006 were reinforced and published in the July Issue of Logistics Management, “Pricing Across the

Transportation Modes - Trucking,” where she is projecting “aggregate trucking prices to rise 4 to

6% in 2006 and 3.5% in 2007.” “LTL prices will accelerate faster – up 6.8% in 2006 and 6% in

2007.11” Immediately below the graph is the numerical data showing the percentage rate

increases by year.

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Trucking Industry Rate Increases

1993 - 2006

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

70

80

90

100

110

120

130

% rate chg Index (2001 = 100)

1993 1994 1995 1996 1997 1998 1999

% Rates

Changed. 0.7% 2.3% 2.1% 2.3% 3.0% 3.0% 3.5%

Index (2001 =

100) 79.3 81.6 82.8 85.4 87.5 90.8 93.7

Base

Year

2000 2001 2002 2003 2004 2005 2006

% Rates

Changed. 4.7% 2.9% 0.8% 2.8% 4.0% 5.9% 6.4%

Index (2001 =

100) 99.8 99.9 102.1 104.5 110.1 117.5 125.0

The second graph depicts and is titled, “Trucking Rates vs. Inflation. Vs. GDP.” Below the graph is

numerical data represented in the graph.

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Trucking Rates vs. Inflation vs. GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%1

99

3

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

% Rate Chg. Inflation GDP % chg Prev. Year

1993 1994 1995 1996 1997 1998 1999

% Rates

Changed. 0.7% 2.3% 2.1% 2.3% 3.0% 3.0% 3.5%

Inflation12

3.0% 2.6% 2.8% 2.9% 2.3% 1.6% 2.2%

GDP % chg13

Prev. Year 2.7% 4.0% 2.5% 3.7% 4.5% 4.2% 4.5%

2000 2001 2002 2003 2004 2005 2006

% Rates

Changed. 4.7% 2.9% 0.8% 2.8% 4.0% 5.9% 6.4%

Inflation 3.4% 2.8% 1.6% 2.3% 2.7% 3.4%

GDP % chg

Prev. Year 3.7% 0.8% 1.6% 2.5% 3.9% 3.2%

Six Sigma Project

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The conclusions that can be drawn from the information present above are:

� LTL capacity through the remainder of 2006 for should remain stable,

� TL capacity will remain tight,

� Inflationary pressures are being felt at all levels within the US,

� Trucking Rates can be expected to rise,

Armed with this data I as the Transportation Sourcing Specialist can proceed in the development

of a high level Six Sigma project document. What follows is a first effort to “Define” the project, by

establishing a problem definition, project objective, and presenting a list of questions I will need to

get answered in order to attain the project objective.

Section Two - Six Sigma Project – “Define”

- List of Dependencies

- 1993 – 2006 Actual and Projected

Rate Adjustments

Six Sigma Project Template

Project Name Leverage Trucking Spend

Group Name Black Belt Name

Department Name Transportation Team Members Tim Lerchbacker

Project Champion Name

Process Owner Name Each business unit's

transportation management group.

Total FTE's Performing Process TBD

Total Cost of Process (000's) TBD

Problem Statement Defect FTE's (if app.) Cost of Defect TBD

Currently, Client has 200 plus carriers servicing their trucking needs and their clients. The problem is to

determine to what extent Clients spend for trucking service can be leveraged. This problem may be

impacting how we are servicing our customers, maximizing shareholder value, and inflating the total

transportation spend for the Client. The Measurement process will start by reviewing all current

trucking contracts from all business units as to service commitments and price. The baseline will be

either, a. the Clients rates in existence from 2001 (if data is available,) up to and including their current

contracts, or b. the oldest rate data available by business unit up to and including their current

contracts. If 2001 rate data is available, this data will be base lined against the industry rate increase

data base lined to 2001 (attached) to determine what level of rate increases have been taken since

2001. Timeframe, to be determined.

Project Objective/Desired State State the Project Objective/Desired State and make sure it links back to the Problem Statement

The project's objective is to leverage the Clients business units total Trucking spend, to drive service

improvements measured against current and proposed Key Performance Indices' (KPI's,) increased

share holder value measured through increased profitability, and cost savings of XX percent across all

customers and business units.

Benefits ($000's) Cost Benefits Client/Employee Benefits

FTE Cost Savings TBD Internal/External Client Benefits

Other Cost Savings TBD Employee Benefits

Revenue TBD

Cost Benefits outside of Group

Total Cost Benefits TBD TBD

Dependencies

Description: Given the limited knowledge of Clients current transportation / supply chain operating

environment, I have created a list of probable questions that would need to be answered to determine

what, if any, significant dependencies may exist.

Potential to Leverage

Description: The potential to leverage the findings and possible improvements in service and price for

the business units extends beyond trucking to virtually all modes of transportation that Client currently

uses. With multiple mega supplier in the market, as well as lesser but capable suppliers, currently

working to leverage their involvement with Client, Client has the potential to improve supplier service

and rates across all modes.

Other Information Include any other information related to the Project as necessary

TBD, Obtain or develop high level process map for existing process at each origin.

TBD, What is in and out of scope for the project.

TBD, Project time-line.

TBD, Milestones.

Dependencies:

� Determine what the external and internal customers want,

� Verify the ability of the consultant to meet with, interview, or request information from

internal customers (sales, shipping, critical stakeholders etc.,) and potentially

external customers,

� Verify the internal requirements to get copies of contracts and rate data back to 2001 or

the most current,

� Establish what the mechanism is to review shipping data as to:

Origin locations,

Terms (FOB point,)

Destination locations,

Carriers used on a prepaid basis,

Carriers used on a collect basis,

Payment terms with the carriers,

Systems capabilities to route when a sales order is created,

Sales order mapping from order to shipped / delivered,

Are sales / shipping orders routed to a carrier’s automated shipping system

electronically,

Which carriers have automated data entry systems on site,

� Analyze claims history,

� Document shipping hours of operation at the shipping locations,

� Verify when GE considers a sales order complete for revenue recognition,

� Ascertain how partial orders are handled,

� Review of shipping dock(s), number of doors, forklifts / pallet jacks, how non-palletized

material is handled (carts, hit the floor, belt, etc.),

� If managed by a 3PL or contracted provider, review their SOP document(s) as approved

by GE,

� Determine by carrier if GE is a daily stop,

� Determine which carriers GE must call for a pick up,

� Determine how GE measures service provided by its carriers (current KPI’s),

� Determine what “ready to ship” product characteristics exist between shipping locations

/ business units, i.e., density, average shipment size, average number of pieces, any

insured or declared valuation, etc.,

� Establish if the contracted rates are FAK or class rates,

� Verify the expiration date for all existing contracts,

� Determine who, by location, is enabled to route shipments,

� Determine how proof of delivery is feed back to GE and if the POD is matched with the

sales order,

� Determine the frequency with which GE formally meets with its carriers,

� Determine proximity of carrier to shipping locations,

� Visit carriers local terminals to ascertain probability for service interruptions due to

congestion at the local terminal,

� Review carriers routings to determine how often shipments are likely to be routed

through a break bulk terminal, and when a shipment is routed through a break-bulk

terminal where the break bulk terminal is, then determine the likelihood that it will

be loaded direct to the destination terminal or possibly transfer through another

break bulk terminal,

� Determine in contracted carriers provide dedicated customer service for GE

o Is it local or via a 1-800 number?

o If so, how is this function handled during vacations and illness?

o Is it 24/7?

� Determine if contracted carriers have provided escalation charts with contact

information beyond the local terminal,

� Determine internally, how customer shipping status inquiries are handled,

1993 - 2006 LTL Actual and Projected Rate Adjustment1

Index

(2001=100)

% chya

(3/12)

ann %

ch

(12/12)

Index

(2001=100)

%

chya

(3/12)

ann %

ch

(12/12)

1992:Q1 79.5 -0.1 1.4 1999Q1 92.0 3.6 3.2

1992:Q2 78.4 0.7 1.5 1999Q2 92.3 3.8 3.6

1992:Q3 78.3 -2.4 0.1 1999Q3 93.2 3.6 3.7

1992:Q4 78.1 -3.7 -1.4 1999Q4 93.7 3.3 3.5

1993Q1 79.0 -0.5 -1.5 2000Q1 95.1 3.5 3.5

1993Q2 79.0 0.8 -1.5 2000Q2 96.1 4.1 3.6

1993Q3 79.0 0.9 -0.7 2000Q3 97.7 4.8 3.9

1993Q4 79.3 1.6 0.7 2000Q4 99.8 6.5 4.7

1994Q1 80.1 1.4 1.2 2001Q1 99.9 5.0 5.1

1994Q2 80.6 2.1 1.5 2001Q2 99.9 3.9 5.0

1994Q3 81.2 2.8 2.0 2001Q3 100.4 2.7 4.5

1994Q4 81.6 2.9 2.3 2001Q4 99.9 0.1 2.9

1995Q1 82.3 2.8 2.6 2002Q1 99.6 -0.3 1.6

1995Q2 82.6 2.4 2.7 2002Q2 100.4 0.6 0.8

1995Q3 82.6 1.7 2.5 2002Q3 101.2 0.8 0.3

1995Q4 82.8 1.4 2.1 2002Q4 102.1 2.2 0.8

1996Q1 83.7 1.6 1.8 2003Q1 102.8 3.2 1.7

1996Q2 84.4 2.2 1.7 2003Q2 103.1 2.7 2.2

1996Q3 84.6 2.4 1.9 2003Q3 104.0 2.8 2.7

1996Q4 85.4 3.2 2.3 2003Q4 104.5 2.4 2.8

1997Q1 86.5 3.4 2.8 2004Q1 105.4 2.6 2.6

1997Q2 86.8 2.8 2.9 2004Q2 106.9 3.7 2.8

1997Q3 87.2 3.2 3.1 2004Q3 108.5 4.3 3.2

1997Q4 87.5 2.5 3.0 2004Q4 110.1 5.3 4.0

1998Q1 88.8 2.7 2.8 2005Q1 111.1 5.4 4.7

1998Q2 88.9 2.5 2.7 2005Q2 113.0 5.7 5.2

1998Q3 90.0 3.2 2.7 2005Q3 114.7 5.7 5.5

1998Q4 90.8 3.7 3.0 2005Q4 117.3 6.6 5.8

2006Q1 118.9 7.0 6.3

2006Q2 119.9 6.1 6.4

2006Q3 121.8 6.2 6.5

2006Q4 125.0 6.5 6.4

1 Baatx, Elizabeth, E-mail with author, 2006

Feb.

1 “Endurance Test,” Logistics Management, January 2006, 26,27,29,30, 32, Baatz, Elizabeth

2 Bureau of Economic Analysis, US Department of Commerce, BEA 06-33, News Release 28 July, 2006

3 Ibid

4 “A Culture of Innovation,” Logistics Management, April 2006, John D. Schulz, 57T

5 Ibid

6 Ibid

7 Internet, 2006 InflationData.com, www.InflationData.com

8 Ibid

9 Internet, www.fintrend.com/ftf/mip.asp

10 Ibid

11 “Pricing Across the Transportation Modes,” “Trucking” Logistics Management, July 2006. 17, Baatz, Elizabeth.

12 Ibid

13 Ibid