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- 1. LTL Industry Pricing Analysis Presented by: Tim Lerchbacker
- 2. 2 Table of Contents Section One LTL Pricing Analysis Section Two Six Sigma Project Define List of Dependencies 1993 2006 Actual and Projected Rate Adjustments
- 3. 3 Section One - LTL Pricing Analysis
- 4. 4 . . . shippers who weathered the logistics storm of the past 18 months arent 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. Costellos 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
- 5. 5 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 Moores 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.
- 6. 6 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.
- 7. 7 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.
- 8. 8 Trucking Industry Rate Increases 1993 - 2006 -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 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.
- 9. 9 Trucking Rates vs. Inflation vs. GDP 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % 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% Inflation 12 3.0% 2.6% 2.8% 2.9% 2.3% 1.6% 2.2% GDP % chg 13 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
- 10. 10 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.
- 11. Section Two - Six Sigma Project Define - List of Dependencies - 1993 2006 Actual and Projected Rate Adjustments
- 12. 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
- 13. 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/Employe
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