Since DHL’s painful withdrawal from its domestic operations in the USA, it is certainly making things interesting on the international stage.

It comes as no surprise that FedEx and UPS quickly began to seize the moment to carve up the spoils back in the USA, but they are also being opportunistic with the larger global shippers based in the USA by attempting to leverage domestic clients to win their entire global contracts and indications point to the fact that DHL is starting to feel the pain. That said, look for DHL to go toe-to-toe with the competition, they have been ambitiously building out there global network in recent ways and in impressive ways: they have improved transit times on literally tens of thousands of shipping lanes around the world, and have expanded their overnight service reach internationally in many, many markets. They have also beefed up and improved their new hub in Leipzig, Germany which will be a source of competitive advantage years into the future.

Look for DHL to defend and grow it’s international base of customers. The advantage for FedEx and UPS on an international basis is not as large as it might appear. Logistics, including parcel deliveries is a service business, and as such all parcel markets are local, requiring local solutions and approaches to solving customer problems and needs. DHL has developed an incredible network around the world, second to none, and it will surely be finding ways to make it worthwhile for their customers to stick around. The real winner though are the shippers, DHL’s pull-back in the USA will create a battle-royale for your business in other markets- competition is good.

Change is Good. What do you think? Thanks, Chris

A few of the prominent trends I am focused on and will be analysing further in further posts on this blog are:-

1) Express vs. Deferred service: the battle is heating up in Europe and has been raging in the USA for several years with deferred service nipping hard on the heels of the lucrative express amrket to the chagrin of the carriers income statements. The fact is, deferred services are becoming more attractive because shippers are discovering that in many cases the parcel doesn’t need to arrive the next morning, it just to arrive predictably when promised.

2) Pricing Transparency: zonal pricing will soar in popularity going forward, further chipping away at profit margins for carriers. As Europe continues to act and feel like a single market, the idea of paying more to cross a border doesn’t make sense and distance-based pricing will dominate in pockets where it isn’t already.

3) Ecommerce: Europe is an ideal playground for eCommerce to flourish compared to the USA. The geographic and carrier network densities across much of Europe creates powerful synergies to meet the rising demand for eCommerce shipping. This powerful distribution channel has not been lost on big or small retailers and have particularly improved the carriers’ cost-to-serve the hard to reach small retailer market. Competition will come from every direction for eCommerce…European posts are wise to be scared.

4) Consolidation: consolidation amongst the carriers will inexorably continue. Although it will play out quite differently country by country from what I can tell. There are big differences between the mature and emerging markets of Europe [Germany vs. Poland]. Moreover, some markets are more fragmented than others when it comes to carrier coverage [UK vs. Norway]. And let’s not forget about the politics and domination variances of the national posts in different countries [France vs. Germany]. Having said this, all markets in Europe are involving and competing at a dynamic rate of change; it is impressive to watch and contrast to the USA whose post is nowhere close to being privatised and the only two carriers left standing are FedEx and UPS. I can’t wait to see what happens to TNT…that will be historic when they tie the know with someone.

The carriers are not passively watching these changes unfold, they are competing at unprecedented levels and will be for some time to maintain and attempt to gain share. One interesting I am eager to see is in addtion to developing their network capabilities which they excel at, is to watch how they re-focus efforts to develop their brands as game-changers. How they position and market themselves to their customers and how well they deliver on their customer services will make or break the European carriers of the future.

having said all that, i would love other people’s opinions of trends in Europe’s CEP Market. Please chime in here. Thanks, Chris

High Volume Shippers get the best rates.
Yes and no. Higher volume helps to a point, then other characteristics become more important like package densities, etc. Enormous shippers though do have a distinct advantage as carriers need to fill their high fixed-cost networks with packages. Yet, carriers desire a good mix of big and small shippers or the heavily discounted revenue (yield) per package they must report in their annual reports will be too low and negatively affect their stock price. Moreover, carriers like a large number of packages per collection and delivery stop but not too much. Enormous pickup or delivery requirements may exceed the capacity of a single truck and require a 2nd vehicle, thus increasing the cost/price per package. The same issue can affect large volume shippers where the receiving location doesn’t have a dock to facilitate the delivery process.

Every Year 25% of shippers contracts are re-negotiated. A full 90% of the shippers end up staying with the same carrier.
This figure was recently published by the largest global parcel carrier. This fact is not lost on any of the other carriers either- they know that it is extremely unlikely for a contract negotiation to end in a client defection which gives them an upper hand in negotiating. In fact they often internally refer to shippers as: Retention, Penetration or Conversion accounts; and if you are an existing acct, you are then classified as Stable, or a Re-bid candidate or Vulnerable to Defection. Shippers that are willing to switch [conversion accounts] or at least put out their contract to multiple carrier bids often get dramatically better pricing results. This makes good sense, as the industry growth for parcels is modest and even declining in recent times. On top of that only 10% of shippers defect every year, making those small minorities one of the only major opportunities for carriers to grow faster than their peers, which is every carrier’s dream.

Long-term customers often have mediocre discounts.
One might think the opposite, yet this surprising fact is often true. Long-term customers are generally the most profitable business for a carrier. This actually stands to reason: carriers don’t want to lose valued, long-time customers but at the same time rates and discounts have changed dramatically over recent years and generally long-time, stable customer’s dont keep pace with their rightful improved pricing…however, it would be difficult for a carrier to offer big price concessions, even if pressed by the customer, because to do so, would be an admission of prior price gouging. Often, an independent 3rd party industry expert can help both sides save face while getting to the appropriate discounts to maintain the integrity of a desired long-term shipper-carrier relationship.

Carriers prefer Commercial over Residential deliveries.
In many ways this is very true for some obvious reasons: residential deliveries almost always involve fewer packages per delivery, and a longer distance between delivery points, lower weight per package, more delivery attempts per delivery, and generally a higher loss/damage claims ratio. However, it’s important to note that not all RES deliveries are equal. Carriers do seek a mix of RES/COMM to balance their network operations and it’s important to know how your RES deliveries [and COMM too] compare to that of your peers for discounting purposes. But perhaps the real surprise is to be aware that even though super-urban (metro) areas like London offer a carrier a tremendous density of deliveries and ensuing cost advantages of such, but there are increasing negative factors with these delivery types that are taking a bite out of the price discounts more and more. Issues include toll costs, traffic slowdowns, limited parking, congestion fees and restrictions on delivery times can vastly impact the price a carrier will offer even the largest of shippers.

Parcel pricing is a tricky process to master because it is so multi-faceted. However, there are tremendous advanages that flow to shippers who have a strong handle on their shipping profile and how that are affected by the economics of the current parcel market realities. Please feel free to share your comments and thoughts on this ever evolving topic.

Changing the way things are packaged to make the most out of a trailer’s space is introducing a little-noticed structural change to trucking.

Square, flat-topped milk jugs are the new way to package milk. A Sam’s Club press release states the new stacking configuration saves so much space that the retailer can ship the same amount of milk in half the number of trucks. That simple change is freeing up dock doors, warehouse space, and labor, and it’s saving enough on fuel and freight costs to yield a 10 to 20 percent price cut for consumers.

Wal-Mart is extending these efforts outward to its suppliers. For example, by reducing the size of packaging in 277 private-label children’s toys, Wal-Mart suppliers were able to eliminate 727 container moves, save 5,100 trees, and use 1,300 fewer barrels of oil. Reducing the amount of water in laundry detergent resulted in using 128.9 million fewer pounds of plastic resin for packaging and saved 478 million gallons of water. It also reduced the number of truck moves by 2.79 million and used 20.7 million fewer gallons of diesel fuel.

Let’s look at the Impact for Carriers.

Large truckload carriers and small truckload carriers…some facts and opportunities:

A scarcity of freight and shorter trip lengths has led to a run up in deadhead or empty miles for truckload carriers. According to the ATA, the percent of empty miles reported by large truckload carriers (over $30 million in TL revenue) increased to 21.6% of total miles in February from 17.6% in the same month a year ago. Small Truckload (less than $30 million) reported empty miles 28.9% in February 2008 versus 24.9% in February of 2007. For a mid-sized carrier, say 500 trucks, a 2 percent reduction in empty miles can result in multimillion-dollar annual cost savings.

No one is paying for these empty miles.

Do these figures increase the cost to you to use this equipment? Do distribution trends affect your cost?

To offset the general higher empty miles and extra time associated with handling regional freight, long haul carriers may need to rethink how they measure equipment productivity. You cannot just measure productivity in miles; you also have to measure in hours. Could/should we measure mileage and then space used per hour? Think of package early A.M (8:00AM), Next Day Air shipments versus Priority Overnight service (10:30AM), a difference of zero to 2.5 hours. Have we created more empties or a more efficient way to bill for their use? Can truckload carriers make an easy space cost comparison to compete with time definite express and LTL? Would this give shippers more capacity to choose from?

How about LTL carriers? They look at “Load Factor” here. Load factor is determined by how much WEIGHT is on a schedule. The higher the weight, the better the load factor or weight on trailer. This has always confused me when I try to buy groceries with “load factor” but the cashier always wants money. Do you think we could use dollars per space (cube) occupied; a simple rent or lease option? Most LTL carriers use a single 53 foot trailer that has 4000 cubic feet for space and 48,000 pounds for maximum legal weight. LTL also uses a combination of 2 – 27 foot trailers for a total of 54 feet, or 4200 cubic feet for space, and 48,000 pounds for maximum weight.

In the last few years, these trailers have become more common for ease of delivery in congested areas and increase space utilization to name a few advantages. The really gifted carriers also use a system called “logistic trailers.” This is a way to have the total height of the trailers divided into two loading configurations by using a “removal deck” that allows more efficient loading space and no double stacking of pallets. “Logistic trailers” provide superior use of space.

Why Are We Still Using a System from 1936 in this Age of Web Services and Applications?

What has brought about this revelation in space management? Why do we all want to be green by cutting warehouse and logistics costs? What is preventing us from doing this?

It is simple. The pricing system used to calculate your transportation cost fails to account for the most important criterion: the amount of SPACE occupied in the truck. We are locked into a system that had its origin in 1936 and the carriers will not or cannot think of a way to use their existing systems for billing, cost management, and yield factors that are compatible with their existing cost systems. They still use the 1936 Class2 rate method. The Surface Transportation Board gave us an excellent solution with the antitrust immunity elimination on January 1, 2008. You now can use your own base rates3 and determine how you want to “class” your freight. We suggest Cube Based Pricing™.

The National Motor Freight Classification (NMFC) has outlived its key use borrowed in 1936 from the railroads Uniform Freight Classification (UFC) of creating a “simplified” table of classes to which a rate can be assigned. International modes of ocean and airfreight have long utilized a cube/weight calculation as they were designed to serve the needs of craft with limited capacities.

With modern warehouse and transport management systems (TMS), we have the cube and weight already in tables. TMS also has the origin, destination, service requirements, and value known. The carrier could use a cube-based scale to quote a rate that would reflect the revenue they wish to earn in a particular lane of movement. This would ensure a minimum amount of revenue for shipment space occupied. A tariff that reflected cube would provide the carrier with valuable planning information for terminal cross-docks and long haul load equipment selection. A tariff reflecting cube would also provide last mile equipment selection and manpower.

Further, computers can store other shipper choices in service levels along with release value for insurance. Computers can even store delivery date/time windows to take advantage of cost saving efficiencies in day of week variations the carrier might share with them. Add to this the ability for systems to communicate with each other in load tendering, tracking, invoicing, warehouse space requirements and settlement. This is when you have the ingredients for a transportation transaction without paper, auditors, and the NMFC.

Benefits to Shippers and Carriers.

Basing a system upon Cube-Based Pricing™ benefits the shipper by providing an understandable rate structure that, with some innovation in packaging (e.g. redesign, nesting), can allow for self-control in cost reductions.

The system used internationally would now be used domestically, allowing uniformity in systems, data, and metrics. A system for carriers that allows for accurate cube information at time of tender will enable operational planning at forward terminals and cross-docks, as well as improved utilization of equipment.

This will allow for immediate change in the classification/F.A.K. LTL rating system, which has become permeated with massive discounts, complex exceptions, and paperwork. The bad news is for the multi-billion dollar legal, post-audit, and audit firms who obtain revenue from the artificially complex NMFC-based system of rating LTL in the United States.

The new adopted system will allow for paperless, pre-rated, auto pay transactions between shipper and carrier. This new system utilizes standard calculations and meaningful rate discount programs that support greater efficiency in load optimization, labor, last mile delivery requirements and fuel usage.

Shipper and Carriers New Green Pricing System Based on “Space”

In my research on freight classification and pricing, I came across this statement in a 1897 book (and that date isn’t a typo):

“It is almost universally agreed that the space occupied by merchandise should be the predominating factor in the fixing of a classification and also the value of the article should have some weight” (1897 ICC Annual report, emphasis added).

Great Caesars ghost did the original founders of pricing have it right and then we let the carriers adjust or “average increase” the pricing? How involved have shippers been in price setting policy since the Act to Regulate Commerce of 1887 (Later known as the ICC Act)? You can now set your pricing based on your needs and not a group of 100 carriers, now a board of 6 (CCSB), to determine your shipping class. No more Rate Bureau average increases either or yearly rate increases determined by a GROUP of carriers.

Your shipments now will receive a true market value price, not distorted by years of averages and rate adjustments from carrier bureau general rate increases (GRI). No longer can NMFC changes in class assigned be applied to your shipments without your knowledge. Each carrier can now custom tune their rates to fit the current market conditions based solely on their lane balance and cost. We have offered Cube Based Pricing™ for over a year now and have been pleased to see it finally realize some traction in a market that is being forced by the current turmoil to look at low risk, user friendly, system compatible alternatives to share and reduce cost.

While Cube Base Pricing™ is not yet sufficiently fashionable for most shippers and carriers to bring into general acceptance, I feel that the long practice of not thinking that the current method of pricing is wrong in the internet age gives the dated method a superficial appearance of being right and is shielded as the tradition of pricing. Can you afford this type of pricing method?

As the uproar increases about the lack of flexibility in the old NMFC class system of pricing and the new STB antitrust ruling is understood, this new Cube Base Pricing™ solution in time with the efficiencies and visibility offered will convert others into the modern age of transportation. Are you ready to change?

The question remaining is “how long can the shippers and carriers let this 8 to 10 percent reduction in cost remain unused”?

Hank Mullen. Hank@tnl-global.com.

I’ve always admired the smart folks at SMC3, the company (which is owned by the carriers themselves) that developed Czar-Lite. Years ago they identified and filled a major need in the industry…and still to this day it is a wildly profitable software tool. CzarLite is a so-called ‘neutral’ rate base that helps shippers and carriers negotiate easier by providing an neutral nationwide base of current shipping costs. Back in the day (1987), freight was deregulated and carriers set their own pricing. The problem was that shippers had no way to compare carriers’ rates across the various shipping lanes and there wasn’t widespread access to adequate software that could analyze rates easily and inexpensively. Now, for most of today’s large shippers that are serious about optimizing their LTL costs, migrating to individual carrier tariffs can deliver serious savings without operational burdens.

Comparing Apples to Apples.
Question: What objective does CzarLite seek to solve? Shippers want to ship goods at the lowest cost and highest service levels and subject to their unique business rules and requirements. Shippers also want simpler LTL rates and carrier tariffs. This is a reasonable objective, but Czarlite takes a strange approach to solving these goals. CzarLite takes each carrier’s rates by lane across the country and averages it to create a benchmark from which shippers and carriers negotiate discounts from their (neutral) rate base. This simplifies the negotiation process but in a manner that needlessly raises shippers’ costs because it does not reflect any individual carrier’s actual cost. And keep in mind, CzarLite isn’t free…either you as the shipper, your carrier or your 3PL (or all 3) are paying those licensing fees to SMC3 (and as the shipper, you bear the collective costs, directly or indirectly).

Why rate averaging doesn’t work to your benefit. If CzarLite was the rate base for the airline industry, it would give you a benchmarked average cost of flying from Chicago-Dallas and all airlines would have to offer a similar discount [as the LTL carriers do if they want to win your business under a CzarLite rate base]. As many frequent travelers know, American Airlines would be profitable but Delta wouldn’t be profitable at all, even at twice the price. The LTL carriers operate on the same network economics as airlines- forcing them to bid against average lane rates that are tailored to their network and cost structure doesn’t make sense any more than it would to expect a great price to fly Delta between CHI-DAL. It’s economic nonsense. When you force your carriers into this routine, you’ll get zapped with hidden costs [from the rules tariffs, tender acceptance rates, lesser discounts, etc].

Anyone who has been involved in transportation procurement for more than a few years will recognize the following to be true. Carriers operate on economies of scope, not economies of scale. Increasing volume is NOT the main driver of discounts. For the carriers, it’s all about balancing their networks. The price you pay reflects your carrier’s cost to haul your goods. All carriers, even the national ones, have different regional strengths based on terminal locations, equipment type available in their fleet, marketing objectives, union vs. non-union employee base, freight flows from their other customers etc. So the value of your book of business is a function of how well it fits into each carrier’s network. Stated simply, carriers have preferences and if you allow them to communicate these preferences effectively and quantifiably in the negotiation process, you can greatly leverage and improve your freight costs.

Think about it…you want to give each carrier its best lanes, and you want to let them customize their pricing based on your lane frequencies, densities and commodities. Carriers want to win the business and make a small profit for their hard work- the only way to do that in a high fixed cost business as this is to allow them to offer discounted pricing based on their network and costs not an artificial average cost per lane that whitewashes the carriers variances and forces them to offer a blanket 80 or 90% discount across all or regional lanes, as is the case with CzarLite. The average doesn’t reflect their costs so some lanes will be wildly profitable for them and others will be brutally negative. The result of this game is that carriers will hedge their pricing and add extra padding into their bids to you- they have no choice.

Things to keep in mind:

1) Every carrier has a different rate base. So any stated “discount off” ABC carrier’s base rates, without context, is a meaningless number . Every carrier has different base rates for each and every lane. An “80% or 85% Discount” has no intrinsic relationship to your final cost per mile or per pound or anything else because carriers A, B, and C all have different base rates on the same lane to which the discounts are being applied.

2) Czar-Lite. Czar-Lite only compounds this problem by reflecting average/neutral rates that do not reflect any carrier’s network adequately– I would be so bold as to say that any shipper using Czar-Lite as its rate base can improve its rates without breaking a sweat, guaranteed.

3) Prior year rate bases are also bad (e.g. using a rate base from 1998, 2000, 2005…); it seems like a great idea because you are avoiding any annual rate increases by using older base rates, but the carriers understand this trick and compensate fully for it in their final pricing, (they call it making it ‘Revenue Neutral’). So all it leaves the shipper is the disadvantages of reflecting old zip codes (increasing your cost and effort to audit) and old pricing based on carrier networks and economics that have long-since changed since that tariff was enacted so the carriers must further hedge their pricing which increases your costs.

Turning these lemons into lemonade. Whether or not you are ready to switch from CzarLite or not, we can help save you money with our transportation spend optimization services. But if you really want to save serious money for you and your carriers, consider moving away from CzarLite now. It isn’t saving you a dime, in fact, it’s costing you plenty. Consider implementing each individual carrier’s pricing tariff, and multiple FAKs instead of just one depending on your commodity mix. Update your rate base year to the current year, it will yield impressive financial benefits, I assure you. If you don’t do this last step, at least make sure your base uses the current year’s zip codes, and confirm that it uses 5-digit not 3-digit zips. Also, be sure to allow the carriers to fine-tune their pricing across lanes through a multiple discount structure- there is no need to worry about how to compare carrier costs via CzarLite, we’ve got that covered, and it wont impact your operations, work-flow, or your current TMS software… and most importantly, it wont require any IT involvement.

The beauty about this strategy of weening off CzarLite is that the benefits are well-documented- this isn’t just one person’s opinion. Feel free to contact me if you want to learn more about optimizing your cuurent freight costs. Thanks.

Chris Brinkman. Chris@tnl-global.com.

Let’s see what some of the charges are.

Address Correction
You would think that you have an accurate address either supplied by the customer, your customer
service representative, or the sales associates that submit the order. This simply isn’t so.
The carriers will go as far as offering an address confirmation, most for no charge. I see hundreds of
incorrect addresses when we do an address audit for LTL and Package address, sometimes even 3 or 4
different spellings of the same address. The additional work and cost to correct these addresses by the
carrier is not covered by the delay in service, and bad feelings generated by late shipments by shippers
and consignees to correct the address. I refer to this as “to many finger prints on the shipment”

Correct weights of shipments
It is not uncommon for a shipping location to have no scale to obtain the last weight check on
shipments. The shipment can change drastically from order entry to the final actual weight shipped.
I have found that in auditing weights, look for the zeros. Every shipment ends in one, two or three
zero’s, 10, 50,100, 300, 500, 1000, 1500, 10,000 pounds. What an incredible way to drive up your cost
and drive a big trust issue with your carriers.
The carriers weight and inspection will eventually find these discrepancies, and the shipper will be
penalized. Additional charges will be assessed.

Classification errors (*1)
There are many users who simply lack any concept of how classes come about and how NMFC
provisions are to be applied. I see this all the time (*2). It is complex, requires up to date information and
requires skills that are rapidly declining in the industry. I have seen shippers that “Pick a Class” and use
this class for all commodities shipped. No FAK was determined and no carrier input. Your liability goes
back 180 days from the date of the shipment when the carrier finally does a classification audit.

Price Fixing (carrier implemented)
More than a dozen airlines around the world had their offices searched or were otherwise contacted by
U.S. and EU investigators probing the possibility of illegal price fixing in the air cargo business. Most paid
large fines and some jail time. It appears that we have a trust issue with carriers also, along with a
system of pricing that will allow a “creative” way to change your cost charged and paid. Who is auditing
the auditors?

Here is one suggestion TNL Global has offered to shippers of palletized freight. Palletized freight
makes up over 80% of LTL shipments. The standard pallet is 40 inches by 48 inches and 6 inches high
(www.nwpca.com.) The only other measurement needed is the height. Once you have the height you
can calculate the amount of “Space or Cube” the shipment occupies. Stackable and non-stackable apply
here also.

A simple chain that the package carriers supply to their drivers to measure oversize shipments would
work for both the shipper and carrier. The chain can measure up to 165 inches and fit into your shirt
pocket. Now all that remains is to input this information in the bill of lading or Cube Shipping
Document© that eliminates the bill of lading and all the NMFC classification problems.
Changing a system currently based upon ambiguous classifications to a new, more exact system of Cube
Based Pricing™ will benefit the shipper by providing an understandable rate structure that, with some
innovation in packaging (e.g. nesting) can allow for self-control in cost reductions. Cube Based Pricing™
is a system modeled after the internationally used systems and can now be used domestically to allow
for uniformity in systems, data and metrics.

In addition to be being beneficial for shippers, Cube Based Pricing™ benefits carriers with a system that
allows for accurate cube (size) information at time of tender to enable operational planning and
improved utilization of equipment. For the immediate future, it will allow for a change in the
classification/FAK LTL rating system (*3), which has become permeated with massive discounts, complex
exceptions and paperwork. (*4)

Would you like to learn more about Cube Based Pricing™? Contact me directly at Hank@tnl-global.com.
Hank Mullen.

Notes:
1. As one court has observed: “Many sellers are blessed with customers who are ‘sleepers,’ that
is, customers who don’t shop around for the best buy; and even for those who do bargain for a lower
price, the list price is usually the starting point for the bargaining and the higher it is (within reason)
the higher the ultimately bargained price is likely to be.” High Fructose, 295 F.3d at 656.
Statement filed in Section 5a Application No. 46 (Sub-No. 20), on April 21, 2004, by Jack E.
Middleton, Attachment 3, at 7. Witness Middleton’s assertion that all shippers receive an automatic
discount of at least 20% even if they do not negotiate means simply that the true collectively set rate is
actually 80% of the nominal class rate.

2. On average, the Transportation Index increased 40%, while class rates increased 100%. See Comments
of Health & Personal Care Distribution Conference, Inc., and National Small Shipments Traffic
Conference, Inc. (HPCDC/NASSTRAC), filed in EC-MAC-I proceeding Aug. 18, 1997, at 8 and Appendix A

3. We too fail to see how use of a class rate as a baseline simplifies the process for shippers. Whether
carriers use a common baseline or their own individual rate schedules, a shipper seeking competitive
rate quotations must approach each carrier individually, providing the same information about the
specifics of the particular movement (weight, distance, time, etc.), and ask for a market rate quote. To
obtain competitive rate quotations that are truly useful, a shipper needs to know the final rates and
charges for the specific movement, not simply percentage discounts taken from bureau tariffs (which
may themselves differ where regions overlap). Under the discount-quotation system defended by the
bureaus, if a carrier responds by quoting only a discount percentage and not the resulting rate, the
The bad news is for the multi-billion dollar legal, post-audit and audit firms who obtain revenue from the
artificially complex NMFC-based system of rating LTL in the United States. The new system will allow for
pre-rated paperless auto pay transactions between the shipper and the carrier. This process will utilize
standard calculations and meaningful rate discount programs that support greater efficiency and
visibility in load optimization, labor and fuel usage real time.

4. Our chief concern – that classification not be used to stifle competition among motor carriers
following the demise of the rate bureau system – reflects a policy of deterring unfair competitive
practices. Termination of approval is consistent with our policy goal to meet the needs of shippers and
other consumers of motor carrier services. Moreover, to the extent our decision facilitates the entry of
competitors to NCC that might devise different ways of determining the transportation characteristics of
commodities; we believe it will increase the variety of pricing options available to both carriers and
shippers. In sum, our action today terminating NCC’s approval is fully supported by the regulatory policy
goals that Congress has instructed us to pursue.

SERVICE DATE – MAY 7, 2007 EB SURFACE TRANSPORTATION BOARD DECISION STB Ex Parte No. 656

Shipper will have to consult the appropriate baseline tariff and “do the math” required to apply the
quoted percentage to determine the rate.
In short, shippers do not need a rate quotation to be expressed as a percentage off of a benchmark rate in
order to understand it and may find it more useful to obtain competitive rate quotations in dollar terms.

There are a host of “Demand-side trends” [surging awareness of carbon footprint impact from parcel deliveries, growth of e-commerce shipments; switch from express to deferred service; distance-based pricing; growing demand for predictability/time-definite commitments] as well as “Supply-side trends” [e.g. the twin pillars of 'Consolidation & Deregulation,' new niche players, products and delivery options in the B2C (Business-to-Consumer) space; carriers expanding product portfolios & geographical footprints] and certainly some exogenous trends [the global recession, air cargo displacement by road and rail, the impact of package characteristics on price. and so on.

1. Near-sourcing [Eastern Europe vs China]

Fuel volatility, ‘time to market’ and perceived quality control issues are forcing shippers to rapidly rethink their options to source manufacturing and warehousing in china back closer to home in Eastern Europe. Moreover, both logistics providers are siting facilities there [e.g. DHL's new hub in Leipzig] as are shippers, who are rethinking the single massive distribution centre in Europe to a hub and spoke orientation of multiple centres (Poland, Czech Republic, etc). Among the many factors driving Near-Sourcing trends, the one that looms largest is fuel costs. Even though trade liberalisation and technology is flattening the world, fuel prices have been rounding it for parcel shippers.

2. A Tale of Two Customers (B2C vs. B2B)

Increasingly, carriers are reckoning with a commodity-like B2C product segment and a highly specialised, differentiated B2B market- both are critical to blend into an effective service offering. B2C is exploding primarily form online purchases. In the U.S., it represents 5% of retail sales, 3.5% in the UK and 1.5% in Mainland Europe…and the latter two are growing much faster than in the US. B2C parcels are characterised by low-cost, low service levels and extreme competition. The advantage will be awarded to the big carriers because the the more deliveries per truck/mile driven, the less cost, the more profit…this is known as the “Drop Factor” and it is paramount. Not growing nearly as fast is the high-value B2B shipments, but due to the nature of the business, customers will continue to pay premium prices for their stringent delivery requirements, as margins will grow even faster than turnover. Spare parts, Healthcare, and banking are the critical mass of this product offering.

3. “Cubing” is a term you need to get to know

A package’s “cube” is simply means to understand the impact of the size and weight of a package on its cost to be shipped through in a carrier’s delivery network. Essentially, shippers are paying for the space their packages occupy in a plane or truck. This is why carriers prefer heavier packages. This is true because almost without exception a plane will ‘cube-out’ or become full before reaching its weight limit capacity. Thus shippers are effectively paying for space occupied on the carrier’s vehicles. The truth is customers are overcharged for heavier packages. Aside from really large, awkward or unconveyable packages, it costs very little more to transport a heavy or light package of the same size. The problem in recent yrs is that shippers are standardising their packaging to increase shipping processes but this is costing them a fortune in their parcel expenses. The smart shipper of tomorrow will be sending out densely packaged parcels [in tight, condensed packaging]. Think of it as ‘the great shrinking package.‘

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Around the world, countries, corporations and individuals are struggling with how to deal with environmental issues resulting from what economists refer to as ‘market externalities’ and has been alluded to as the Tragedy of the Commons. Parcel and freight deliveries are carbon-intensive activities to be sure, but many innocent bystanders [including mother earth] are subjected to the emissions caused by a private party’s decision to transport goods. The dirty secret is though that the pollution is a silent thief that sneaks up and builds up over time so hardly anyone notices or objects until it the problem is intractable. One day, it is very likely these costs will have to be unavoidably built into the carrier pricing of deliveries- it’s already starting occur…but in the meantime, DHL created this clever voluntary programme to determine the market’s appetite for this enhanced service*.

Shippers can elect to pay a ‘green premium’ to ship via DHL in a carbon-neutral fashion. Importantly, DHL has committed to tracking the routes, movements and modes of each package individually, so this aren’t carbon calculations aren’t bogus ‘averages.’ DHL have necessarily enlisted a certified third-party entity [Swiss based Societe Generale de Surveillance] to verify the calculations and will re-invest the GO-GREEN proceeds in internal and external carbon-reducing efforts around the world– hybrid vehicles, solar panels and so on. In return, shippers are to receive a certificate from DHL each year stating the total amount of CO2, which was offset on their behalf during the year.

What is interesting to me about this is that this is a terrific experiment to see what the market [customer] appetite is for this type of service, as customers will surely vote with their wallets. Which industries will want to GO-GREEN enough to pay for it? Will these certain shippers select GO-GREEN for all shipments or only certain types… customer vs supplier vs internal shipments? shipments over certain lanes? inbound vs outbound? Beyond that, what premium will customers be willing to pay? Will the premium be negotiated for large volume shippers and to what extent? What reporting will shippers require for their own eco-initiatives? Will there be an opportunity for benchmarking within industries to spur on adoption of this service option?

If managed well, DHL stand to gather significant market intelligence on a powerful trend in the coming years with their GO-GREEN project. The way they have structured the programme as a voluntary, pay-by-the-drink service will help them learn the market needs today and as it rapidly changes with each passing quarter.

Please share any comments- Thanks, Chris

* TNT have a similar programme in concept to DHL’s called “CO-2-GETHER”

• [from tntplanetme.com] For a fee, TNT will offer customers the option to offset the CO₂ emissions of their shipments or mailings. TNT will then invest the same amount of money to create a “carbon positive” consignment. The collected funds will be invested in dedicated climate change programs.

Consider some of the trends emerging out of the recent energy price roller coaster ride the world has been on. In places like Europe, Canada and the USA, carriers and shippers alike are re-thinking their global distribution strategy and looking toward regional solutions. When oil prices increase, the cost of shipping from Mexico vs China to Canada or the USA gets temptingly cheap; same with Eastern to Western Europe, which helps to explain why countries like Poland and the Czech Republic are the two fastest growing parcel markets in Europe in recent years, with pre-recession growth rates well into the double digits. It wasn’t long ago that the manufacturing center of gravity in Europe was heading southward to Spain and Italy, but now, manufacturing, along with distribution is gravitating toward Eastern Europe and Russia.

Carriers are making big investments in Eastern Europe [DHL in Leipzig, etc] to build out powerful logistics networks and shippers are doing quite the same, finding opportunities to locate new distribution centres in Eastern Europe. The European market has expanded so rapidly in recent years that many companies are abandoning the mega distribution centre concept for a hub and spoke formula of major and minor centres to more efficiently serve the gigantic market that is today’s Europe.

The math of moving parcels is a moving target itself. The carriers are building out and modifying their networks globally at a breathtaking pace- UPS broke ground on its giant hub in China, DHL has pulled out of the USA and FedEx is delaying its $150b hub in Guangzhao until 2009, to name a few recent developments…Decisions on site selection today need to be considered in light of the impact of the changing logistics market conditions.

It will be interesting to watch the regional and global distribution strategies play out and its impact on the ebb and flow of logistics volume on the current powerhouse China. Thanks, Chris

Consider the following fascinating article from one of my favorite tech bloggers Robert Scoble, who talks about his recent trip to visit ‘Mr China’ himself Liam Casey whose company PCH in Shenzhen, China is helping to change the way products are amde and delivered worldwide. It is the age-old story of eliminating the middle-man, the distributors of the world, but the middlemen these days are no less an icon than Amazon.com itself who is starting to get cut out of the product supply chain equation already due to profound efficiencies that stand to be gained by shipping direct from China to your doorstep.

The article is here: http://scobleizer.com/2008/11/12/disruptive-factories/

There are a number of interesting angles to analyze about this changing world order in logistics, but one that may be overlooked is how FedEx and its comrades in parcel delivery are actually driving down the dust-to-dust cost [carbon impact] of the products the world creates, i.e. the total environmental impact from cradle to grave [to cradle]. Delivering a package via plane from Shenzhen ultimately to your flat in Notting Hill is not exactly a carbon-minimizing transaction; however, it must be understood that if the process eliminates the need for circuitous delivery paths from factory to hub to distristribution center to store and so on, you’ve eliminated a massive amount of overhead from the equation and along with that, you’ve prevented an awful lot of carbon production. The amount of direct and indirect carbon generated by the mere existence and daily operation of a modern distribution center is staggering. If FedEx et al can get me my macbook without need for the DC’s and what not, then they have done their work for the day of savng the planet.

Thanks Robert for the great snapshot of the changing face of logistics. Chris