"Can it be that it was all so simple then
Or has time rewritten every line
If we had the chance to do it all again
Tell me - Would we? Could we?

Memories
May be beautiful and yet
What's too painful to remember
We simply to choose to forget
Barbra Streisand

The words, "relationships" and "partnerships" are now being used by shippers as the "Mother of all Capacity Shortages," nears. 2010 was the first good year in trucking since mid-2006 when the first signs of the Great Recession reared its head.

During the recession, many shippers took advantage of the downturn in volumes and the fragmented nature of the industry, by employing predatory and abusive practices towards carriers. The volume of bids rose to unprecedented levels, as supply chain professionals were replaced by accountants, purchasing agents and consultants. The oft repeated mantra was, "That's the market."

Carriers were forced to price below costs to keep trucks running. Networks were destroyed and in a constant state of repair. Asset based carriers with sizeable investments were pitted against brokers. Carriers lost bids to brokers who turned around asked the same carriers to haul for even less. Shippers downsized warehouse staff, thus creating waste, detention and hardships on drivers. Some refused to pay detention that was contractually agreed to. Order entry work was shifted to carriers.

Carriers responded by desperately agreeing to unprofitable rates, deferring new equipment purchases, downsizing their fleets, cutting driver pay and laying drivers and staff off. Front line people went years without raises or contributions to their 401(k)'s, while health insurance continued its annual upward climb. Carriers negotiated loan deferrals with their lenders, delaying equipment payments while watching their losses pile up and their equity and cash diminish. As this was occurring, regulators began intervening aggressively in carrier operations. The goal of most carriers was not profit, but survival.

The shipping community destroyed capacity and failed to invest in capacity that they now need. We have danced to the music and now the piper must be paid. Analysts predict the next few years will be the "glory years" for asset based carriers. Carriers are leaned out, and are looking forward to making healthy profits. They are not anxious to increase their capacity without a reasonable return on invested capital. Qualified drivers are scarce. The government is cranking out rules that cut productivity and raise expenses, while failing to invest in infrastructure. The survivors are smarter and preparing for the next recession. Any responsible pricing strategy anticipates that profits be sufficient to deal with new regulations, inflation, make a reasonable return on capital, considering risk, and recapitalize for the next down cycle.

Some predatory shippers now want a "relationship" with carriers but continue to put out bids, in an attempt to lock in prices and avoid future rate increases. Shippers' have leveraged technology in the bidding process to drive down rates.  Most bids focus on miles and rate, while failing to disclose to bidders the operational details of the business. Incumbent carriers are often at a disadvantage on bids, because they know these details. As a result, bids usually result in incumbents having higher rates. Customers have a negotiating advantage when carriers price freight without understanding the costs of servicing the account. Shippers then weigh the savings from awarding business to brokers or non incumbents against the disruption in their supply chain from the churn that will result. A common bid strategy is to save money by taking advantage of carriers in down markets and add carriers and minimize increases in transportation spend in up markets by bidding and locking in pricing before the crunch.

How does one select the right customers and respond to bids in a tight capacity market? Some put in a low price now, but abandon them when it suits them. They overbook their system like an airline and bump the extra passengers or broker the excess. This strategy maximizes utilization. It may be profitable now, but does not prepare one for the next inevitable recession. During a capacity shortage, service carriers must make smart choices in pricing and allocating capacity, to enhance profits and fix the lane, customer and commodity mix BEFORE the next down cycle. Fortunately, carriers will have many options from which to choose.

A carrier must know its costs, the operational characteristics of the freight being priced, and future inflationary and regulatory trends to price properly. Costs are rising rapidly. Office people and drivers need and deserve pay increases. The EPA has caused tractor prices to soar. Carriers are experiencing unprecedented regulatory interference in productivity. The weak dollar policies of our government are creating double digit inflation for a carrier's largest expenses (fuel, equipment, interest, labor and tires). Driver pay, recruiting and advertising expenses are rising as carriers compete for good drivers. The longer period a customer desires to lock in a rate, the farther into the future a carrier must try to predict both for inflation and capacity.

Obtain a thorough understanding of the operational costs and requirements of the business from the customer PRIOR to pricing the business. Salesmen like making the deal and will often advocate for the shipper. After all, they are normally paid on commission. Require your sales to obtain all pertinent information from the customer. Widen your net and obtain input from operations, safety and customer service. Once you fully understand the feasibility and operational costs of the business, THEN you are in a position to fill rates into the bid. Document the assumptions upon which the pricing is based and draft a statement of understanding to review with the customer. This will create an institutional memory within your company which enables you to compare the representations upon which the pricing is based to what happens in reality. After you have obtained business, measure the key indicators regularly by using a customer scorecard. This sets the stage for future conversations with the customer if the reality differs from the original understandings. If you find that the original assumptions are incorrect or have changed, talk with the customer about adjusting their operations to drive efficiencies, or correct pricing to reflect the change.

In crafting your customer mix between now and the next recession, take care of and find customers who have demonstrated fair dealing with carriers. What is a relationship customer? It may be hard to describe but carriers know it when they see it.

Love means never having to say you're sorry.
Oliver Barrett IV, Love Story.