Market Insights to Improve Your Supply Chain

[Adam Kroupa] Good afternoon, everyone. I'd like to welcome you to the Key Note— logiChem presentation hosted by CH. Robinson titled Hindsight is 2020 Market Insights to transform Your Supply Chain.

My name is Adam Kroupa and I'm the Director of the Chem Solutions division of CH Robinson, which is our bulk division. And with that, while I primarily focus on bulk transportation, I do get to work with many of our chemical customers and really collaborate with them on what they're seeing in the freight markets. I've been to logichem the last few years, and I've met many of you in person. And, boy, I cannot wait to meet you all again and see you next time we can meet together.

With me today, I have Steve Raetz. Steve is the director of research and market intelligence for CH Robinson, but I'll let him tell you a little bit more about himself.

[Steve Raetz] Thanks, Adam. And thank you for welcome me to LogiChem. Leading our research and market insights at Robinson has me aggregating all of the content that's in the marketplace; Trying to describe the influences to both supply and demand. Trying to understand what's hype and what's real and offer up to us as a business and to our clients (you) some insights that hopefully helps shape your expectations in your strategies for the coming market and learning from the past. And how might they apply to the future? Much to the topic of this slide.

The other part of my job is commissioning research. Robinson has the largest platform, the largest number of connections and freight in North America. We take that data set to universities, and we ask questions about strategies employed by shippers. And we also ask about attributes of freight. And we look to see how strongly those two are correlated outcomes. They really help us understand some of the behaviors of the marketplace and, frankly, what you can do to get the most of any marketplace. So in today's conversation, we're going to talk a little bit about the attributes of the marketplace and strategies that we've researched. Thanks. Back to you, Adam.

[Adam] Between Steve and I, we have 50 years of experience in transportation logistics. We are a global company, but our focus here today will be on the domestic transportation and just a little bit about us. Last year (2019), as a company, we had $21 billion under freight management. We had 105,000 customers worldwide. We have about 73,000 carriers in our contract and moved 19 million loads. Were also the number one NVOCC from China to the United States.

So diving in today as we talk about this, we talk about fragmented capacity. How does that relate to chemical shippers? So, Steve, can you walk us through what we're looking at here on the slide?

[Steve] Yeah. This is something we do at Robinson every year. This is 2019, 4 higher class A tractor capacity, and we're working on the 2020 right now. But I can give you some insights of what we know. Here is kind of the theme: Trucking is different than other modes when it comes to North American surface transportation. You know, LTL you got about 100 and 20 carriers between the nationals to locals, and you've got your two primary parcel carriers and some locals, and then you've got five railroads, right? Trucking is clearly very different. This is the fore-hire capacity we've taken out private fleets, LTL carriers, busing companies and so forth to get to the kind of freight capacity we're all trying to get across the trailer types from van, reefer, tank, flat and so forth. You can see 274,000 carriers. Roughly 59% of those are owner operators, one person companies.

On the left, you see two demographic buckets in the fleets of 50 or fewer. You know you've got about (98%) of the companies, and about 56% of the power units so very fragmented down to the small side. You've got a decent sized middle bucket there and, frankly, the big ones on the right. That's an interesting community that in today's world is focusing much more on yield than actual growth. And so what you see is mergers and acquisitions fuel some of the growth, but organic growth to put more capacity in the for-hire space, irregular routes space at least, is not a primary strategy. Especially when you look at the publicly traded companies, the biggest ones on the right. Those are pretty state clearly stated strategies. And 2020 you saw The Wall Street Journal, very recently, they talked about a record year of bankruptcies and trucking. True enough, what was left out of that insight is it was also a record year for a new carrier start-ups. It's a very resilient industry here in the United States, and the market is only getting more fragmented.

And so you need to think about how do you approach capacity across the size segments across your plannable demand and your unplanned demand. We'll get into some of that as we go forward. Adam, why don't you tell us a little bit about the capacity and the HazMat space?

[Adam] Steve, thanks for that. As we look at the hazardous material, we realize that a lot of what you should hazard material might be a small percentage of it. It might be a large percentage of your your shipping needs, so we wanted to give you some perspectives on what we see here. CH. Robinson works with about 1000 hazardous material carriers, and you can see that in those numbers, the percentages are skewed a little bit more to the right. Larger carrier fleets. And obviously there's some reasons for that having authority for it, having the insurance for it, employing drivers that can all have this material and whatnot. So what we wanted to talk about today, as part of our strategy is, is really how do you get to understanding and and and and looking to see who those carriers are that might be able to help you, that may not be the large hazardous material carriers that everybody knows. We find in this region or in this segmentation, the primary focus or ability is between about 35 about 200 trucks. So when you look at that segmentation, there's a real good distribution of carriers in there that kind of fly under a lot of radars. And those go on relationships that people like C.H. Robinson have.

We also want to talk about bulk segmentation here as well. While we don't have specific numbers on bulk, those are very difficult to come by, especially looking for higher and dedicated fleets. C.H. Robinson works with about 200 bulk transportation providers. Some different research that we've done looks to be that there are about 185,000 available tractors in bulk transportation. That was done by the NTTC. Back in about 2018. If you do a little bit of back of the napkin math and figure about 1.5 tanks/tractor— you're looking at about 275,000 available bulk containers. Which could be dry pneumatic. It could be food grade. It could be chemical. So that segmentation can be a little bit more difficult to look at. We have seen a large shift in the bulk space to move, if you will, on our graph here to the right, we're seeing a lot more mergers and acquisitions to get larger fleets to have more capacity and be more national brands. C.H. Robinson does a lot of work with those carriers in the 100-250 tractor range, which can really bring in some capacity that you may not see from the large carriers. There are about 39 carriers in the top 100 of all truckload providers. So as we said, most of the bulk transportation is done by larger carriers that many people have heard of, and we can look at different ways to bring in other carriers that might be able to support your networks.

We do a lot of voice of the customer discussions and try to figure out where they are so we can be our best selves and recently came across a conversation. And we're talking about a procurement process they said there should always be three main S's is when going through a procurement process: safety service and savings. Notice savings as last. It's really important still, but safety and service in the chemical space are so important. I know that I've been talking to some people and their carrier relationships go back 15-20 years, some even longer, and we very much understand how important that safety and service is. But you've got to look at savings to, and so how, what we're going to talk about today is how you can try to focus on savings as much as possible while keeping your safety and service in line. And we're not saying change up your carrier base or give all you're afraid to different providers. But How do you do your procurement in a manner that allows you to keep your safety and service while focusing on those savings?

So, Steve, can you talk to everybody today about some of the transportation procurement types that CH Robinson sees?

[Steve]Yeah, actually, that's a great segue, because what I'm about to share here isn't asking you to throw out your carrier relationships, your brokerage relationships- It's prioritizing them and aligning them correctly. The idea that we're going to walk through quickly on this graph is that you have different expectations and you have different needs from your supply chain— things you need transportation to do. And we would suggest, based on the research and experience, is that segmenting your supply chain, and then going to market in your procurement events and building your route guides in your relationships around that will give you the services you need. So let's start with this little bit describing its service levels are on the X axis from left to right and pricing on the Y axis from low to high. Okay, so let's let's look at it this way. Award core carrier program on the right. This is often that space where you've got pretty plannable freight, consistent demand patterns. It's really a pretty easy portfolio or basket. Afraid if you want to call it a to go to your service providers and say, I'd like to make an award, I'd like to get some sticky pricing from you and we'll build it into a route guide strategy for you.

Also, for some of that really high service freight, you might use your dedicated fleet, if you have that, a very similar thing. Service oriented first right that meets the needs you have. And likewise, you probably have customers that dropped last minute orders on you. Or maybe it's your go to market strategy to be able to respond rapidly and use team service expedited in the upper right. Be mindful. Planned full about that. Be ready for those things.

Okay, so that's kind of more of the planned freight. Now the reality is not all freight can be planned. The demand patterns of all lanes and all customers is not always predictable, and carriers and brokers simply cannot put a capacity strategy against it, and you find yourself needing to deal with some variability. Likewise, route guides as market cycles and so forth, tend to perform better at some times than others. So how do you address those needs? And that's where the spot market comes into play. What you see, first off in the lower left back haul, transactional. Maybe that'syour 2nd, 3rd, 4th 5th on your route guide, and you're hoping people will take it right? You didn't make a commitment to them in the route guide, but they gave you a price and they're hanging out there. And they'll either accept or not as you go into it, at an elevated price over your primary. Then as that route guide, I've seen some route guides that are very extended: they're not just two or three deep, maybe 7-8-9 deep. Your deep backup could be in there! So it's still a carrier you'd rather take than just the broader spot market. But they put in a very high price that says, Yeah, if you call me, I'll take it, I'll get a truck over there. But it's at a very high premium.

Now the reality is, spot market comes into play again for all that unplanned stuff or sometimes that you simply can't get one of your backup carriers to take it. In the past, that was like sending an email out all your carries. "Hey, I've got these loads available who can take them? And what's the price?" In today's world enabled by technology, CH, Robinson and other service providers now are linked right into your TMS, and spot market is a core strategy. And so that's why you see it moving from the left to the right— because service levels are going up as part of this. Where instead of waiting till you've exhausted all your options, go into the spot market. Not sure what you're getting, you've predefined whether the carriers are brokers that you want to work with and you're deciding when in the route guide you want. Maybe it's the second the first backup, right? Maybe it's the fifth. Whatever it is, it's strategic. So all I'm offering to you is think about your freight portfolio, the planned the unplanned, and the services you need go to market with that strategy. As Adam said, you build in those car carriers that you want. We're not saying wholesale change amount. Adam back to you.

[Adam] Thanks, Steve. And even on the chemical side specifically, I think most of the business that we see or most of business that we can get involved in is outside of that core carrier program. We can be that core carrier, but when that core carrier fails, there's so many different questions that come up as far as the specifics of your freight. I know going back to mid February, when we had all those weather events, it was really a challenge sometimes to understand what the customers needed. They said they needed a truck, but then there are some other things that went into that. And that's why sometimes having a group of people that can help you understand outside of your main core carriers is really helpful. You can have some relationships there.

And Steve, this is a great graph [Truck Portfolio Strategy]. I love what you've put together here just to kind of take what we look down on that last slide and put it into a graphical form, with different trucks and different graphs here. Can you explain what's going on here?

[Steve] Yeah, so we'll try to do this quickly because we'll reinforce some of the previous messages. The left chart— Imagine that's a single lane in your portfolio, afraid, and there's 52 weeks of lane volume across the X axis. Okay, and then the lines going up represent the number of loads in each week, and what you see is that every week doesn't have the same amount of volume. So as you think about that, when you go to market in your procurement event, who are those core carriers that Adam talked about that you want to be laced down in that predictable demand pattern? And that could be both asset carriers and brokers. But oftentimes, if you've got an asset bias towards your strategy, that's where you put them in, because that's the great they can actually bid on because they can actually plan those those lanes, then into their multi leg routes over the course of week and can get high yield.

Now, the reality is, your demand patterns at some point have variableness to them. So in the awards strategy, we oftentimes recommend you then lace brokerage in. So maybe depending on the lane, you're splitting it 50/50 between your asset Carrie and your broker or 75/25 or whatever it might be that ensures that the broker is seeing some freight with regularity, so that when you spiked to the highest points to, they can flex and go to their carriers, who are familiar with your freight and bring the capacity when you need in a predictable way.

So that's the idea of how you think about demand patterns and how you layer in different strategies, even at the lane level. On the right its trying to explain to you a little bit what we see in many shippers. Ask yourself if your company looks like this— 80% of the volumes in 20% of the lanes. Okay, where maybe 80% of the lanes have 20% of the volume. Those top ones, oftentimes, is where brokerage needs to play the role, because the volume the demand patterns are just not predictable enough for an asset carrier to really build it into their network and give you the level of tender acceptance and predictable price you're looking for.

So that's what we would ask you to think about when it comes to your go to market strategy and how you build a route guide from the procurement event. Adam.

[Adam] Yeah, and you know, Steve, I think some of the things that we've mentioned here to just on the straight chemical side, 20% of the volume that might be your tail. That might be new accounts that are coming in. The tail of frieght that doesn't go to the dedicated fleet. It's a great idea to have people that understand your business and know what that tail may be like. So if you have several lanes that you're looking to ship, or or different regions of the country that are not typically going to, it's great to have someone who understands you, and your company, and your freight mix so that they can help you procure at a good level there.

Another voice of the customer that we have here is we're talking with someone that we work with, and they talked about. There are three main initiatives that they wanted to achieve, and they said that they needed to work with someone outside of their organization to get there fast. They needed to partner with a lead logistics provider, or 4PL. And those three main goals are really (1) to improve global logistics operations, (2) increased supply chain visibility and (3) reduce dependence on internal resources. And, boy, I tell you, that's where I think a lot of the soft costs that don't get measured come in when you look at that dependence on internal resources when things go awry when your route guide fails. You know your procurement people are going to bat a lot more to try to find capacity or operations. People are more involved. That really drains on a lot of the resources that you may have internally that are dedicated to other avenues of your company.

Again, you go back to what we saw in mid February, and even some of the demand challenges of the end of 2020, How much time were you and your people spending, too, to procure when typically it would just run through a route guide? And so, Steve, can you talk just briefly here on what we're looking at with this demand variability?

[Steve] Yeah, this is one of our research pieces with MIT's Center for Transportation and Logistics. I'm going to a real briefly. We do have a published white paper on this. If you're interested, you can follow up with us, but we'll touch on it real quick.

[Slide: Demand Variability and Lead Time Research] Here's the cost of a rough guide underperforming and go into the spot market. We did three years of research across a shipper base. I think we had 40-45 shippers in this data set where we looked at how their route guides performed across similar lanes. What you're looking at and I would ask you to focus on the dark blue color in both graphs. That's from October of 2017 through September of 2018, which is a most similar time period to what we saw in 2020, because as the reopening of the economy of the Covid shutdown and maybe what we're going to be looking at in 2021. And so what you see is the 1-2-3-4-5 on the X axis. That's the first back up, the second back up, the third backup and so forth, after your primary rejected the tender. And what we saw is about 5.2% on average across these shippers is what the premium price was over the carrier you expected to take the load. And then another almost 5% for the second and so forth as you go up, always between about 4-5% more as you go deeper and deeper in your route guide through tender rejection process. And what happens if you jump to the right chart is that if you can cover your loads within the route guide, in other words, you've got the depth in the elasticity to go deeper in the route guide. At that time period when the market was really tight, shippers who were able to cover their loads within the Route guide spent about 11.7% more on shipment, then the primary, the care they took. So be clear when, when the when the primary rejected the tender if it got covered in the route guide on average about 11.7% more.

If, on the other hand, the route got completely failed and the shipper had to go to the spot market 35.4% increase over the intended primary service providers. So the lesson is, construct a route guide that helps keep your freight within it, even when it underperforms, and try to minimize that need to go to the spot market. Adam.

[Adam] I think long story short here, right? The goal: The solution to your questions are really... maintain your route guide! And we've talked about that a little bit today. How to maintain that route guide? One of the things are involved with that It could be taking your tail, putting it together in a basket and and trying to sell that to a service provider. It could be looking at ways to go to a mini-bid before an RFP hits. Or it could even be looking at some new business that you may not be, working through with your carriers currently, and trying to find carriers that will bid on that until you go to procurement. And big thing, here is really if you're fighting carriers that are not meeting your service expectations, you need to re-bid that and try to get a new primary on there because that is going to help you and, really again talking about savings, help keep that savings in line for you while keeping your service at a level that we're all comfortable with.

[Steve] Yeah, that's right. We actually saw this in our research. Shippers who maintain the route guide outperform on a cost standpoint, those who just publish it live with it for a year. You'll spend more. So maintain your route guide. Sorry about that. Thanks, Adam.

[Adam] Oh, no, of course. Thank you. And thank you all for coming today. We appreciate you attending, and hopefully you learn something new. Steve and I would be more than happy and willing to talk to you about anything that might come up. My contact information is on the screen here.

[On the screen: Visit our Market Insights]

You can call me email me. We also have a really great website with market insights. Go and check that out. It's nothing that you have to sign up for. You can go and just read through it. And if there's something on there that you're looking for, it can help you connect to one of our experts. But we really again appreciate your time today and hope you have a great rest of your conference. Thanks. Thank you.

Hindsight is 2020: A retrospective virtual event with LogiChem

The many challenges of 2020 created areas of opportunity we can learn from. As the trucking industry continues to evolve, many large shippers are reevaluating their transportation procurement request for proposal (RFP) processes in order to meet new customer demands and deliver predictable freight budgets at desired service levels. Our experts provide both proven and new ways for chemical and supply chain experts to transform their transportation strategies.