Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Perhaps we could start with a brief introduction of your role, the type of goods you deal with currently, and your responsibilities.

I am the Head of Logistics for the company. At Deere, logistics is entirely centralized. I have teams all over the world, and we manage every aspect of logistics, from inbound to manufacturing, outbound to dealers, and all spare parts. We spend about $4 billion on logistics, and we're very active in this area. As we'll discuss over the next hour, we have what we call a tier one mindset. We prefer to work with carriers that own their assets, which has proven beneficial to us over time, both from a leverage perspective and during crises like Covid. As a large shipper, we find value in having a direct connection with the carrier that owns the trucks. As for the goods we transport around the world, John Deere is a well-known brand. We're the world's leading producer of agricultural equipment, both large and small, and a major player in the construction equipment market in North and South America. We're also the global leader in forestry equipment and road building, largely due to our acquisition of a German company called Wirtgen. We have a significant manufacturing and dealer footprint worldwide, and we transport a wide range of items, from very small to very large. LTL is crucial to our operations.

How many LTL carriers do you typically work with regularly?

I'll provide some context on the U.S. and Canada market, as that's where a significant portion of our volume is, and where LTL is very prevalent. We categorize our LTL carriers into two groups, national and regional, or super-regional, carriers. In the US and Canada, we work with 12 to 13 LTL carriers. Half of them are grabbing about 80% of the volume. We are in direct relationships and direct contracts with those carriers.

Why don't you use brokers?

In my view, transportation is not a commodity, I think what we do is really special. If I were to associate the term 'commodity' with anything, it would be truckload. There are truckload lanes where the process is simple, you show up, get loaded, and leave. The average trucking firm in most of the world has maybe ten trucks. So there are thousands and thousands of truckload carriers. There's no way we would want to cover all of our volume with only direct contracts. Having that kind of broker model is pretty cool for truckload.

We might have, say, 10% of our volume go with non-asset carriers. We can work with a company like C.H. Robinson, who has thousands of carriers under their belt. They handle the insurance, risk, and service levels.

However, when it comes to LTL, I have a different mindset. LTL is unique. It's like comparing ocean transport with container carriers versus ocean transport for car or our equipment carriers. There are fewer players in the LTL world, and often there are special requirements due to the nature of LTL.

Because of the nature of LTL, where you load at a supplier, or at a shipper, and it might be a couple of pallets. Then you keep running your routes to get that 20 foot or 40 foot loaded. You go back to a terminal to unload all that, put it on a line haul, and it goes somewhere, and then you unload all that. Finally, it goes on another truck for a final delivery. It's a lot of handling, and a lot of risk. It's important to have visibility with all those handoffs.

We prefer to deal directly with the carrier for peace of mind. There's also a customer service aspect. If a different provider delivers LTL using a broker, you lose some rhythm. Often, the same driver who does the pickup also does the delivery on the other end. This rhythm is hard to quantify, but it's part of the distinction between commodity and non-commodity that many of us larger shippers care about, whereas smaller to mid-sized shippers might not.

Why do you use both national and local carriers?

When making a decision about LTL, we consider the usual criteria: cost, quality, and service. If I look at service levels first, and this is a generic statement, all of your LTL carriers will publish a matrix on service levels. This means if I'm picking up in this origin, I'm going to deliver to this destination the next day. You have a visual of a concentric circle, it’s in their profile. Let’s use my location as an example, Moline, Illinois. I can see this picture of all their next day points, and I can see a circle around that where it would show the second day points.

Generally, regional players specializing in routes, for example, from Wisconsin to Iowa, will have a stronger profile of next day deliveries. They build their network around this, ensuring there's a lot of density, so there's never a risk of the line haul waiting for the next day. It operates like a bus route or parcel service. We prefer this where we have a lot of density.

If you look at most Original Equipment Manufacturers (OEMs), for example, Deere, our manufacturing footprint in the US is primarily in the Midwest and the Southeast. Typically, where you have your manufacturing footprint, you also have your supplier footprint. This means we have a lot of LTL going a relatively short distance.

National players like Old Dominion and XPO often don't compete well on my first component, service level. They also don't often compete as well on cost, my second component. Quality, which I define as Over Shortage and Damage (OS&D), can be a wash. In our experience, when you have these tight regions where you're running, let's say, 500 miles or less, the larger guys can handle it, but they don't perform well enough on service and cost.

Why is that?

There could be several reasons. Regional local players have been operating in those spaces for so long that they've mastered the 500 miles or less segment. Anecdotally, they tend to care more for their larger customers because they rely on them a lot. On the other hand, larger LTL carriers wouldn't be significantly affected if they lost a client like John Deere.

From a cost perspective, regional players generally have lower overheads and are often union-free. Most of the larger ones are unionized, which results in a different cost footprint. These are some of the explanations I can provide.

Why work with several carriers given your size? Isn't working with one large carrier more beneficial? I understand there's an element of risk, but wouldn't this simplify your backend processes? You could leverage price and gain more bargaining power. Why work with multiple carriers?

We partially answered it when discussing why a national player might not be the best fit. There are several reasons why we would or wouldn't choose a carrier. One is simply supply and demand, or basic economics. We appreciate the competition since our model involves dealing directly with asset players. We don't hesitate or share rates, but they all know who the competition is because they're all visiting our factories and dealers. So, competition is one factor we consider.

We also evaluate things from a risk perspective. For instance, we've experienced cyber attacks like the ones that affected FedEx and Maersk a few years ago. In those instances, we were single-sourced and somewhat paralyzed for a while. So, we consider risk as well.

Furthermore, no LTL carrier could completely meet a large shipper's needs. It's simply not feasible. We use some decent sourcing tools, such as those from Jaegers, and we look at LTL where it makes sense from a dynamic perspective. We can do some dynamic route optimization. This means we have some lanes where a trailer pool isn't required, or there's no network impact, so it can be a pure one-way route.

When we plug in the orders of the day, certain LTL carriers are more competitive in certain lanes. If we just gave that to one carrier, they would essentially build out what works best for their network into the pricing for us, and we would lose the value.

For example, XPO might want more freight or equipment getting into the Pacific Northwest, while FedEx freight has other advantages.

So, we try to benefit the carriers' networks. There's the risk factor, and there's a cost factor. These are some of the main reasons why a large shipper wouldn't necessarily choose one carrier.

To your question, a non-asset player like C.H. Robinson could be used. They might tell the shipper not to worry and that they'll take care of their regional and long-haul needs. They might work with five, six, or seven carriers on the shipper's behalf. This might work for some, but not for us due to the intricacies of our network. We prefer the tier one philosophy and feel comfortable working with more than one or a few carriers.

If you had to rank what matters to you as a shipper, what are the criteria that would make you choose one carrier over another?

In our sourcing process, we use a decision analysis matrix to ensure we're not making decisions in isolation.

When dealing with LTL, cost is a significant factor. This cost is divided into two parts. The first is the traditional tariff and its associated discount. We negotiate this discount off the standard tariff, which is the commodity piece.

The second cost element is the accessorials. These can include stop-off charges, rural area delivery fees, waiting time, fuel surcharges, and so on. We evaluate the cost side based on the pure discount, which is straightforward as it's zip code to zip code and weight breaks. This allows us to compare carrier to carrier. We also consider the accessorials, which is a heavily weighted item in our decision analysis matrix.

Another factor we consider is the carrier's history with us. If you're an incumbent carrier, we have data on your on-time pickup, on-time delivery, and on-time in full delivery percentage. The latter means you delivered on time without shortages or damages.

If you're a new carrier bidding on our business, we may seek customer references to gauge your service levels. We also consider your service profile.

There are other softer factors that matter to our units. Some units require a trailer pool for LTL, so we need 53-foot vans staged for loading. This requirement is also included in our decision analysis matrix.

Service levels are crucial. A carrier may offer the best pricing, but if they add a day in transit because they can't deliver to certain places the next day, it will negatively impact their overall matrix score.

Our process is quite sophisticated. LTL is arguably the most challenging aspect of transportation for shippers to navigate. It's so complex that many shippers, including us, prefer not to do tenders every year.

If you're an LTL carrier providing good service, there's less likelihood of turnover. Unlike commodity truckload or ocean freight, where turnover can be high, the barriers to exit in LTL are quite high, especially in larger relationships.

Why is LTL so challenging for a shipper to figure out?

When we consider ground freight, which is the area you're looking at, we have small parcel with few players like UPS, DHL, FedEx. Then there's truckload, which is more of a commodity, often point to point, with a rate per mile or fixed rate. Then we have LTL, the middleware, handling anything from 250 pounds up to 10,000 pounds. It's crucial and necessary, but also complicated.

Most people in my position or on my teams struggle to understand the pricing because it involves tariffs and other accessorial aspects. Figuring out trailer pools and navigating regional versus long haul can be challenging. It's tempting to hand everything over to a company like Old Dominion, but then you might find you've added a day in transit or increased costs. It's a necessary inconvenience, a sentiment shared by others in my role in Fortune 100 companies.

You mentioned weighing the service level in the total equation. If you had to prioritize your criteria, including cost, service level, and customer service, what would be your hierarchy?

While we all want the best service, the reality is that significant changes won't be made unless they're commercially competitive. So cost is the primary factor, accounting for about 50% of our weighting. Following closely behind, at around 30% to 40%, is the service profile, such as the ability to extend next day, second day, third day delivery.

The third factor, if we're categorizing into three, would be quality. LTL carriers, like any business, aim to maximize profit by keeping their trailers full, especially the line hauls. However, without a focus on loading and unloading, freight damage can occur, which is why we weigh quality as well. Other factors like technology and customer service are important but less significant.

For instance, is the carrier invested in technology that ensures scanning and freight invoicing work well? Customer service is also key. Regional, local players tend to offer better service as they're more familiar with their customers and their freight. Larger players can be a bit more challenging in this regard.

Do you see a clear difference between regional and national players in terms of how they treat you? Does anyone stand out?

In my opinion, when considering national players in the US, Old Dominion stands out from the rest. It seems TForce is adopting a similar approach. However, Old Dominion challenges my hypothesis because they excel at customer service, acting like a small provider despite their large scale.

However, the reality is that a global account manager at Old Dominion won't be intimately aware of what's happening at a terminal in Portland, Oregon today and Miami tomorrow. Regional players, due to their tight-knit operations, have a better grasp on everything. As good as Old Dominion is, and you do pay for their high-quality service, there's a clear distinction between national and regional providers.

If I were a new entrant in this market, starting my own company, what would you need to see from me to consider giving me a chance to transport your freight?

I've always told providers that while it's challenging to get in the door with us, once you're in, it's difficult to get out because we usually have a win-win situation. There are two scenarios to consider, a new entrant providing a national service versus someone coming in at more of a regional level. But it’s still about hitting those same quality points I was discussing.

There must be a compelling business reason for us to consider a change, especially from a cost perspective, as that will always grab our attention. It's also important to discuss how the new entrant is seeding the talent in the leadership. You can't enter an LTL environment with just venture capitalists or private equity people at the top. They need to hire well.

If I were in private equity, I would want to ensure that we have top-notch talent on the operational side and the sales and marketing side. LTL requires street credibility. If someone walks into a shipper and only talks about generics, it won't work. LTL is risky for us. If we make a change, especially for an OEM, the last thing I want is to get a call that we just shut a line down.

The business case needs to be compelling. For example, presenting a pricing matrix based on your discount to a company like John Deere could get the door for further discussions. However, we would then want to know more about the operational aspects. Who is your VP of operations? Where are they coming from? What are they doing? How are they hiring? How do you plan to hire and compensate your drivers?

Due to the high risk associated with making a change, we would ask ten times more questions than we would of a truckload carrier. For a truckload carrier, if the pricing looks good and the references are okay, we might give it a try. But LTL is completely different. The barriers to entry for companies like DHL or Mainfreight are high and it's very capital intensive.

Hiring the right people is crucial. For us, an interesting business proposition could open the door, because cost is extremely important. Then we would start to dig into other aspects like service levels and terminal locations. If you're entering a certain region and you have one terminal in a 500-mile radius, we would have concerns. That's why entering the LTL market is so risky.

How long does a relationship with your preferred LTL carriers typically last?

I can give you a range, but we rarely sign a one-year contract for LTL. It's not beneficial for either the carrier or us because the process is challenging. However, we have a couple of relationships that have lasted for 80 years.

In the LTL sector, it's important to have a sense of the pulse of your business. This understanding allows for proper pricing, which can be risky. For instance, a new entrant might offer attractive prices, but then find the business challenging or encounter unexpected issues. We try to be very transparent from the start. We have some longstanding relationships, while others are more transactional, typically with larger players.

It's interesting to note the different types of players in the market. There are national players, pure regional players, and regional players that interline. For example, consider PITT OHIO. They handle the northeast of the US, but they have interline arrangements with partners connected to their systems. Therefore, while their coverage is primarily in the northeast, they can offer pricing for a movement into a place like Iowa, where we are, due to their partnerships.

However, we need to know who the partner is, how well they were chosen, and whether the IT is truly seamless. Can we track one order number all the way from origin to destination? It can be quite challenging. For instance, DHL tried to enter the US market about ten or 15 years ago, but after a $500 million investment, they withdrew.

They attempted to enter the LTL market?

No, they tried to enter the small parcel market. The two are similar in that they are both capital-intensive. If you're planning to go national as an LTL player, you'd probably want to acquire someone, but the capital requirements are immense. You'd need terminals, pickup trucks, and so on. It's similar to the parcel market in that respect. It's a challenging sector to compete in, especially against established players.

Could you explain why one-year contracts are not beneficial for either you or the carrier?

I wouldn't want to speak for all shippers with my response. Some may be less focused on service levels and are content with the status quo. However, for most, if you have any significant scale, preparing the RFP or tender could take up to three months due to the complexity involved. After all that preparation and awarding the business, you then have to start the process over again.

Another aspect to consider is the need to serve our customers and internal stakeholders effectively. For instance, I have around 90 factories worldwide. When dealing with something like LTL, the rules of engagement regarding pick-up and delivery are quite sensitive. Continually offering a changing product can disrupt the flow of business. Although this may seem like a soft answer, it's a factor we take into account along with others.

Loading freight tables is a complex task due to the intricacies of pricing. Despite the advancements in transportation management systems, LTL remains a unique challenge. Most of us prefer not to make these changes annually. Some do if they have a simpler, more one-way model. However, we strive for a balanced network. If I have LTL flows coming in from a certain region and LTL flows going out, there may be leverage for me to match those two. If I keep changing that every year, it's difficult to administer and realize some potential benefits.

If we set Old Dominion aside, as they only do LTL, and look at the others like XPO before they split the company, or Mainfreight, they all strive to be one-stop shops. They aim to provide transportation, logistics, drayage, and even brokerage under one umbrella. Interestingly, the synergy ratio is quite low. It's rare for a single one-stop shop to serve all needs. Why is this the case?

You've accurately captured the reality we often see. Many of these companies aren't proficient in all areas. Take DHL, for example, they acquired Exel Supply Chain years ago. Excel was proficient in warehousing, whereas DHL wasn't. Despite the acquisition, there was no synergy with the parent company.

I believe part of the answer lies in the fact that these companies can't excel at everything, regardless of what they're selling. Therefore, we need to consider whether their services are related. For instance, if you imagine an international freight forwarding chain from Europe to Brazil, that's related. They could handle inland transport, ocean transport as a non-asset entity, and drayage because it's within the chain and makes sense.

However, as a shipper, we won't give you any special treatment if you step outside of the chain. If DHL tells me they're handling all my international freight and that should give them an advantage to manage a domestic warehouse in Iowa, we'd probably disagree. We'd allow them to bid because of our relationship, but we'd treat them like any other bidder unless we see a direct synergy.

If the services are related, we might consider combining some elements. But if they're not, we won't.

What do you mean by related? If you have your own warehouse and they propose to manage it for you, why not? They know how your freight moves and probably have a lot of data.

Let's consider this from a large customer's perspective. In the example I gave, let's say the warehouse is in Brazil. While they might know our business, we generally don't put all our eggs in the same basket for forwarding. We might use three or four different expediters from India to Brazil, DHL from Europe, and so on.

They may have some synergy, but it's limited. They'll only have visibility to what they handle. That's why we won't give preferential treatment for warehousing or LTL because we don't use one party for all our volume. This comes back to risk and cost considerations.

They may think it's advantageous because of what they have, but they don't see the total picture. That's why we wouldn't give anyone preferential treatment. The exception is engagement with senior executives.

For instance, with a large player like DHL, having an executive sponsor at a high level can get things done. If there's a problem with one division or an opportunity with another, you can leverage it at the top. However, at the lower levels, the divisions start to fragment. The warehouse team doesn't communicate with the forwarding team and vice versa. Different models recognize the revenue, and we haven't seen enough benefit to put more eggs into single baskets.

According to the carriers, the more international their clients or shippers are, the more advantageous it would be for the shipper to use them as a one-stop shop.

Yes, I would say the same if I were in sales and marketing. Consider Maersk, for instance. Have you been following Maersk? They're no longer just an ocean carrier. We're evaluating their new product offerings, but we don't necessarily see the value. There might even be some risk. However, I understand the appeal, especially for smaller entities.

As you mentioned, you have manufacturing plants internationally and work with different LTL carriers worldwide. How does the US LTL market compare to, say, the New Zealand market in terms of LTL?

Our strategy varies depending on the market. In the US, due to the population size and market complexity, an asset-based LTL approach makes perfect sense for us.

However, in smaller markets, we're more open to different approaches. For example, in New Zealand, we might work with Mainfreight, Toll, or DHL because we have less leverage there. We might ask them to bid on customs brokerage or handle last-mile delivery, regardless of whether it's a full container or a single pallet.

In smaller, less important markets, I don't want my team running tenders for small volumes with asset-based providers. Our approach changes based on scale. In some markets in East Africa, I'd rather work with one partner. We might leave some money on the table, but we have to focus where our density is, like Western Europe, Australia, Mexico, the US, Brazil, Argentina.

In these one-off markets, we're much more open to an asset-light or asset-free partner helping us.

Could you walk me through the process of sending a pallet from point A to point B? What are the steps you undergo internally to contract the right LTL carrier? What happens internally when you need to move a pallet?

If I start answering this question incorrectly, please interrupt me. There's the contract aspect and the day-to-day aspect. Which one are you more interested in?

Let's start with the contracting process and then move on to the day-to-day operations.

We've been striving to become more scientific and professional with the sourcing tools we use. When I first started in this role, our primary tool was Excel, which is not sufficient for LTL. Now, we have proper tools, such as Jaeger, for example.

These tools are incredibly helpful as they allow us to get very specific with our quotations, whether it's from one origin to many destinations or many origins to one destination. We can organize and package all the weight breaks, then push the RFP out, go through the rounds of negotiations, and involve our legal team.

Before we send a tender out, the recipient has to sign our contract. We don't want to award business to someone who doesn't agree with our terms and conditions. This process can be quite complicated, especially with LTL. After several rounds of negotiations, we're ready to make decisions.

We approach the A to B question in two ways, static and dynamic. There are some lanes that we choose to be static. Maybe they require a trailer pool, or it’s long standing. When it’s static, our transportation management system (TMS) will be coded as such. When an EDI comes in with a static job, the TMS will tender it to a carrier. Some of our business runs that way.

On the other hand, some of our business is more dynamic and we're kind of proud of this because it's hard to do. For instance, a factory that produces items like lawn mowers and has 100 loads a day, some of which need to go LTL. In this case, we care less about the carrier and use a dynamic model.

Orders come in the night before, we download them into our TMS, and then we build the loads for the next day. The loads that need to go LTL due to service requirements and destination will go into the dynamic engine. We might have four or five carriers that could take it, and we have all their discounts and accessorials loaded. We also consider soft criteria like their service levels. The engine then generates a tender. For example, Old Dominion might receive an EDI tender from us for a specific lane and pallet quantity. We then execute from there.

You mentioned that most of your contracts with LTL carriers are on a multi-year basis. What is agreed upon in these contracts? Is it price-based, volume-based, or dependent on a certain volume? Is it blanket pricing or lane-specific pricing? How does it work?

Let's provide a brief answer on that. We aim to do a thorough job in the beginning when we conduct a tender or an RFP. We try to include historical volumes on lane freight characteristics. You've probably delved into how freight is classified. It's quite complicated and outdated. We do our best to say, for instance, this is class 50 off of this tariff. They then bid on it. This is essentially how we try to structure things so they understand what your freight looks like, where it's going, and the volume. We may then award half, all, or none of the business. However, we request your pricing.

On the dynamic side, we have a bit of flexibility with our TMS and our 4PL provider, where we can designate new or infrequent business. We have some modeling where the carrier can hold whatever they quoted on that lane. But we also have some modeling where they can immediately accept a new bid. This is a small part of our business and that's traditional. For example, one carrier might outbid another, and we'll choose them because they just became cheaper today. Some of that falls into the dynamic aspect. You could argue, why wouldn't you do that all the time? Well, it's a two-way street. It's complex. It's about trailer pools, rates can increase. They can also decrease. Right now in North America, it's a challenging time to be a truckload carrier as rates are plummeting. It's still really beneficial to be an LTL carrier. They're not competing well, depending on how you look at it.

Leaders of these large LTL carriers often say it's a more rational market than the truckload market.

I agree, it is. And it's harder to enter. I'm sure you've studied the risks there. Take the example of YRC kind of going under last year. What does that mean for your potential client? It's a tough space.

I'm not referring to the dynamic part of the contracting, but the standard part. So you actually input the type of freight, the category, the lane into your system, and then you send an RFP. This RFP will be based on a certain volume and will last for several years.

Yes, we just haven't found a way to do LTL annually or less frequently. I think many people in my position would say the same thing.

You made an interesting point about your TMS system that I'd like to delve into further. You mentioned that you input some qualitative ideas into the system. Could you explain how much weight these ideas hold? Who assesses these qualitative factors and how does the process work from start to finish?

Part of our TMS allows us to hard code certain factors because it's not feasible for us to make changes on the fly. Regarding the weighting, it essentially tricks the system. For instance, if a carrier is having a lot of service issues, we can adjust their rating in the system. This adjustment doesn't literally change their rates, but it artificially inflates them, causing their ranking to drop. We can change this after a month if things improve.

This is an interesting opportunity for us as a high-end manufacturer. We need to maintain service levels to keep the factories running. So, as tempting as it is to always default to the cheapest option, when we factor in these other items, it changes the rankings.

Are there levels of quality there? For example, if a carrier is performing poorly for a period, how do you gather that data? Is there a range of satisfaction levels?

Yes, there's both a quantitative and qualitative aspect to this. We can accurately measure on-time pickups and deliveries, overages, shortages, and damages. These are all quantitative factors. We also measure tender acceptance, which is important to us.

We have a lot of quantitative data that we can load into our model. However, we also have a softer side. If we're getting feedback from a factory that something's wrong, such as not staging enough trailers or poor billing practices, we can artificially inflate their rates.

How long do these qualitative factors last? For example, if there's an issue with a company and you decide to input a negative qualitative factor, does that typically last a few weeks or does it last indefinitely?

We meet with our more strategic carriers monthly, less strategic carriers quarterly, and transactional ones never. For the more strategic ones, the meetings are very metrics-driven. They have the opportunity to improve within three or four weeks after we made a decision, and we can immediately remove the negative factor.

However, sometimes we might require two or three months of consistency before we change the rating. It's a bit soft, but we never hard code a change and forget about it. We stay on top of it because, ideally, we'd like the cheapest carrier to be hauling.