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

{audio:0:06:45} Let me tell you first a little about how I am coming at this and what my perspective is. I have a fund and we own Old Dominion Freight Line, a company we hope to own for a long time. Can you give us a snapshot on your 30-year career in LTL?

{audio:0:07:32} I started right out of grad school and worked my way up through operations. I came up through operations and, every year and a half, was fortunate to get a promotion. It was a wonderful company who treated people with dignity and respect and the results followed. The owners made it a point that I understood them. I started as a management trainee in an industrial engineer type job, then became ops manager and regional VP of operations. They would say, we have a challenging situation, go do it, and I would do it. 

{audio:0:08:27} In my late twenties, I was promoted to VP of regional operations. Back then I did HR, operations and sales, so I got all that experience on how the operations side works, which is a nice blend, because there's an awful lot that happens on an LTL operation set up. They said, take over Florida – which had been a challenge for them – and fix it. I used a model I had learned and we turned it around and hit six years of best in class. After that, I switched to the sales side because I wanted that pricing experience from being full time on the regional sales side. I was in their strategic planning and social media team for 10 years. I was in new markets we were going to enter. 

{audio:0:10:07} We opened up Kentucky and used the same model going from nothing to a million in month one. They realized the logistics landscape was changing and wanted me to look at that, so I built a team and came up with a model, but after 30 years I thought it was time for me to move on. That last year and a half was spend diving deep into the logistics 3PL landscape. Old Dominion was always number one and Southeastern was usually number two.

{audio:0:11:50} What elements go into maintaining that top spot or what are the key competitive things for LTL? I know there are many variables, such as on-time delivery claims.

{audio:0:12:06} If you focus on the wrong things, you will get what you asked for. In the LTL market, you have to do your best to avoid ups and downs. They are currently in a big up but it will eventually change. You have to create a consistent pricing strategy. When it starts dropping, you have to be able to weather that storm and not start throwing out cheap rates. An example of that is when business gets tight, people will bring on any new accounts with lengthy freight or what we used to call ugly freight. In LTL operations, if you get overly aggressive on pricing, it helps short term revenue but hurts long term operations.

{audio:0:13:20} It seems that the industry has got better at that.

{audio:0:13:28} It used to be terrible, but a rising tide lifts all boats. It's been good times for some people recently but it will be interesting to see what happens when it dips.

{audio:0:13:50} Did they change how they price or what made that happen?

{audio:0:13:57} The volume and revenue started increasing so they started looking at what fits. Are they equipped to handle lengthy freight without thinking through pricing it properly? That revenue allowed everyone to make different decisions, which were the right ones.

{audio:0:14:33} There wasn't a leader who started doing it and everyone copied them? Did the whole industry come to that realization or how did it work?

{audio:0:14:41} Old Dominion led that effort because they stayed consistent. That caused people to chase them as they continued to win and the environment was right for change.

{audio:0:15:17} Do most people in the industry price similarly or are there differences?

{audio:0:16:08} Pricing models are all over the place. Some base it on tonnage while others base it on piece and weight. Different models have created challenges with price variations. 3PLs have made the pricing models more consistent, which is good and bad. Shippers were frustrated with LTL carriers making this way too complicated and having no clarity, so 3PLs clarified that for them by negotiating on their behalf.

{audio:0:17:24} Do you perceive them to be a threat?

{audio:0:17:29} Yes, 3PLs are a threat. Old Dominion held a harder line in negotiating with 3PLs than others. They had their pricing strategy and when a 3PL came in to negotiate, they would simply say no. 3PLs are definitely changing the landscape fast because smaller ones are getting bought up and larger ones are growing and gaining more control over the business.

{audio:0:18:38} The industry has become more consolidated. The top 10 have 70% of the volume with FedEx at number one with 15% and ODFL second with 10%, so do changes like this crush those 30% who are outside that top 10?

{audio:0:19:03} It sure does. XPO started as a 3PL, then bought one of the larger carriers, so 3PLs are gaining control of the customers and, as they become larger, they get more leverage.

{audio:0:19:30} Does that 3PL threat apply to the top 10 carriers or do they have enough muscle to not negotiate any differently with a 3PL than they would with others?

{audio:0:19:45} Old Dominion could have done that, and they still can. Carriers will have to watch the growth, especially if their LTL is growing at 8%, which is low these days, and certain 3PLs are growing at over 20%. The large ones could still fall prey to that if a 3PL technically owns the accounts. 

{audio:0:20:34} What other factors are there for LTL competition, other than pricing?

{audio:0:20:48} You have to balance claims and on-time delivery, which Old Dominion are good at. If you measure on-time service first and foremost, it could hurt your claims or load average. One needs a system that measures efficiency and customer performance simultaneously. Old Dominion had that, but if someone doesn't have the leadership incentive to do the right thing, you could easily inflame that. If load average is down, focus there, but if you only focus on load average your claims could increase as a result of you simply cramming goods in. You need to focus on on-time service and claims first and, then pull efficiency in after and incent people on both.

{audio:0:22:16} The purchase transportation element is another area where ODFL does well as they use a very low percentage of other carriers. How do they manage capacity?

{audio:0:22:34} Old Dominion manages that well as they have a very thoughtful growth strategy. Purchasing transportation shows you are growing faster than you are able to handle, so you farm it out to somebody else, which also means you risk sacrificing customer service. If they are managing that, it indicates that they're also managing price and service numbers.

{audio:0:23:23} The purchase transportation number at ODFL is low compared to others, but capacity additions are also an important part to manage, so how does that work? 

{audio:0:23:52} Old Dominion is slow at expanding in new territories and one has to be very thoughtful about how to expand and let your current client base know you are expanding. You should find where the business is and where you can still control it, then build a good base to grow on. If Old Dominion is expanding, they have the right format for that.

{audio:0:24:41} Do they decide where to go, do customers lead them or is it a bit of both?

{audio:0:24:47} It's a combination of both. When Southeastern did it, it seemed to be a good fit for their service area and they were getting requests for it. They were also slow to expand. Many carriers don't do market research well, but Old Dominion do. If they leverage their current client base in a way that they have control over the client base instead of the 3PLs, they could ask, if we open up this state, how much additional business could we get? Most carriers don't; they either expand to quickly increase or it fits into their model.

{audio:0:25:39} Old Dominion buy the land for their service centers which not everybody does, and I hear it's harder to find the land to put these things in, which makes your existing network all the more valuable, especially if you own it. Can you talk about your experience in purchasing and leasing land and how difficult it is to find new locations?

{audio:0:26:07} If they have the ability to own the land, that's a big step up as it's very difficult. Either you buy the land or buy a struggling carrier's facilities because finding land has become worse than it used to be. If they are making land purchases ahead of opening, they are thinking long term which is a great sign.

{audio:0:26:57} They buy more than they need so that they can expand later.

{audio:0:27:11} I worked with somebody who did the same thing, which was very wise.

{audio:0:27:25} The LTL industry is having a great year and there's been a lot of debate and discussion about how long it will last, or if it's permanent. These trends have been in place for a long time and industry operating ratios are consistently down over the last decade, but they've taken a particularly sharp downturn over the last few years and have got much better. How sustainable is the current performance or could this time be more sustainable due to more retail than industrial, which I know in the past benefited from ecommerce? What other factors might be pro or negative?

{audio:0:28:22} I've lived in that for so many years and always thought we were in this for the long run, then something would happen and it dips down. The number of carriers exiting over the years due to poor decisions has limited the options, so it may last longer this time because it's so difficult to enter the LTL market. The main question is, what will the 3PLs do?

{audio:0:29:28} If the cycle is going to turn and it's not going to last, would pricing weaken?

{audio:0:29:39} The pricing will weaken and people will start driving ORs down as they're trying to keep their people working through revenue or laying them off. When things start dropping and people react with poor pricing, the ORs will start coming back down.

{audio:0:30:03} What are the top three things that make it difficult to get into an LTL?

{audio:0:30:11} Land, facilities and driver shortages.

{audio:0:30:23} ODFL has among the lowest turnover of drivers in the industry, and there's a big divide between union and non-union carriers; what is your view on that?

{audio:0:30:44} They will have to hang onto their low turnover, not only in their drivers but also with their leadership people, because there's a gap between the experience that's coming in. They have a good performance-based system and have a reputation for treating staff well. Drivers have a lot more options and control than they ever have, so they will have to keep drivers happy. Drivers have more leverage today because they are so difficult to find.

{audio:0:31:51} The LTL market has shifted to non-union at the expense of union carriers. How realistic of a risk is that going forward that a non-union company could be converted to union, or are the relationships of employees generally good?

{audio:0:32:18} There's a definite difference from employees and drivers between union and non-union, but if they have a good plan to keep them happy, they're in a good place.

{audio:0:32:44} Drivers know this so I imagine they would be reluctant to take on a union?

{audio:0:32:53} That's well-stated; now more than ever, they know and see the difference.

{audio:0:32:58} Is there a risk that one of the top 10 is a weak player who might disappear?

{audio:0:33:13} There is that risk because if a 3PL controls their margins and customer interactions there's a chance one could get purchased by a 3PL, similar to the XPO move.

{audio:0:33:43} How much more concentrated can the industry get? Does the remaining 30% serve a specific niche that won't go away or could it all be consolidated to top 10?

{audio:0:34:10} It could be consolidated. Some of it will turn into a commodity where you only have industrial, home and larger accounts who simply move it from here to there. There will be more specialty the more online retail grows. So I think you may have seen more of a shift as some just hit that commodity. They will specialize more in white glove, home deliveries. If a 3PL owns it, they will set their pricing based on who the best commodity is in one lane. Many carriers are reducing their local account sales call base, because more of it is controlled by national accounts or whoever controls the 3PL.

{audio:0:35:52} Who is the dominant 3PL or who would you say is the best?

{audio:0:36:08} The majority of them are not in the best interest of the carrier; it's about margins, but the top few are doing some things well and do meet a need.

{audio:0:37:07} There hasn't been that much overall capacity added when you look at it?

{audio:0:37:18} XPO are a legit 3PL who are head and shoulders above the others.

{audio:0:37:32} Because they are not so focused on margins, they are better for customers. What other factors would a good 3PL look at besides price?

{audio:0:37:51} Price, relationship and service, not necessarily in that order. A good 3PL will act as a bridge between carrier and shipper. It's common practice to bring on the accounts and tell the carrier to no longer communicate with the shipper. XPO do not do that because their purpose is to be the bridge and grow with you. The ones who do that will separate themselves from the rest.

{audio:0:38:50} How do carriers keep their customers? Are they typically sticky? I know there are some contracts but is it easy to move volume from one shipper to another or would they only review that every few years?

{audio:0:39:13} Everyone will try put the shipper on a multi-year contract; that is the way to go. Some LTL carriers don't require contracts but many of them would disagree with me. If you can rely on your service and price well enough to go without a contract, that says I'm going to build a relationship with you and serve you well enough not to sign a three-year contract. With shippers who are not with you or don't already know you and they have been bitten before by a contract, they don't want to go there. LTL carriers putting them on contract is a big plus. 

{audio:0:40:31} What are those contracts based on?

{audio:0:40:35} They will give you a price for one year, based on your shipping data. At the end of one year, they will review if the price worked for both parties. That is very idealistic because most don't have a good enough system to measure the cost. Some will offer straight tariffs without a contract. If you do that, you can miss lane change fluctuations or business levels.

{audio:0:42:04} Are these contracts exclusive or would a shipper use several LTL carriers?

{audio:0:42:18} With the 3PL, most of them want to make it exclusive to who they bring to you. LTL carriers are not exclusive; they give you the price per lane and the shipper can choose.

{audio:0:42:38} If you’re a Target, you might manage volume between Southeastern and ODFL depending on the location?

{audio:0:42:46} Most shippers do that because they don't want to put all their eggs in one basket. They have a primary and a backup, and have the relationship with Southeastern, AAA and Old Dominion. That way, they have pricing set up for both of them and if service or prices change, they have the option to switch. With local shippers, they could make changes daily. If someone shows up late or gives bad service, I can switch if I still have control of the account. 

{audio:0:43:34} In the industry, are there certain competitive strengths that stand out such as XPO is good at X and Southeastern is good at Y, or are they all viewed as capable?

{audio:0:43:52} No; it's all about service and claims.

{audio:0:43:56} Are those the two big items?

{audio:0:43:58} The service and the claims are big in LTL. The pricing model is somewhat hidden.

{audio:0:44:35} Is there any disruption risk to LTL such as Amazon getting in the business?

{audio:0:44:54} Somebody who has a relationship with one of the 3PLs and can make things transparent will be able to disrupt. A transparent system that shows you all options without a contract and allows you to make a decision while seeing the margins, could turn the tide. 

{audio:0:46:19} Would there be a limit to what 3PLs can do or do they have weaknesses? 

{audio:0:46:39} They could if the carrier started saying no or there was disruption in the system. They're using the same system to give the pricing, but putting a different front on it. 

{audio:0:46:54} Would a very big shipper still use a 3PL?

{audio:0:47:06} It seems they could simply deal with the LTL directly to get the best deal?

{audio:0:47:14} The best way is to go direct, but if the carrier wasn't performing well or there was some complexity, they may want to farm it out because there are big pluses to 3PL. A logistics department working with one carrier may say, there's a lot of auditing of freight bills and a lot of pricing things we have to do, so we will rather let the 3PL handle that for us. There are advantages with the 3PL and some larger ones are already going in that direction. 

{audio:0:47:58} Do they solve the complexity issue by making life simpler for the shipper?

{audio:0:48:06} If you want to set up pricing with three carriers who all ask for information which you don't understand, the 3PL will take care of that. The simplicity could be the disruptor which is why 3PLs started disrupting it 20 years ago, and there is a way to offer even more simplicity to what they have already built.

{audio:0:48:47} Could LTL carriers make their product simpler to respond to the 3PL threat? What was the takeaway from your big study at Southeastern? What were the steps you said they should take to protect or compete better with the 3PLs?

{audio:0:49:09} The carrier saw a transparent TMS system off the back of it. As a lane shifted, they knew where the margins were shifting and they could negotiate with their customers. If you are a shipper who needs warehousing, you could offer them your warehousing partner. Building those collaborations and that network keeps the carrier/shipper relationship solid.

{audio:0:50:32} I thought ODFL had a small LPL within them but I could be wrong. Are there LTLs that have their own internal 3PL?

{audio:0:50:45} Some do have an internal 3PL which serves the same purpose. They either bought or formed one. 

{audio:0:51:06} They have a little window inside how it works, but to your knowledge, has an LTL carrier been successful with that business or are they simply very different?

{audio:0:51:20} Old Dominion need some way of giving customers what these 3PLs are offering. 

{audio:0:51:54} Is it hard to get into third party logistics?

{audio:0:52:02} It's harder than it used to be because they're consolidating so much.

{audio:0:52:23} It seems like if you wanted to get into third party logistics, you had to be willing to make a lot of phone calls and work it for your client to be in the business?

{audio:0:52:35} I've tried to get out but am still drawn into it because shippers ask for my help. We used to joke that someone in their pajamas on a laptop could get customers onto 3PL. It is easy because you could function as an agent for a 3PL, making you a 4PL, and I have some friends who do that. You simply cut an agreement and you have a 3PL. The relationship with shippers is what matters and unfortunately that is shifting away from locally-controlled to national or 3PL, so it's harder to get those. LTL relationships used to be controlled locally.

{audio:0:53:53} Is it no longer like that?

{audio:0:53:54} There is still a fair amount of it but it is shrinking.

{audio:0:54:03} I've heard that port congestion is pushing deconsolidated freight to LTL, causing LTL carriers to move closer to ports, whereas they used to only handle freight once it was many miles inland; that's starting to change. Do you have a view on that?

{audio:0:54:30} What you described is all I would know but I don't have any facts or proof of that.

{audio:0:54:45} Are there any longer-term trends I should know about or keep an eye on that we haven't talked about? Any threats/opportunities that will be good/bad for LTL?

{audio:0:55:03} What are you seeing in the home delivery, there's another term for it?

{audio:0:55:12} I think they call it last mile.

{audio:0:55:16} Online purchasing is causing malls to close down. Whoever is in front of that, because I don't see that slowing down.

{audio:0:55:29} Some experimented with last mile delivery but it's not as profitable. Old Dominion offers that for certain customers, but they don't do much of it. I was shocked recently to see an Old Dominion truck roll down my street, which I hadn't seen before. Maybe in some special circumstances they are doing last mile delivery.

{audio:0:56:04} Many of them will hand that off to cartage agents, depending where they go to. That is different and does not easily fit into the LTL market. They still rely on others.

{audio:0:56:29} Is there any regulatory risk you could point out?

{audio:0:56:35} Not that I'm aware of as I was only in the sales and operations side of things. 

{audio:0:56:45} There could be experiments with autonomous trucks but I guess that will be more long haul first than LTL?

Old Dominion Freight Lines: LTL Pricing & 3PL Threat

Former VP at Southeastern Freight Lines

inpractise.com/articles/old-dominion-freight-lines-ltl-pricing-and-3pl-threat

Old Dominion Freight Lines: LTL Pricing & 3PL Threat(July 30, 2022)

Former VP at Southeastern Freight Lines

Interview Transcript

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