Last year, U.S. Army Chief of Staff Gen. Raymond T. Odierno wrote about “The U.S. Army in a Time of Transition” for Foreign Affairs magazine. He outlined how “the service will have to adjust to three major changes” of declining budgets, shifting emphasis to Asia and a need to “shape the strategic environment.” The transportation industry has faced these challenges for years.
After deregulation, carriers had to balance their supply of capacity with demand for their services. Revenue growth from new business was always attractive, but often unprofitable. Frequently, this business was only attainable through aggressive pricing. As a result, profitability grew much slower than revenue. Ultimately, success required cutting costs.
In Washington, both political parties have embarrassed themselves by first creating — and then denying their role in — the budget sequester process. A need to reduce spending was the basis for the 2011 budget deal between President Obama and Congress. The agreement mandated painful spending cuts in the absence of a budget deal. This political theater ended with the kerfuffle over air traffic controller furloughs — and resulting flight delays. After less than a week, sequester cuts in this area were eliminated.
This series of events reminded me of rearguard opposition I saw to spending cuts 30 years ago. Frequently, spending cuts prompted large-scale headcount reductions. When called on for job eliminations, most managers took a pragmatic, if painful, approach to achieving them. Others treated personnel cuts as a game. Rather than searching for ways to minimize disruption resulting from job losses, they sought the opposite. By creating a chaotic situation, they hoped to affect a reprieve from the mandate. (Such was the intention of cutting air traffic controllers last month.) Frequently, this was successful, but many obstructionist managers over time found their own jobs targeted for elimination.
Companies also improved their financial results by eliminating capacity in other ways. Many railroads reduced their infrastructure by shedding low-volume lines and passenger operations. Shippers outsourced warehouses and dedicated fleets. The results were astounding. Not only did the leaner companies prosper, but new industries — short line operators and contract logistics providers, for example — also developed where none existed before.
In some cases, this required abrupt reversals in strategy. From 1976 through 1980, Conrail, as part of its physical plant rehabilitation strategy, added capacity in the form of a third and fourth track to its mainline between Pittsburgh and Harrisburg, Pa. In 1981, facing dismal financials, it changed its strategy to be one of rapid infrastructure retrenchment. Accordingly, it removed one of its recently constructed mainlines.
Neither strategy was wrong; they were both right for their specific time. Transportation companies today are constantly re-evaluating strategies for possible improvement. Examples include network design (hub-and-spoke or point-to-point), procurement (build, buy or lease) and production (in-source or outsource).
Technology has been a critical component of progress for 30 years, but it wasn’t always a standalone solution. Although improved communications technology allowed for many local offices to be consolidated, most early efforts failed because reductions in personnel didn’t line up with expectations for productivity. Success was usually the result of effective business process engineering of automation projects, not mechanization of the status quo.
Technology changes not only are increasingly large, but they also can change quickly. Larger ships have changed the economics of liner shipping. The first lines to acquire 8,000-TEU vessels had a cost advantage over their followers because of an increase in the price of steel.
Carriers that waited to acquire 12,000-TEU vessels, however, have an advantage over the first movers because of the drastic improvements in engine technology in just two years — and the newer vessels cost much less to operate.
These examples are a small sample of management decisions with major impact. Our industry requires significant investment — and frequently results in profit margins that are less desirable than we’d like. Improvement is a constant mandate. The gap between stretch goals and arbitrary targets continues to shrink, and may differ depending on who is evaluating it.
For the freight transportation industry to grow, we must strive relentlessly and responsibly to improve — ideally in a balanced fashion. Regardless of setting, we all must navigate political challenges to achieve a beneficial outcome.
The public sector used to set the stage. Now it might fall to the private sector to demonstrate to our elected leaders the path forward.
Ted Prince is principal, T. Prince & Associates. Contact him at email@example.com.