Expert Insight: Thinking Outside the Box
By David Schneider
Date: May 7, 2009

Supply Chain Perspective: Orders of Magnitude and LTL Shipping by the USPS

New Pilot Program will Offer Opportunity to Some Shippers

There is something to be said about being fashionably late. For parties, it means no awkward making too much small talk waiting for things to warm up; by the time you arrive, things are swinging. 

The same can be said for “fashionably late freight." If you are shipping to a bunch of crazy retailers who want you to hit a narrow delivery window, the following are not suggestions that you should take. But if you are not pressed by the “need of speed,” there are domestic freight options that could help you be profitable. 

A new option appeared in the form of a request by the United States Postal Service (USPS) in a request to provide “LTL like” services.

USPS now does LTL! Well, sort of. The United States Postal Service will move shipper pallets in the excess capacity of the truckload network that ties over 440 Sectional Center Facilities and 40 bulk mailing centers. USPS is not in the freight P&D (Pickup & Delivery) business, so the shipper has to deliver the pallet to the SCF at origin and pick up the pallet from the Destination SCF.

Current LTL service providers, like Yellow Roadway or ConWay don’t need to worry, since so many small shippers cannot make the P&D to the Postal Service. It is a 24-month market test, but we should expect competitive rates, since the regulatory filing states that the service would be at “risk of losing business to other firms in the LTL shipping space” if it was not competitive.  But the question is - does this new entry really compete with LTL services? I think not as much as it competes with, or could help freight consolidators. So how many shippers will use this “space available” service?  A better question is - why? 

Let’s look at that first.The USPS market test is a way for the Postal Service to create a collaborative transportation network to help “lift” some of the cost burden off of the required network. Last year, I had a long conversation with a “senior” USPS manager of the SCF network operations about the growing unused capacity in the SCF line haul network. We talked about what some other private and dedicated fleet operators were doing to fill unused capacity. 

What became clear in the conversation is that the USPS is, in reality, a huge, time-sensitive, pool-point consolidator. Consider there are over 480 “nodes” supported by over 220,000 lane pairs, the USPS has a huge network. UPS and FedEx are simple “pikers” when compared to the size and scope of the USPS network. Consider how parcel and printed matter mail move through the USPS system and the parallel is accurate. 

While there is a volume of first class mail that does move through the “air," much of the mail still moves on the “ground." Bulk mail, magazines, newspapers, catalogs, parcels, oversize envelopes, and some 1st class moves in the SCF line haul operations.  That is a lot of mail. That volume is falling. And the mail still has to move on time, so the SCF line haul network has open capacity in it. The trucks, operated by different contract carriers, run as a scheduled service with specific capacity from point to point.  Like the airlines, the truck runs from SCF to SCF, full or only half full. And they are running more often half full in more and more lanes.

The Numbers are Daunting

he scope of the numbers is a bit daunting. Assume that each of the 220,000 lanes has at least one truckload in it, and that the loads have 5 empty pallet positions, 11.1 MILLION pallet positions per day of capacity.  That is a lot of capacity to fill. In general, freight commerce, larger shippers have been using “pool point” consolidation for a long time.  There are service providers that operate a regional LTL network that picks up freight for a collection of customers (retailers) and builds full truckloads that will ship to the customer DC. 

Target has an extensive regional pool-point program that is executed by four regional consolidators. Target has many distribution centers, and even for its high volume it orders in LTL-sized shipments to the DCs. If all that volume flowed via LTL carriers, it would be very expensive, and could “choke” the inbound DC operations. But by picking up all of the company demand from a vendor, de-consolidating and reconsolidating the freight into full loads by DC, Target gets to hold down costs, and more importantly, knows what is on each inbound DC truck. The bugger of a consolidation network is that there is “waste” in the network, even a really well run network that has lots of volume to work off of. 

The “savings” of a traditional “pool point” consolidation depends on the consolidated load being big enough, that there is enough freight in the consolidation to “spread” the cost across all of the freight so that it moves at a lower cost per shipment than if shipped LTL. Target is large enough to make the concept work.  It is an issue of Order of Magnitude, a Target or a JC Penny has the freight volume to make “pool point” work. But smaller shippers do not have the order of magnitude in volume to make the program work, and have to turn to traditional LTL carriers to make the freight move. It is easy to run a “pool point” network if the movements are insensitive to the transit time.  Don’t have a full load going to that destination?  Hold the truck and see what arrives into the lane tomorrow.  Sometimes, it just takes a day and a full load develops.  Sometimes, it takes a few days.  If there is not enough volume to a destination node, a week can go by before any more cargo materializes for that lane.  Good volume fixes those issues, and if there is no hurry to move the freight to destination.  If there is time, the trailer can sit and wait until it is full. But if there is any sensitivity to the transit time, or you have an operation where management wants the dock cleared and all freight moving at the end of the week, you are going to have empty line haul trucks.  That “operative” cost for the line haul cost for that freight goes up.  You might not lose much, or you might lose more, all depends on the cost of the lane and how much empty capacity is in the lane.

Just as private and dedicated fleets are selling backhaul space at a discount to market to fill unused capacity; the USPS is working to find firms willing to collaborate to fill the unused line haul capacity.  There are conditions that the shipper will have to accept for that “economical” LTL line haul service.  The shipper needs to perform the P&D services, and produce the “Bill of Lading” for the full transit of the shipment.  Another issue is that the freight may not move if space is not available. 

But, in the tight world of today, where freight volumes are shrinking due to decreased demand, the USPS collaboration model may be just the ticket for some smaller shippers that cannot afford to run a full-scale consolidation program.  Small shippers that need to move LTL loads between distribution centers could use the USPS program.  There is a challenge to make the collaboration work, just as there is with any collaboration.  Creative and innovative management processes will get created, and perhaps the  USPS market test will last beyond the 2 years. 

Time will tell.

Agree or disgree with Schneider's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

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About the Author
David Schneider is founder and president of David K. Schneider & Company, a supply chain and logistics consulting firm. Prior to that, he was Director of Logistics for Pep Boys Auto and a consultant at Keough.

Schneider Says:

What became clear in the conversation is that the USPS is in reality a huge, time sensitive, pool point consolidator.

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