Retailers, Manufacturers Fighting Transit Deadheading.

Rising diesel fuel prices and a shortage of truck drivers has consumer goods and food manufacturers refocusing on the chronic deadheading problem.

“Deadheading” is a trucking industry term used to describe trucks traveling back to a manufacturer’s distribution center without any goods after delivering shipments to a retailer.

“It’s an empty truck and extremely wasteful,” says David Goodson, senior manager in KPMG’s Audit & Risk Advisory Services practice in Minneapolis. “A shortage of drivers and the increase in fuel costs are making companies look for ways to deal with inefficiency.”

Trucks are empty about 30 percent of the time for private fleets operated by shippers, and just a slight increase in “load optimization” can have a huge effect on the bottom line, says Gary Petty, CEO and president of the National Private Trucking Council, a trade association representing manufacturers, distributors and retailers.

“The trend is not just about moving as much product as you can, but selling the extra capacity to the market to make revenue,” Petty says.

Deadheading has long been an industry problem, but rising fuel costs are highlighting the issue. Diesel prices have risen 43 percent in the past year to average $2.19 per gallon, according to the Energy Information Administration, a division of the U.S. Department of Energy.

There is also a shortage of experienced drivers: The industry needs and additional 5 to 8 percent more drivers, and sometimes the shortage means goods aren’t being moved as quickly as they should. “During peak season, some orders are getting shipped late, leading to a build-up of two to three days,” Goodson says. “This can add to the out-of-stock problem for retailers.”

The Grocery Manufacturers of America (GMA) estimates that consumer products manufacturers and the retail industry lose $6 billion a year because items aren’t on store shelves.

While retailers and manufacturers acknowledge the importance of transportation issues, the financial aspects aren’t always so clear-cut. Large food and consumer goods manufacturers usually own their own trucking fleets. While a fleet is expensive to maintain, manufacturers like to maintain control over shipments.

“Who pays for the shipment, the retailer or manufacturer, depends on the negotiations,” says Jonathan Leal, founder of Milo’s Whole World Gourmet in Athens, Ohio. “If the distributor picks up the shipment from us, we can negotiate a discount [on the price of goods.]”

When shipping goods, retailers and manufacturers sometimes battle over control, says Richard Kochersperger, a professor at St. Joseph’s University in Philadelphia. Both parties want to make sure their inventory gets where it should be on time, he adds.

A delay in picking up shipments has a domino effect on the entire supply chain, Kochersperger says. Despite efforts to computerize the process, it’s still complicated, he adds. “There are thousands of distribution points so the potential for errors is significant.”

Retailers and manufacturers also want to oversee the quality of the shipment, as well as minimize delays, which can cause havoc in the supply chain.

Part of the problem with food and consumer goods manufacturers, KPMG’s Goodson explains, is the fact that they aren’t in the trucking business. “This isn’t their core business, which accounts for some of the inefficiency,” Goodson says. A trucking company is more aggressive about looking for goods to bring back on their return trip, he adds.

Large food and consumer goods companies need to consider transportation challenges more carefully if they’re going to cut freight expenses and increase revenue by backhauling, says Bruce Barren, former CEO of two trucking companies, including Four Winds Enterprises. Backhauling is the process of finding goods to ship on a return trip to a company’s warehouse.

Independent contractors that truck material from one location to another are highly motivated to backhaul, says Barren. Large manufacturers have to start acting more like independent contractors if they are going to reduce the waste.

“With rising gas prices and the increased costs of making food and consumer goods, manufacturers are looking for ways to increase profitability,” Barren says. “Although freight costs are less than 10 percent of a manufacturer’s expense, it’s a great area to find ways to reduce expenses and increase profits.”

Manufacturers are also looking to reduce the distance between warehouses and retailers to reduce deadheading, Barren adds.

John Rittenhouse, National Practice Leader in KPMG’s Operations Risk Management practice, says companies such as Wal-Mart Stores and Target Corp. are building additional distribution centers closer to their stores.

“Rather than looking at [transportation] as an expense, it’s an opportunity for grocery manufacturers and retailers to generate revenue.” he says. “A company doesn’t want deadhead miles because it’s not generating revenue. It’s a waste of space.”

Companies such as Ben & Jerry’s and McDonald’s make use of backhauling by ‘piggy-backing’ on other firms’ trucks. For example, McDonald’s sends recycled polystyrene to other locations by piggy-backing with a recycling firm’s trucks.

The trucking industry is moving toward compensating “drivers for hire” or independent contractors based on productivity, rather than the miles and time traveled, Petty says. “Companies are compensating drivers on doing more in less time. This way the driver has an incentive to remain focused and not get distracted.”

May 31, 2005
By Kathleen Kiley, Managing Editor, Consumer Markets Insider

Courtesy of http://kpmg.com