HOPE FOR BACKHAUL? 2004-04-05 (1)

MICHAEL GARRY

Ever since the Motor Carrier Act deregulated trucking in the early 1980s, retailers have had an opportunity to generate both revenue and efficiency through backhauling. It is an opportunity that has largely gone unrealized.

With backhauling, retailers are simply making use of the space in their trailers that becomes available after a delivery is made to a store. Why not pick up some product from a manufacturer on the way back to the retail distribution center rather than coming back empty-handed?

It makes sense, but several factors need to be in place. For one, a manufacturing facility has to be located in the right place. In addition, it requires a manufacturer willing to give up control of making its own deliveries and allow a retailer, or a third-party carrier representing the retailer, pick up its products. Finally, and perhaps most crucial, it requires a manufacturer and retailer coming to an agreement about the allowance the retailer will earn for handling this pickup -- an allowance that could net the retailer extra dollars.

With all of these complexities, it's no wonder relatively little backhauling has gotten done in the last few decades. In 2003, just 15% of inbound trips were accomplished via backhauls, a drop from 20% in 2002, according to the 2003 Food Industry Transportation and Fleet Management Report. On the other hand, the average weight backhauled per trip grew from about 18,000 pounds to nearly 25,000 pounds. "Over the last five years, backhaul has been level," said Richard Kochersperger, director, Food Marketing Group, Wallingford, Pa., who wrote the report for the Food Marketing Institute.

Kochersperger assigned blame to both retailers and manufacturers for the paucity of backhaul. Retailers, he said, focus on outbound shipments to the store, while "inbound transportation [to the DC] is not looked at strategically." Manufacturers worry about retailers not showing up for pickups, or "not coming on time and messing up the dock."

Realizing that retailers and manufacturers are far from in sync on backhauling and pickup issues, FMI and Grocery Manufacturers of America formed a Joint Logistics/Distribution Subcommittee two years ago; it issued a report on the subject last October. The report, "Manufacturer & Distributor Customer Pick-Up/Backhaul Fairness Statement," is designed to serve as a guide for retailers and manufacturers who wish to collaborate constructively on backhaul or third-party pickup arrangements. It is available at fmi.org.

Last month, at FMI's 2004 Distribution Conference, held in Kiawah Island, S.C., the Fairness Statement was one of the main topics of discussion. Two of the key players on the Subcommittee -- Mike Scott, vice president, logistics, Ahold USA; and Dennis Donelon, director, customer service, PepsiCo Beverages & Foods -- gave an update on the report. In addition, representatives of a retailer and two manufacturers who have collaborated using the Statement's guidelines -- Hannaford Bros., General Mills and Nestle USA -- described their experiences.

Scott summed up the backhaul dilemma as stemming from "a lack of trust between suppliers and retailers." Moreover, he said some of the feedback he has gotten on the Fairness Statement suggested the lack of trust persists. "I've been asked by retailers, 'Why doesn't the document force suppliers to do this or that?"' noted Scott.

The intent of the Statement, however, was to address the trust issue, Scott said. "So we decided that neither the retailer nor the supplier should have a hammer in this relationship."

Overall, the Statement encourages trading partners to engage in a dialogue to establish a "fair allowance" for backhaul arrangement and "manage the performance of each party," said Scott.

Todd Schultz, senior manager, customer initiatives, General Mills, Golden Valley, Minn., acknowledged at the conference that his company "needs a large amount of CPU [customer pickup] done by our customers." To that end, General Mills has allotted 10% of its $600 million transportation budget to CPU, he said.

According to Schultz, General Mills has "gotten a lot out of" using the Fairness Statement in concert with Hannaford Bros. to overcome distrust and set allowance rates. The conventional process, he noted, "was not working" and was based on "outdated rates." He pointed out that in making backhaul arrangements with Hannaford, General Mills also established service requirements.

As a result of the initiative, Schultz said, General Mills changed its rates to reflect shipping platform and truck utilization, and it will publish new rates at the end of May. In addition, Hannaford was given the opportunity "to interject 53-foot [trailers] on certain lanes."

Also speaking at the Distribution Conference, LeRoy Katz, customer logistics manager, Nestle USA, Solon, Ohio, noted that "there are good reasons why as manufacturers we want customers to pick up, and there are good reasons why customers ought to pick up."

Katz observed that in the past, a lack of collaboration led to parties holding onto information rather than sharing it. "Once we got past that, it worked out much better," he said. He said another challenge in backhaul has been "blended rates" that include several variables. Thus, Nestle has endeavored to "unbundle" the rates into components such as freight, fuel and manual labor (lumpers).

To its surprise, Nestle discovered there are some cases where Hannaford actually loses money through backhaul, said Katz. "I always thought that the only time a customer would do pickup is when they're making money at it."

Representing Hannaford Bros., Scarborough, Maine, at the conference was Gerry Greenleaf, the chain's vice president of distribution and chairman of the conference planning committee.

About 35% of Hannaford's freight is picked up either by the chain or by a third-party carrier, and of that about a third is handled by Hannaford alone, Greenleaf said. Hannaford's backhaul possibilities are somewhat limited by its location in the Northeast, he noted.

Among the insights Hannaford gained from the initiative is that "the open-book approach does work," said Greenleaf. "You may not agree with the information, but it can be discussed and analyzed. If you open up and truly have a rich dialogue, trust will grow. Allow the information to drive the decisions."

He added that early on, Hannaford and its trading partners agreed they would take a "lane-by-lane approach" as to which party would end up handling the inbound transportation. "Some lanes that had been a good fit for backhaul weren't anymore," he said.

In addition, for lanes where Hannaford uses third-party carriers for pickup, the chain will be adding more 53-foot trailers. That change will "maximize transportation revenue," but needs to be balanced against "additional carrying cost of inventory." For its own backhauls, Hannaford usually uses 48-foot trailers.

Another key learning for Hannaford, Greenleaf said, is that, as often happens with trading partners, its data was out of sync with vendor information. Thus, more frequent reviews are needed.

Greenleaf pointed out that there are many inbound transportation elements, in addition to rates, that can be discussed by trading partners, including on-time delivery, carrier reliability, inventory and lead times. "We might be able to reduce a manufacturer's lead time by a few days by backhauling," he said. These gains could make it worthwhile for Hannaford to break even, or even suffer a slight loss in backhaul. "If you're in backhaul just to find a nickel, you're missing the big picture."

Greenleaf is hopeful that retailers and manufacturers will see the Fairness Statement as a "nice template to create dialogue. I don't see why they wouldn't." Though Ahold's Scott and PepsiCo's Donelon have not gotten much response from the industry to date about the document, Greenleaf said several executives told him at the conference they had not been aware it was available.

Backhaul Trends

Trends: 2003; 2002; 2001; 2000

Percent of trips with backhaul: 15%; 20%; 21%; 20%

Weight backhauled as a percent of weight shipped: 15%; 11%; 13%; 14%

Average weight (lbs.) backhauled per trip: 24,859; 18,081; 20,342; 20,122

Backhaul income as a percent of sales: 17%.; 20%; .19%; .18%

Source: fmi transportation benchmarking report