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Talking Freight

Perspectives from Freight Transportation Providers: Air Cargo and Logistics

October 20, 2004 Talking Freight Transcript

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the talking freight seminar conference call. I will now turn the call over to Jennifer Seplow.

Jennifer Seplow:

Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Seplow and I will moderate today's seminar. Today's topic is Perspectives from Freight Transportation Providers: Air Cargo and Logistics. Please be advised that today's seminar is being recorded.

Today we'll have two speakers - Libby Ogard of Prime Focus and Herb Parr of DHL.

Libby Ogard is an independent consultant working on Outsourcing, Asset Management and Economic Development projects. She is also the President of the Council of Logistics Management's Northeast Wisconsin Roundtable.

Prior to her current work, Ms. Ogard spent 9 years at Burlington Northern Railroad performing a variety of operations, transportation, sales, marketing and business planning activities. She also spent 8 years at Conrail managing the West Region Intermodal Sales group. Customers included APL, KLine, OOCL, Hyundai, Hanjin, NOL, IMC's and perishable intermodal operators. She also spent 7 years at Schneider National where she was responsible for designing the build out of the Truckrail program, launched Optimodal the non asset based IMC, managed the Intermodal Customer Service area and coordinated the core carrier drayage partnership program before she became General Manager Retail Sales Division, with Target, Family Dollar, Home Depot and Walgreen's as primary customers.

Herb Parr is the Vice President of Ground Network Transportation Planning for DHL Express (Americas). DHL is the premier Express Logistics Company operating in more than 220 countries with 160,000 employees. In his position, Mr. Parr is responsible for the Strategic Planning (ten years out) of a fully integrated ground line haul transportation network. He is also responsible for efforts to plan future cross border ground linkage between the U.S., Mexico, and Canada. Presently, transitioning the U.S. ground line haul network from a centralized design to a National Hub and Spoke System.

Mr. Parr has served in various Transportation and Logistics positions for the past 37 years. The first 27 years involved a variety of worldwide inter modal transportation/logistics assignments with the United States Army Transportation Corps. The most recent ten years consisted of Logistics jobs with several Global Transportation Air/Ground Corporations.

I'd like to go over a few logistical details prior to starting the seminar. Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. The Operator will give you instructions on how to ask a question over the phone during the Q&A period. However, if during the presentations you think of a question, you can type it into the smaller text box underneath the chat area on the lower right side of your screen. Please make sure you are typing in the thin text box and not the large white area. Presenters will be unable to answer your questions during their presentations, but I will use some of the questions typed into the chat box to start off the question and answer session in the last half hour of the seminar. Those questions that are not answered will be posted to the Freight Planning LISTSERV. The LISTSERV is an email list and is a great forum for the distribution of information and a place where you can post questions to find out what other subscribers have learned in the area of Freight Planning. If you have not already joined the LISTSERV, the web address at which you can register is provided on the slide on your screen.

If at anytime you would like to zoom in on the slide that is showing on your screen, you can click on the zoom icon at the top of your screen. It looks like a magnifying glass with a plus sign in it.

Finally, I would like to remind you that this session is being recorded. A file containing the audio and the visual portion of this seminar will be posted to the Talking Freight Web site within the next week. To access the recorded seminar, please visit Talkingfreight.webex.com and click on the "recorded events" link on the left side of the page and then choose the session you'd like to view. Due to the size of the file, recorded files are available for viewing/listening purposes only and cannot be saved to your own computer. We encourage you to direct others in your office who may have not been able to attend this seminar to access the recorded seminar.

The PowerPoint presentations used during the seminar will also be available within the next week. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.

At this point we're going to hang on a few minutes until 1:00, just to let others join in. At 1:00 we'll start with the first presentation of Libby Ogard. So everybody will be put back into hold for a few minutes and at 1:00 we'll start with the first presentation.

Operator:

All right. Ladies and gentlemen, thank you for standing by. Welcome to the talking freight seminar conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. I would now like to turn the conference over to Jennifer Seplow. Please go ahead.

J. Seplow:

Thank you. It's now about 1:00 and I see that many others have joined us, so we'll begin today's seminar, which the topic is perspective from freight transportation providers, air cargo and logistics. Our first presentation of the day will be that of Libby Ogard of Prime Focus. Libby, you can begin when you're ready.

Libby Ogard:

Good morning. Thank you for listening in to talking freight today. I plan to go over a brief industry overview of third party logistics. I think it's always helpful to start with a few definitions and these definitions were pulled from the council of logistics management website. We look first at third party logistics and I wanted to note that the definition indicates that outsourcing involves all, or much of what a company's logistics operation is planning to do, to a specialized company. When we look at the provider role, we get a much more richer description of what kinds of things are really done by Third Party Logistics firms. Usually providers offer multiple services. Usually these services are bundled and they link suppliers to manufacturers. Often they manage the transactions across the entire supply chain, from raw materials to manufacturers, from manufacturers to distributors and distributors to retail outlets and to consumers. Typical functions 3PL's perform include transportation services, warehousing, cross dock, inventory management, packaging and freight forwarding services. So why outsource? According to logistics management magazine, roughly 80% of the top U.S. companies operate on a global scale. In the map on this slide the blue boxes represent production locations and the red boxes represent merchandising or service locations of providers to the retail industry in the global environment. Freight flow patterns and transactions are incredibly complex, outsourcing these international trade and customs issues is a growing 3PL segment of business. The distribution patterns in the domestic U.S. isn't really a lot simpler, although the documentation is easier.

In this is representative of a domestic retail supply chain. The blue boxes might represent a fashion supply chain. The yellow boxes might represent an international cross dock mixing facility. That is where international containers come to a port, international containers get stripped and then the imports are restuffed into domestic containers for inland distribution. The red boxes would represent regional distribution centers that would support 300 or more stores. Stores Magazine reports that WalMart now has 4,906 stores and is growing at a 4.5% annual rate. Target supports 1500 stores and is growing at about a 5.3% rate. K-mart has about 1500 stores and Walgreen's has 4,227, growing at 8.9% rate. All of these retailers use a similar inland distribution program where international and domestic goods are mixed at regional distribution centers and are then distributed to stores with that region. So as you can see, freight may pass through your community several times before it finally comes to rest in the customer's cart.

Today's leading fortune 500 companies know profitability depends on speed, reliability and visibility. This collection of ads represents these themes and shows what many of the 3PL providers are focusing on these days. Speed is an important. Many of the retailers are really competing for shelf space on a day-to-day basis. C.H. Robinson wants to know if your supply chain is taking you on a wild ride? They may be hitting at on time reliability with that comment. FedEx is highlighted in the middle advertisement, this details the type of complexity that taxes, duty and customs require of the logistics manager as they perform their day-to-day functions. The last ad focuses on the supply chain visibility issues. At the most recent Council of LogisticsManagement annual meeting in Philadelphia, supply chain visibility was one of the key program topics. Many companies report that it is more difficult to see where the freight you're shipping is going to, than to identify when inbound shipments will actually arrive. These supply chain visibility concerns often say a lot about who controls the freight and the terms of sale.

Outsourcing trends, this slide highlights an industry survey done by AT Kearney here several years ago. If you look at the reasons for outsourcing, financial savings and cost avoidance are the leading motivators to use a third party logistics firm. Flexibility, improved service and the access to additional labor or talent pools are all contributing factors to the growth of the 3PL industry. The next slide showing Outsourcing trends highlights a survey recently conducted by Armstrong & Associates. In this study purchasers of 3PL services were asked what kinds of savings they had realized by function after they had been in the relationship for several years.; As you can see, as the industry is maturing, there are more and more real savings being realized across all of these distribution and logistics functions.

In this pie chart 3PL global gross revenue by industry is shown. Technology and automotive sectors are leading in the use of 3PL services due in large part due to the cost of inventory. Those industries with the highest product costs and the need for just in time parts often rely heavily on 3PL services to coordinate and ensure lean manufacturing demands are met.

Who are the customers? If we look at the costs broken down by both global costs and domestic costs,we see that the industry is growing. Global costs are about twice as much as the domestic costs. As you look across the industry sectors, you'll see the sectors with dominant global players are spending more for logistics than domestic users,. In another study recently completed by Armstrong & Associates shows if you are a large company, the chances are that you're using 3PL services is very high. If you look at the small and middle tier companies,their use and reliance on third party logistics services is growing at a faster rate than fortune 100 companies.

If we drill a little deeper into who's really buying the 3PL services and what kind of services they're buying, we find by customer they're using a lot of different 3PLs to do a lot of different functions. This may not be such a startling number if we look at the services and functions 3PLs perform. This slide shows the types of 3PL services that are currently being purchased. Warehousing, value-added services and transportation management are the three largest categories of services that are being purchased from 3PLs.

Who are the top providers? This list was compiled and ranked by 2003 annual revenue. The following top 12 providers are dominated by international companies. I'd like to spend a moment on each. Excel is the world's largest 3PL and divides their revenues between transportation management and contract logistics. Their emphasis is on a lead logistics and many of their customers are in the automotive business. The second 3PL is the world's largest ocean freight forwarder and fifth largest air freight forwarder. They are broadening their contract logistics function with further acquisitions and they're growing at an aggressive rate. Schenker is ranked no. 3. They're a key transportation and distribution company in Europe. They built their business on shared networks globally and are heavily reliant on partnership alliances. The fourth one, DHL, (our next speaker) has a strong brand in Europe and Asia and they're building on their Airborne acquisition in the U.S. P and O Nedloyd is focused on the global container logistics and are in the warehousing business. No. 6, T & T is the world's largest automotive logistics 3PL and they're also the master of value-added warehousing and manufacturing support with rapid expansion in Asia. Panalpina is a freight forwarder primarily with air freight operations and an increasing ocean forwarder business unit and line of project logistics. UPS is the largest North American based 3PL with revenues fairly evenly divided between U.S. and international operations. Nippon Express is a freight forwarder with procedures for handling a lot of global freight primarily in the global market. C.H. Robinson, earns the majority of their revenues from the food and beverage business sector. As you may know, they have a large refrigerated division and they're growing transportation operations in Europe and Brazil. Menlo is a solid, supply chain management company with a lot of experience in finished goods and distribution management and NYK has three business units covering retail, manufacturing and intermodal with their value-added forwarding and warehousing operations business.

When we look at 3PL's and the development of a 3PL relationship, there are several -contracting principals to keep in mind. Here is a list of Key Commandments or things for companies and providers to discuss before they enter into a relationship. It's important to enter into these agreements with a strategy for outsourcing. What are the benefits and what are the goals and objectives that you're trying to achieve by outsourcing a segment of your business to a third party provider? There needs to be a rigorous provider screening and selection process. There are many providers out there with many different skill sets and competencies, but it's very important to be an informed buyer in the process. Clearly defined expectations make it much easier to understand when you have achieved your objective or when you may be falling short. Develop a good contract with expectations is important. A living document is what many users seek, with clear understanding and identification of performance measurements and task responsibilities. Establish sound practices and procedures, identify and avoid pitfalls and points of friction, communicate effectively with your partner. Communication is really what helps make or break the relationship, and the transition between an in house function to a Third Party Provider who is managing the operation and the data is a critical process. These are some critical interfaces that really need to be managed closely as the transition occurs. There needs to be a reward for the provider and some type of motivation. It's important for both provider and user to be a good partner in the process.

J. Seplow:

Thank you, Libby. Again, I do want to encourage everybody if they do think of any questions to type it into the chat area. In just a moment I'm going to turn the presentation over to Herb Parr, who will be speaking about DHL's strategic redesign. Herb, if you just give me a second here and I'll set it up for you. A little bit of a delay here in turning the presenter role over to you. I'll be ready in just a minute.

Okay, Herb, you can begin when you're ready.

Herb Parr:

Good afternoon. It's my pleasure today to be able to speak to you about the strategic redesign of DHL's ground network. As you can see by the first slide, we're an intermodal company. We are one of those global companies that Jennifer talks about which is a good segue into my presentation. As I speak more in detail about the way we're organized, you'll see that we are a user of third party logistics for common carriers. We essentially have air, ground, and ocean transportation. I'm going to speak today about the ground network design. The purchase and integration of Airborne took place in august of last year. This slide shows a tractor-trailer moving through what we consider to be the white space, which is probably Montana or Wyoming. Here's the purpose today. I would like to discuss exactly how we design a transportation network that's national in scope and transition it from a super regional ground network to a hub and spoke network, which is very competitive with FedEx and UPS. They are our two major competitors in the package business within the United States. And, also show you how we redesigned the network from a ground network that evolved from an existing legacy airborne network, to a full fledged national network that covers all the 42,000 zip codes in the lower 48 states. This is the agenda. Who's DHL? I think you've seen a lot of good advertising in the last several months. In fact recognition for DHL has gone from 8% to 28%. This resulted from a significant investment. Again, when I speak about DHL outside of the United States,, we have more business than federal express and UPS combined in the worldwide express network. We are no. 3 at 8% of the market. FedEx and UPS have 80% of the workload. So they're a significant duopoly. In Canada we're no. 3. Throughout the rest of the world, we're no. 1. I want to talk about the design of the network which exists today and how we're going to change that. Talk about the transportation factors that impact you and us and the economics of transportation involved in making that transition. Talk about the methodology we follow to optimize and the type of modeling that we use to optimize the network. Also, I will discuss the design of the hub and spoke network and economic reality of competing in a very competitive marketplace in the package business. And, I want to address the use of double trailers. 45 and 48-foot trailers and 28-foots as well as the impact of the existing interstate and turnpike network that Dwight Eisenhower helped design in 1950. And a little bit of help possibly that we could have from those in the audience today, at least understanding some of the challenges that we have and then summarize what it is that I set out to state in the presentation.

DHL was founded in San Francisco in 1969. So we recently celebrated our 35th birthday. We have 8% of the market. We offer express service, ground deferred, residential delivery at-home services. We're the no. 1 provider in the world in more than 220 countries that we operate in. We have about 38% of the global market share. The only two countries that we don't enjoy significant market share is in the United States and in Canada. We operate in the United States with 32,000 employees. We have 160,000 total employees and we are a $25 billion company. We also own a freight forwarder and an ocean freight company as part of DHL. We also have own several other companies throughout the United States and Canada. We expanded the size of the company. In the four years that I've been with the company I've seen it grow from about 60,000 to 160/ 170,000 people, almost double in size. Our motto is we move the world. When, we purchased airborne express in the United States, that took us to no. 3 in the U.S. We move about 386 million packages a year in the Americas. And, what I do in my job and my group of people is we design transportation ground deferred networks for the Americas from Canada down to Brazil. Today I'll speak about the United States.

This is the legacy airborne network. The center of gravity really was in Wilmington, Ohio. As you can see our network was always intermodal in terms of connecting aircraft and interhub truck moves. We had product operating out of Wilmington that moved directly point to point via by pass operations into California and the western states. But, a lot of this area that we call the white space, was in fact covered by air with our excess air capacity. And, now we are shifting this center of gravity to ensure that we have a national system throughout the United States. You may have seen some of our announcements. This past Monday, we announced the opening of a hub in phoenix. On the 22nd of October we're opening up a hub in Memphis, this Friday. We have opened up hubs this past month in salt lake city and Denver. At the end of this year, DHL will have 19 hubs and operate 442 service centers. We cover about 285,000 truck lanes within the United States. We service all the zip codes. We're shifting from a central hub to a fully operational hub and spoke network. Our business plan calls for an investment about 1.2 Billion Dollars in the Americas. We are very serious about the growth and the opportunities within the United States and the Americas. DHL is divided into three geographic areas. The Americas is one-third of the world. Western and Eastern Europe and Africa another third. And, as Jennifer mentioned, we have very strong presence in the far east, particularly in china.

Why are we transitioning? We need to be competitive in the marketplace and we need to have full ground coverage throughout the United States. A super regional operation will not put us in first place, which is our goal. So we need to develop and make capital investments in our national network so that we can better serve our customers and compete in the marketplace. In line haul distribution, the more product density that we have and the bigger scale, the more profitable we can be. This results in better profit margin. With these investments, we can better serve our customers by more direct point to point transportation. The customers demand a transportation network that is competitive throughout the United States and meet or surpass the industry standard. The standard for the package industry in terms of information, on-time service, is probably one of the most demanding industries that exist in today's market place. Under the old system design, our product moved to Wilmington and back out by truck. Since we decentralized our region hubs, we have more one-day markets. We previously used excess air to move a lot of our product and we're now moving that product by deferred ground. We still have a rigorous air network but we're mostly moving our air product on air now and ground on ground transportation. So we're expanding the network throughout the United States. We look at density, we look at the interstate road connectivity, the industry transit times, the road speeds. We select the optimal location for regional hubs through location analysis. I'll speak to some of the strategic tools that we use to make those analyses. We factor in labor constraints, whether it's favorable labor, traffic and weather patterns and the proximity to airports and determine our final location, We can do this because we do have good coverage throughout the United States and airports. Here in Cincinnati where I'm located is our air hub for the United States. We are transitioning from Cincinnati to Wilmington, which is a 2200 acre airport, Wilmington is the largest privately owned airport in the United States. Our international connectivity is Brussels for western and eastern Europe. Again, we operate air operations throughout the world in 220 countries. When we shift to a hub and spoke network we'll be competitive within the U.S. industry, and take full advantage of the kind of scale that comes with consolidation, But, we do look closely at the density over these various lanes on the 265,000 lanes that we have. And, we use the interstate road connectivity because we're interested in being very competitive on transit days.

In the past, we pretty much determined our road network by manual trial and error. With good logic and gut feeling and basically looking for the metropolitan statistical areas. Since than we have become much more sophisticated in the use of our modeling tools. We use a strategic and a tactical modeling tool. The strategic tool essentially uses the evaluation criteria that we populate from the database. We take a look at the existing distribution patterns of the product from origin to destination throughout the United States. We flow that product over 265,000 lanes. Based upon the flow of that product, we determine where to locate our hubs and where to locate our service centers. So the output of the strategic tool is both optimizing the location of where we place these hubs and service centers and at the least cost or the best cost solution. While giving us the best competitive time. In the U.S., we essentially take the distance within the United States, we divide it by 48 miles per hour because we design our system based upon that rate of speed, we take into consideration the windows to process the product, the packages at each hub or service center and that gives us a one to five-day deferred product. This matches our competitors. So within the United States in the package business, from end to end from the key west, Florida, to Spokane, Washington, we should be able to move the product roughly within five days. Notice when I say 48 miles per hour, that's the movement rate that we use to design our network. We don't design our network at 70 miles per hour or 60 miles per hour. We're very concerned about safety. We design at a 48 miles per hour. We also use a tactical modeling tool, that provides our routes and our schedules. So we route 265,000 individual lanes as well as produce the cut off schedules, The covers the time when the product arrives at the various service centers or until it departs from the first mile pickup to the last mile delivery. By equipping our analysts with this kind of information, we're able to make decisions on placing the hubs, what truckload requirements will be needed, the hours of operations, the cost benefit and safety analysis. We optimize the routing and scheduling. We take a look every quarter when we update our electronic service directories to see how we perform compared to FedEx and UPS. That information is available to our customers on the website, as well. Customers know immediately which service provider is the most competitive in the package industry for certain specific lanes at a certain cost.

We currently use transportation planning factors that are shown here. It's important for me to point out, that we do not move heavy loads over the interstate system. The small package business cubes out before it weighs out. Most of our packages truck loads will be in the -- 18,500 pounds load range. We usually move 2800 to 3200 packages in a 53-foot trailer. Right now because we don't have significant capacity in terms of density, we only have 8% of the market share, Because of this, a lot of our product is consolidated in the trailer. If you open up the tailgate of the trailer, you would see loose loads, truck and air containers, and 40 by 48-inch pallets. Also, the truckloads will vary a great deal in cube space. The loads will cube out before they'll ever weigh out. As a result, we don't damage much of the highway systems because of these low weight factors. Again, we use 48 miles per hour as a planning factor. I point that out because of our concern for public safety. We outsource via a contract with ABX air, airborne, who in turn contracts about 160 different carriers throughout the United States. Right now we operate about 1700 to 1800 truck runs a day using existing truck capacity. In other words, we do not have any tractor-trailer operators that are employees of DHL. It is all outsourced through third party providers. through ABX air, I manage that contract. By way of review, we dissect the United States into five transit days and we operate mostly at night. We operate generally from 8:00 at night to 8:00 in the morning. For the air package movements, if you look at the airports within the United States, you would see that our prime operating hours are from midnight to 04:00 A.M.. Because of this, we're not using a lot of the driving space that non-commercial transportation would use. By operating at nighttime, we reduce the opportunity for any safety conflict. If you think back to what you earlier in the presentation, you can more easily see how we completely redesigned the network by adding the 7 new hubs. Also, with 19 hubs, we successfully created a land bridge so the center of gravity has moved from Wilmington to the Western Region Hubs.. We have a major center of gravity shift ton salt lake city. Phoenix feeds into it as well as Los Angeles, California and Washington state. Then the major roads that we use are within the southern and central range. We operate 19 hubs. FedEx has 24 approximately and UPS has approximately 28. Eventually we get to a point of law of diminishing returns where more than 28, 29 or 30 hubs in a hub and spoke network, would actually cause a loss of service transit time. This is how our network is being redesigned. We still have intermodal connectivity with aircraft as well as the interhub truck moves. We transit over these lanes to various hubs that are shown in blue. You can see the service center dots, which there should be more than 445 there. You can see the location of the 19 hubs. Again, without the lines it shows you the blue and the yellow dots. So we cover all the zip codes in the United States, Actually in Montana, Wyoming and South Dakota you see a lot fewer service centers.

Again, economic reality suggest that density is our best friend. This also occurs within the air passenger industry or air cargo. Package volume really drives where we move the product and how economically successful we are. Success is translated by a high marginal rate of return in terms of revenue generation. Each added package that we move over the 265,000 lanes should decrease operating unit cost. The unit cost for ground, of course, is much less than for air. So the more product that we can put on ground to meet one-day footprints, the more economic advantage that we have. Current loads that we talk about are either loose loaded, what we refer to as brick loaded or a combination of pallets and roll on, roll off containers. Roll off and roll on containers takes less labor at the various hubs and sorting facilities but we don't get a very good load factor. So if you're the U.S. postal service, the load factor could be 70% or less because they move a lot of your product in eastern regional mail containers. Or, if you're UPS or Federal Express, they use double trailers that have 15% of the product in the bellies with embedded rollers. As a result it is possible to achieve a 95% load factor. When I'm using 53-foot trailers, with a combination of these loads, my load factor is much less. It's in the range of about 60%. That drives down our economic efficiency because we still use one prime mover. This is the same power, the same tractor that is required to move one trailer, which under a different combination, could easily move two trailers. In the future,We'll run 45s and 48s. Probably over the central area from salt lake city into Kansas City and drop and hook them off the side of the road. That is where we have to break down the doubles. I want to speak to you about safety. Presently we do not have the good economic loads that we need. Right now we use 160 carriers to move 53-foot trailers. As density builds we'll transition to more double trailers on the high density lanes. Right now only 8% of all our product is loose loaded and we would like to move that up to 20% very quickly.

These are the states that allow double trailers. They're very specific in terms of where you can use them and when you can't on the turnpike systems. If you take a look at from Utah through Kansas City, Missouri, then you have to break them down. We have a hub in Columbia, Missouri, but we couldn't run doubles in there. Only to Kansas City. We can run them down in Florida. As with any transportation network in the design stage, you take a look at where you can get a good economic advantage by using the existing highway system to your advantage. You must drive down transportation costs and operate in a safe manner. That is why, we operate and design the networks using to 48 miles an hour as a standard. We operate principally at night. You won't see any trailer attributed to DHL because we have not started trailer branding. But, as you can see, we're branding our planes and we're branding our pickup and delivery vehicles. We have 6 to 8,000 pickup and delivery vans that have or are being branded within the United States so you'll see the yellow and red colors. Eventually, you'll see us branding these trailers and that will be great advertisement. You'll see them moving over the highway in a safe fashion.

Performance management. We are very concerned about on-time performance. We also use some automated tools. If you were here in Cincinnati you could see on a visual screen, exactly where all of our airplanes are, whether they're on time or whether they're late. We use Qualcomm with our major carriers which basically gives us visibility 24/7. We can ping them every hour to find out where they're located. If a truck is running late, it will show up red on a national board. We can determine whether or not we need to put in recovery mode to take a product off a truck and put it on error if a truck is broken down or in some cases if a truck is stolen, you know, that happens or if it's in an accident, we know that the power unit is down for some reason and we can track it down to the carrier to find out what's taking place. On-time performance, we run a network hopefully as precision as a Swiss clock. 15 minutes late from any point of departure is late on the 16th minute. We hold those carriers to that time frame. In order for us to be able to compete in the marketplace throughout the United States on basically a five-day deferred product, one to five days, we must be there within 15 minutes of the promised schedule.

In the future, we hope to have all of our carriers on Qualcomm tracking, although we use 160 carriers, we principally use the top 10. We want to be able to know exactly where they are throughout the network, that they're on time, that they're not in trouble, that they're operating safely. We want to model and continue to optimize the modeling of our entire network as to where to put the hubs and service centers because the distribution patterns within the United States change. As an example, we can determine where the metropolitan statistical areas are and pretty much where the consumption of the product takes place. But, a lot of the companies have outsourced their distribution channels and their manufacturing -- manufacturing to different places that you would not think they would be there, but because of the favorable labor, for example, Muskogee, Oklahoma, Memphis, some areas of Arkansas, some areas where there's a good economic cost advantage to manufacturing at a good labor rate, that's where a lot of the product is originating now. So you can predict where it's being consumed, but it's difficult to predict where the product is originating. You have to design your transportation network to take that into account. So we're continuously optimizing our network to ensure that we are competitive in the industry.

We will soon be linking North America with Mexico and Canada. That's also within my area. We already have the transit tables established, but we don't have the cross-border linkage in place. We purchased Danzas as one of our companies. It has been around since 1815. After the Napoleonic war he started the company so if you're aware of Danzas as a huge company of about 40,000 people that we now own, that is an ocean and air freight, but it also is very much involved in customs brokerage and so they have operations on the northern border of Canada as well as to Mexico. We are working now to design and optimize the network in the United States. Once we get past that, we'll link the U.S. with Canada and Mexico and Danzas will be our cross-border clearance broker. In the future, we'll be refleeting our truck network. We're getting larger size vans to p 500s. The competitors have p 1,000s and 1200 which are a thousand cube and 1200 cubes. The product is getting larger, the boxes are getting bigger. As a result, we must upgrade our small PUD vans. And also we'll be involved in refleeting our trailers and getting them branded also.

We do outsource. Again we'll probably try to outsource to fewer carriers than we have now because it costs more money to manage 160 carriers than it would 25 or 10. But that's what we're looking forward to in the near future with the DHL ground network.

We need help from DOT. For an example, I try to design this presentation so that it was meaningful to the audience here, and hopefully it is, because we're talking about ground transportation. But DHL probably represents some of the same thoughts of the industry. We cannot in some areas, we cannot consolidate and deconsolidate double trailers, which we call drop and hook. If you look at any of the turnpikes, you'll see us as well as other carriers , breaking down trailers. In order to get a good economic load, they'll be moving 45-foot trailers in tandem or 28s or 48s and break them down on the side of the road and take the dolly and leave it there and then take the prime and one trailer in, then they must return to take the other trailer out. Oftentimes, you will see this activity take place on the soft shoulder of the road and that presents a dangerous situation. So we really need to take a look at the economic realities. Major carriers are going to have to pull doubles. When we design these transportation networks on the interstate, we may want to take a look at -- especially on off-ramps in these major metropolitan areas, take a look at possibly building a place where we can couple and decouple these trailers. A good example is the Florida turnpike. We have an operation between Miami and Fort Lauderdale but we can't break down doubles there on the side of the road. in a safe way. So we don't. Also we need more direct interstate connectivity. Thanks to lieutenant colonel Eisenhower in his first trip to the west coast, when it was principally dirt roads, after he saw the Audubon systems in World War II, in 1950 he set up this fantastic interstate system. So it's strong east to west and north to south but take a look at some of the areas where we run catty-corner. Memphis to Atlanta, Kansas city to Memphis, Denver to phoenix, Tulsa to Kansas city, Dallas to Denver, salt lake city to phoenix. These aren't direct north-south, east-west. But they're a reality in terms of connecting major cities for transportation hub and spoke networks. We need to look at enhancing these types of transportation networks.

In terms of how many hours you can operate a week to our carriers, the carriers are out there trying to determine when they're in service, when they're out of service. It costs us a lot of money. It costs our carriers a lot of money and they pass that on to us since they are our third party provider, so we need to make sure that we nail down this decision on the hours of service pretty quickly. So those are three areas that I appreciate all of you thinking about. Whether you can directly impact it or not.

In summary then, DHL is expanding this ground deferred service. Believe me, we're a player. We have 160,000 people. They're serious about being the no. 1 service provider. I think Jennifer had 2003 numbers when we were smaller than a $6 billion company. Now we're a $25 billion company. We are changing from a network -- from a centralized super hub network and moving the center of gravity out to where we're a national hub and spoke network. We're doing that now. $1.2 billion investment throughout the Americas. We're designing networks on the east coast of Brazil, Mexico. We have very strong ground network in Mexico. We have a strong network in Canada now. In Mexico we have about 40% of the total market share. Overall, with our growth, there will be little change in truck traffic on the highway system. I think that's important for you to know, because we use the existing excess capacity of the national truck fleets. So we're not buying trucks, tractors, we're leveraging our capital investments through third party providers. We use the existing network and excess capacity as third party providers. In other words, there will not be more trucks out there because of DHL. Addressing package market share, there's a finite number of packages within the market. Sometimes you'll see the packages move from truckload to Less than truckload across to the package carriers. We certainly witnessed, after September 11th, that a lot of cargo moved off the airlines. We saw a shifting within the market from truckload, less than truckload, package and air, And, we saw shifting (market share)within the top three package companies. So what we're trying to do is gain more of the market share and take some of that 80% away from UPS and Federal Express and increase the 8% share we now have, We must do this because scale is very important for the company to be successful and operate effectively. We'll use more doubles, but we'll reduce the number of power units. So the more double trailers that say we use, will result in fewer power units on the road. As an example, if we operate 1800 tractor-trailers a day and we begin using more o doubles, we now would operate 900 tractors instead of 1800 over the same road space. This would take place at 8:00 P.M. to 8:00 the next morning over specific areas of the interstate system. We have identified areas where we need -- or would appreciate some help and support from the Department of Transportation. In summary, I hope that I have been able to help you all understand how we go about setting up a national transportation hub and spoke network. This doesn't come along very often. This is the first time I've done this in the past ten years, I've done it a number of times in the U.S. military. But you're watching a national network being developed virtually right in front of your eyes today. UPS did it may be 97 years ago. FedEx through RPS, Inc., now FedEx Ground did it about 18 years ago. Right now DHL is developing their network. So I'd be more than happy to take any questions that you all may have. I'll turn it over.

J. Seplow:

Thank you, Herb. I hope everybody found both of these presentations interesting. There are a number of questions that have been typed in and sent directly to me, so most of you out there probably can't see these questions but I'm going to go ahead and start reading them off. Actually right now most of these questions are for Herb, but if you do have questions for Libby, please type those in as well.

So, Herb, the first question for you is do you use GPS in tracking the shipments?

H. Parr:

Yes. When we use Qualcomm, Qualcomm is one of several GPS systems. It happens to have the largest portion of the market share. So we can't really direct all of our carriers to specifically use Qualcomm, but most of the major carriers that we do have just happen to use it. So certainly on our hub to hub, there's 19 hubs. So hub runs where we have the majority of the product, we use Qualcomm and the GPS system. Then that tracks into a software development that we did here within the company and then we can project that on screens here in the operations center and we can track our tractor-trailers throughout the system. But, yes, we use GPS device.

J. Seplow:

Thank you. The next question is for you as well. The question is in determining your methodology, what major issues have you had to resolve with state officials? What did you do?

H. Parr:

You know, we have had very few problems with state officials because we try to stay, abreast of what's taking place within the law. So awful our carriers are all registered, they're all major carriers. They have their responsibility. We just need to know over which routes we can move in different configurations, longer combination vehicles, and right now we're principally using 53-footers. But we have had very little problems with any of the states in moving product. You know, we are not moving -- you know, there's limitations on HAZMAT, there's limitations on liquor. All those types of things, we try to stay away from moving. If we moved a lot of hazardous material, or if we moved restricted product, then it becomes much more dicey and then you have to work almost on a state-by-state basis. But we're not moving a lot of that product so we don't have to be concerned terribly about those issues.

J. Seplow:

Okay. The next question is for you as well. The question comes from someone who is with an MPO. The question is how does DHL or other private companies factor in current urban traffic congestion and future highway construction plans into its operational forecast?

H. Parr:

That's a good question. That is why we plan our network using 48 miles per hour. That takes into consideration -- we use a lot of teams. Team drivers. That takes into consideration a lot of problems. Certainly construction and obstacles is one of those. Rest breaks, rest stops. Those types of things. So when we design the network, we build in -- obviously these trucks move much faster and have the capability of moving much faster than 48 miles per hour, but we designed the network so that we build in those factors. Now, having said that, when we have situations like on the east coast right now and in the Boston area, we're having some significant problems with road construction in that area, and I'm not providing very good service to my customers. But as you can see we operate normally from 8:00 at night to 8:00 the next morning. So we try to operate when construction crews aren't working and then we try to by pass these routes as much as we can.

J. Seplow:

Thank you. The next question also for you, Herb, is why is DHL planning to make such a significant investment in the U.S.? What are the implications of this investment on the nation, states and regional freight transportation system, particularly air and surface network?

H. Parr:

Well, that's a good question from Caroline Marshal. I'm seeing that one show up. We're making a significant investment because the -- because the United States has the largest gross national product in the world. Japan is second. We're strong -- we're no. 1 in the world. You can't really have -- you know, we are by fortune magazine for several years running, back several years ago, I believe, it was the most -- DHL was the most global company in the world. So our mantra is really outside the United States, but you can't operate as a for-profit company if you can't service and be competitive in the United States. So we have to be competitive in the United States. We're making tremendous investment here because, you know, we're just taking on -- we're very up front our advertising. It's like you make call it -- might call it in your face advertising. We're making no qualms about it. We're taking FedEx and UPS on. At the same time, they're entering our markets outside the United States. You'll see advertisements where they're becoming very strong internationally. So what was happening in the United States, essentially we started to lose our international product because in the industry they'll use the term bundling. Which means we have a very strong ground network, but if you want us to give you these good prices ground network, then you must give us your international products because now we're in the international arena a. So that started hurting us, we started losing our market share, as little as we had in the United States and Canada, so we had to provide a strong ground transportation network. So we had never had anything other than pickup and delivery tied into airports. So we had to get into the ground transportation business, which means we had to develop line haul ground network. So, therefore, we're putting investments in those states and those cities that you could pretty much see where we have hubs located. Of course they're located there through locational analysis in terms it gives us the good five-day deferred coverage. But beyond that, we're putting capital investments in these buildings, we're going through several cycles, the first cycle is just to give us connectivity or what a call a land bridge from east to west on 70 as well as the lower area from phoenix into Waco, Memphis into Florida and to Atlanta. Those are the two major land bridges that we have. And we're putting $1.2 billion in the Americas. The air connectivity, we're also operating in Wilmington, for example, and also here in Cincinnati we have an air-ground hub operations. We will be putting an air-ground hub together on the west coast to move in product from Asia also. So those are the types of things that we're doing on the ground and the types of things that we're doing for air-ground combination networks. So I hope that answers your question.

J. Seplow:

The next question is does DHL have or plan any significant use of alternative fuel vehicles, either inside or outside the U.S.?

H. Parr:

Well, no. Right now we use -- of course we use third party providers, and so we're using pretty much the existing system. I can tell you that we're watching the price of crude oil very carefully. I think transport topics predicted $70 a barrel. Right now it's around $55. We have seen our operating costs shoot up. So we would definitely like to use any carrier that has something alternative to fossil fuel, but we use third party providers and essentially they use whatever power that they have in their -- and their power is driven by fossil fuel.

J. Seplow:

Okay. The next question is what training do you provide your drivers that drive the doubles and especially the triple combinations?

H. Parr:

Again, these are not our employees. They're certified CDL drivers, but having been in the industry for 37 years, I can tell you that the drivers that pull the doubles are the best qualified and more seasoned drivers. They usually have higher wages. So they're probably the safest and the best drivers out there. As far as what specific training that they have to go through, that's pretty much left up to the third party provider. But that's generally the way it is. And they also operate -- most of these will operate at a slower rate of speed, not only to reduce the cost of fuel, so you'll see the major carriers usually governor their power units at 62 miles an hour. The only time you see somebody going beyond that are usually independent truckers that may be running, you know, faster rates than that. But because of the fuel consumption and because of pulling doubles, you'll mostly see these tractors governed at 62 miles per hour.

J. Seplow:

Okay. Let's see, actually there's a few more for Herb but there's one for Libby here so I'm going to throw this in to kind of switch over a little bit. Libby, why are 3PLs such a key player in the freight and logistics industry? How do you see the role of 3PLs changing in the future and what will be the driving force, challenges and opportunities?

L. Ogard:

I think 3PLs are going to continue to grow as are supply chains and the complexity of them continue to accelerate. I think one of the stats that I read is that china's growth last year alone was pretty close to 35% and it's projected to grow at 11 to 12% per year over the next couple of years. When you compare that to U.S. North American growth, which during a period of expansion is typically 4 to 6%, I think what we're seeing is more vendors coming online, coming with regulations and requirements and security issues from other companies and how do we expedite that freight through the handling process. So I think that as our logistics connections continue to grow to overseas countries and as speed, transit time and visibility are increasing in importance, the opportunity for third party providers to grow on a continued basis is there. One of the big things that we're seeing is sort of a spike in technology right now that a lot of companies are -- have been sort of on cash diets for the last couple years, are now looking to spend some more money on supply chain visibility. And some of that is actually being spent with 3PLs because there's this notion that why buy that technology and maintain that technology internally when a 3PL is probably a better location for that to be housed. So I think the outlook for 3PLs is good and I think that as our supply chains grow, so will the use of 3PLs.

J. Seplow:

Okay. Thank you, Libby. Back to Herb. Approximately how many trucks operate between Memphis and Atlanta and what are the main highways used by these trucks?

H. Parr:

I'd have to get my director of line haul to answer that question. We just set up Memphis. We just -- in fact quite frankly we're having a conference call in a couple of hours about the opening of Memphis. Memphis opens up this Friday, the hub there. So we will start out probably with about -- I believe what I have now is I'll probably be running about 20 to 30,000 packages a day through there. And I don't know exactly how many will go to Atlanta versus the other 17 hubs, quite frankly, but Atlanta is a good connectivity for the east coast. I mean we can drop down to Florida and then go through Atlanta or we go up to Wilmington. We still move about 40% of all of our ground product through Wilmington. At one time we had 70% but now we pushed it out to these regional hubs so we reduced that number. A tell you specifically but I can tell you Memphis will start operating with that many packages and then we normally look at a load of maybe 1500 packages to 1800 packages per trailer. So if you divide that number by that, we spread out throughout the United States, we'll probably start out with just a few trailer loads going into Atlanta and a lot going into Wilmington and a lot going to the west coast, some going down to Florida.

J. Seplow:

Thank you. The next question is does DHL plan to make use of rail?

H. Parr:

Yes. We definitely do. We put in a new -- relocated a hub from San Marcos, California, to San Bernardino because it gives us great air and rail connectivity. But, you know, as we -- again, as I've said all along as density is our friend. Certainly UPS uses rail to the west coast because they have a tremendous amount of density, whereas we don't have that density with 8% yet. But we are looking at rail and we will certainly use rail as we get more density. What we also do is we get -- if we get full trailer loads, we don't move -- necessarily move them through the intermediate hubs. We'll move what we call point-to-point bypass so we'll take full trailer loads from customers and bypass the hub and spoke system and move it as far forward as we can to destination.

J. Seplow:

Okay. The next question is where is DHL's New England hub to be located?

H. Parr:

New England hub. We don't have a New England hub per se. Right now we have a hub located in providence, Rhode Island. That covers the northeastern area, so that's probably our utmost northeastern area right now.

J. Seplow:

Okay. The next question I have is have you found that DHL needs transportation system improvements around your hubs? If so, how have you communicated your concerns to local or state transportation officials, such as local transportation planning committees?

H. Parr:

You know, we have -- we're pretty pleased with the connectivity to the major arteries. In fact when we do our location analysis, we locate one of the major factors is access. In and out of the major arteries. So the only issues that we have is we have some hubs located in the wrong place based upon old distribution patterns and also labor situations. We will probably be in a process in the next several years of relocating some of these hubs to better locations. What we do is we ensure when we take a look at locations, we take a look at the access and that becomes extremely important to us. So we haven't had a lot of contact with state or federal agencies because of that, because we take a look at where we want to put them in the first place. Certainly where we want to put them is what is a good location to get to the major networks.

J. Seplow:

The next question also for you Herb is what is the reporting method for the 3PL truck carriers to ensure on-time delivery.

H. Parr:

Great question. We have -- we track every carrier and every route every day within 15 minutes. And so essentially what we do is with each carrier has a required cut time, critical cut time from a hub, originating hub or originating service center. As it moves into that hub, that hub has a certain time to process the product and then has a critical exit time. So we have critical entry and critical exit. And then the carrier has a specific time frame in which to deliver the product within 15 minutes. So we know every day exactly the performance of every carrier. If those carriers fail three times or more with the exception of forces of nature, weather, hurricanes, road construction, those types of alibis are legitimate, but if they fail to meet that criteria we go to a different carrier over those particular routes. In addition, we have three conference calls a week with ABX air, who manages the third party activity, and then we have daily performance reports that come out that tells exactly what the cut times were out of the hubs and the service centers and what the running time was for these various carriers. So the entire network is based upon strict adherence and discipline to this 48-mile-per-hour network. That doesn't mean the trucks are operating 48 miles an hour over the network, it means they're operating within the law of the network, but it means that's the way we set it up and the transit tables are based on that. So we have daily reporting on each carrier. They can lose their job if they don't meet our criterion.

J. Seplow:

Thank you. The next question is one that I'm sure a few people out there are wondering. What do the initials DHL stand for?

H. Parr:

The three company owners. It's Dalsey, Hillblom and Lynn. They were the three owners that started in San Francisco. It's kind of an interesting story. This is how they did it. They got together in San Francisco and they saw that the shipping lanes into Honolulu, that there was demurrage being drawn by each of these ships because of paperwork, so one of them was a pilot more or less. What they decided to do was they would take the paperwork for these shippers, they would fly it to Honolulu, they could get in front of the queue and process the paperwork and those ships could be brought on port out of queue because the paperwork was already there in good order and that's how they began in 1969. They saw a niche opportunity. And then they further developed globally outside of the United States. So they have been going into different countries years ago, Brazil, Mexico, Europe, and they would establish offices in these countries by using local employees that spoke the language and knew the customs of the company. That's why it became such a strong physical international network.

J. Seplow:

Interesting. The last question that I see right now is where is the DHL hub located in northern California and if you can, share some statistics on volumes and growth rates.

H. Parr:

We have a -- right now in California, I'm looking at my map here of the United States. We have two locations. We have -- we moved San Marcos into San Bernardino and we have Fresno, which is not northern. Fresno may be in the wrong location. That may be another discussion later on. But we're operating Fresno and we're operating out of San Bernardino oh there's a lot of traffic in California, a lot of traffic up and down the coast. Right now our growth rate for ground is substantial. There is definitely -- and that's all I can say about it. I can't give you numbers. I can say this, that there is definitely a customer demand for a strong third package carrier as alternative to federal express and UPS. We'll never have the lion's share, but we just -- you know, our objective, our intermediate objective is probably 20%, to grow from 8 to 20%. And that 20% now is being shared by U.S. postal, small carriers, DHL and some others with DHL at 8%. But we are growing our ground business substantially and we have also stopped the leakage of our domestic air and international because now we can provide a full service for logistics to include ground service within the United States which hurt us before. Because they were bundling against us.

J. Seplow:

Thank you. Libby, were any questions sent to you that I may have missed or didn't see?

L. Ogard:

I didn't see any.

J. Seplow:

Okay. And, Herb, did you have anything that I may have not seen?

H. Parr:

No. I would just like to say, and Libby was a great -- that's a great segue into what we're doing. I mean third party logistics is the future. That no. 1 reason she had up there for capital investment, can you imagine what it would cost us to invest money to have a full fledged carrier? We'd have to go out and buy trucking companies, which we could do, but we certainly don't want to put that kind of investment in that. We want to put knit a hub and spoke network. So third party logistics is one unbelievable growth area. Certainly that capital investment and the fact that overnight you could be competitive if you could outsource and write a very good contract with a carrier, so I appreciate Libby's presentation because it really ties into our operating business case and what we're doing right now in DHL for our ground network.

J. Seplow:

At this point we do have some time left, so I think we'll go ahead and open up the phone lines and just see if anybody wants to ask any questions over the phone. If not, we'll end a little bit early. Operator, let's go ahead and open the phone lines for questions.

Operator:

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Your line will briefly be accessed by the operator to take down your information. One moment, please, for the first question.

Our first question comes from the line of California DOT, name of Todd Lacasse. You may proceed with your question.

Todd Lacasse:

Yeah, how do you see California as a major expansion market for DHL and are ground access issues a concern for DHL in California?

H. Parr:

Todd, thanks for the question. Yeah, California is a huge market. Principally it's a huge market -- it's a consumer market, although we have quite a bit of outbound. But basically we have trouble finding traffic to move west to east. We move more east to west. Just about every carrier has that problem trying to balance the loads back and forth. But we need to put some more investments in California. I think you're going to see that in the future. California's network is one in which our biggest problem is probably congestion, road congestion. The Los Angeles area alone, trying to service that area. What we do, for each hub we market one-day footprints. So we have about 1200 to 1400 salespeople and if we can market a one-day footprint around a hub, then we can provide express service to that geographic area. We like to move out to have a footprint of 200 miles. So when you get into the California area there, then of course you've got a lot of people and a lot of roadway congestion out there, which creates a problem for us. But we move product, a lot of product through California. We link in now to phoenix, which we just opened up, like I said, into Waco, Texas, and then to Memphis and Atlanta and Florida. So California is a good market for us coming and going. Congestion is a real problem. We will probably be making some investments throughout California. The construction and the congestion is the biggest problem that we have.

J. Seplow:

Do you have any other questions on the line?

Operator:

I show no further questions at this time.

J. Seplow:

Okay, thank you. Libby, is there anything you wanted to say before we close out?

L. Ogard:

Thank you for inviting me. It was a great presentation by Herb. I learned a lot. Thank you for a great group. I think we had 37 people on the line at one time. Good job, Jennifer.

J. Seplow:

Thank you. Herb, is there anything you'd like to say in closing?

H. Parr:

I just appreciate the opportunity to talk to the audience and folks around there today about what we're doing because I think it is of interest, any time you have an expansion program using the highway systems, the common user highways that there's always concern about safety. I want people to understand that we're a good company that is very concerned about being a good corporation that takes into consideration safety and also takes into consideration, you know, using the highway system that say we have. We appreciate the highway systems. They're better than any other country in the world. Again, back to Libby and third party logistics, that's the wave of the future. Fourth party in fact is another topic of discussion probably for another time. And I just appreciate the opportunity to have people on here to see what we're doing in DHL. And learn a little bit more about us, because we're going to be a player out there for many, many years and a bigger player.

J. Seplow:

Well, on behalf of FHWA and I'm sure the people in the audience, thank you both for speaking today. Thank you, everybody in the audience, for attending today's seminar. The recorded version of this event will be available within the next week. The next seminar will be held on November 17th and is titled uses of freight technology. We'll have speakers from the U.S. Department of Transportation, the Federal Highway Administration and the Federal Motor Carrier Administration. If you haven't done so already, I encourage you to visit the talking freight website Talkingfreight.webex.com and sign up for this one as well as future seminars. Plans are currently in the works for the 2005 seminar series, so keep an eye out for those being posted and available for registration. I also encourage everybody to join the freight planning listserv if you have not done so and to everybody, enjoy the rest of your day. Thank you, Libby and Herb.

Updated: 03/29/2011
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