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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Suggested Citation:"6 Trucking." National Research Council. 1999. U.S. Industry in 2000: Studies in Competitive Performance. Washington, DC: The National Academies Press. doi: 10.17226/6313.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Trucking1 ANURADHA NAGARAJAN JAMES L. BANDER CHELSEA C. WHITE III University of Michigan INTRODUCTION This chapter examines the technological and non-technological factors that have influenced recent service and process innovations in the trucking industry. Intense competition, low margins, and relative ease of entry in the trucking indus- try motivate firms to develop or adopt many innovations. Unstructured and semi- structured interviews with trucking industry stakeholders indicate the following: Technological factors have enabled many process innovations. Non-technological factors have motivated many service innovations. · As is typical of other service industries, several service innovations have been generated from within the industry, by attempting to emulate competition or through assessment of customer needs. · Innovations adopted by the trucking industry have extended the business of moving freight into the realm of managing information. · Innovations, developed outside the trucking industry, particularly in elec- tronic commerce and navigation, tracking, and sensing, have been adopted by specific segments within the industry to enhance customer satisfaction and im- prove business processes. Deregulation, globalization, the availability of novel, modern technologies, and new demands by customers for advanced logistics and other services have iThe authors gratefully acknowledge the generous grant from the Alfred P. Sloan Foundation pro- gram on Centers for Study of Industry. We thank Pete Swan for his insightful suggestions and Harish Krishnan for helping with the data collection. 123

24 U.S. INDUSTRYIN2000 changed the competitive landscape for trucking firms. The movement of freight is no longer the single strategic focus of the trucking industry. Trucking firms are becoming involved in the generation and movement of timely, accurate in- formation. Customers and trucking firms can use information relating to the exact location of shipments to enhance operational efficiency. This paper iden- tifies several significant forces that are driving the development and adoption of innovations in the trucking industry, and discusses their influence on industry performance. The significant conclusion of the paper is that innovations in the trucking industry have addressed two basic issues: the enhancement of value to customers at an affordable price and the utilization of information to improve business practices through the application of technology. In general, trucking firms have invested in technology that is particularly relevant to the key success factors in their segment in an attempt to enhance productivity and increase com- petitive advantage.2 Freight activity is increasing worldwide with road transportation and air freight becoming the dominant modes. OECD countries generally increased their freight activity at an annual rate of between 1 percent (e.g., France, the United Kingdom, and the Netherlands) and 4 percent (e.g., Italy, Japan, and Spain) between 1970 and 1994. In the United States, freight activity increased annually by about 2 percent. The United States dominates the world in domes- tic freight activity. In 1994, U.S. domestic freight activity was estimated at 5.13 trillion metric ton kilometers (mtk). In comparison, domestic freight activity in Western Europe was 1430 billion mtk and in Japan was 557 billion mtk (BTS 1997a). Trucking's modal share of the freight activity has been growing fast at the expense of other modes. Table 1 provides an international comparison of domestic freight activity for selected countries and regions with particular at- tention to freight moved by road. The trucking industry moved an estimated 27 percent of U.S. freight traffic in 1996 (measured in ton miles) and accounted for 81 percent of the nation's freight bill, valued at about $367 billion (Bank of America, 1997~. Competitive pressures and technological advances have combined to make innovation critical to the growth and sustainability of the trucking industry. Many of the innovations created and adopted by the trucking industry extend beyond new products to include broader processes and activities, as emphasized by Kline and Rosenberg (1986~. In their view, innovation may be thought of not only as a new product, but also as: 2Many of the innovations discussed in the paper have been implemented only recently. We there- fore do not draw any inferences relating to innovation adoption and firm performance based on em- pirical data. In our judgment, sufficient time has not elapsed to realistically measure the impact of innovation on the survival and profitability of individual firms. For example, Swan (1997) used a three year time frame to study the impacts of change on trucking firm survival and performance. Our conclusions about innovation in the industry are based on our observations, stakeholder interviews, and popular press articles.

TRUCKING TABLE 1 Domestic Freight Activity for Selected Countries and Regions (billions of mtk) 125 Total Average annual Real average domestic growth rate in domestic annual GDP Country/region YearRoad freight freight activity (%) rate (%) United States 1970602.0 3216.5 2.0 2.8 19941326.0 5130.3 Canada 198443.6 296.6 0.3 2.5 199460.1 305.5 Mexico 198082.2 141.8 2.5 1.6 1993139.7 194.8 Japan 1970135.9 350.5 2.2 4.2 1991281.6 557.0 (1970-1991) (1970-1992) Western Europe 1970420.6 839.3 2.3 Unavailable 19941010.2 1430.0 China 197013.8 414.6 7.5 7.5 Source: Transportation Annual Statistics (1997). · a new process of production; · the substitution of a cheaper material, newly developed for a given task, in an essentially unaltered product; · the reorganization of production, internal functions, or distribution, ar- rangements leading to increased efficiency, better support for a given product, or lower costs; or · an improvement in instruments or methods of doing innovation. For the purposes of this chapter, we embrace this broad definition and apply it to the study of innovation in the trucking industry. Figure 1 illustrates the innovation process in the trucking industry showing how technological and non-technological factors motivate and enable service and process innovations. Service and process innovations, in turn, may be expected to improve firm performance. We consider that a service or a process innovation is motivated by a factor when it is intended to fulfill a need created by the factory An innovation may be enabled by a factor when the knowledge embodied in its software and hardware is instrumental to its effective utilization. For example, the just-in-time manufacturing environment demands that the location of parts be known at all times. Real time tracking is an innovation that is motivated by the just-in-time manufacturing environment. Satellite communication has been core to the development of real time tracking systems and can be considered as an enabler of the innovation. Our study reveals that customers are the primary sources of innovation in the trucking industry, as can be expected in a service industry. Changes in manufac- turing and retailing practices recognize that significant value is created when

26 U.S. INDUSTRYIN2000 Non-Technological ~ --| Service | ~ | Increases In Factors I/1 Innovations | | and Share / ~ ~tI I Technological id/ ~ | Process Factors | -| Innovations ~ Enables - - - - - - - ~ Motivates FIGURE 1 Interactive model of factors, innovations, and outcomes. Decreases in Cost inventory levels are reduced and when goods are produced closer in time to the point when the goods are consumed. Such modern time-sensitive management practices have drastically altered the role of the trucking service provider in the economy by altering the size, distance, and frequency of shipments and by in- creasing the importance of transportation reliability, timeliness, and speed. The emphasis on customers and their important role in the innovation process is con- sistent with the current industry dynamic. Loyal customers become critical in a competitive environment where there are a large number of trucking firms for the customer to choose from and changes in customer preference entail no significant switching costs. Fierce competition compels firms in the trucking industry to develop and adopt appropriate innovations. Large firms in the trucking industry are often lead users of new products intended for the industry. Many of the technology-driven innovations that have been adopted by the trucking industry have been developed outside the industry. The communications and computer industry have had a significant stake in the innovations adopted by the trucking industry. The wide- spread adoption of some of these innovations has been enabled by the close coor- dination between the user (the trucking industry) and the developer (communica- tions industry, for example). This is consistent with Von Hippel (1976) who found that lead users in the scientific instrument industry often play a major role in the innovation-development process. Smaller trucking firms adopt these inno- vations in order to achieve competitive parity with their larger rivals in the com- petition for customers. In this chapter section 2 presents a brief overview of the trucking industry and discusses the transformation of the trucking environment through the birth of 3Rogers (1995) defines a need as a state of dissatisfaction or frustration that occurs when one's desires outweighs one's actualities.

TRUCKING 127 the logistics industry and the transportation services industry. Section 3 discusses some of the non-technological factors that influence innovation in the trucking industry, such as the globalization of markets and resources, intermodal transpor- tation, changing business practices, competitive pressure on price and service, labor productivity and skill, and environmental and safety considerations. Sec- tion 4 presents some of the important technological factors that have influenced innovations in the industry, including telecommunications, computer hardware and software, navigation and positioning systems, surveillance, sensing and tag- ging technologies, and data exchange and fusion capabilities (BTS, 1997a). Sec- tion 5 discusses the relative contribution of technological and non-technological factors to innovation and firm performance. Section 6 concludes the chapter with a look at the future of freight and expectations for the trucking industry. AN OVERVIEW OF THE TRUCKING INDUSTRY Traditionally, the industry has been segmented into three categories, depend- ing on the size of the shipments that are carried by each firm: truck load, less- than-truckload, and package express. Trucking appears to be expanding into a fourth segment logistics. Recent industry trends indicate significant industry consolidation, with large firms participating in multiple segments of the industry through subsidiary relationships. These firms offer a "one stop shop" for a vari- ety of transportation services. The Traditional Trucking Industry Segments Truckload (TL) carriers specialize in hauling large shipments (often weigh- ing over 10,000 pounds). The average TL shipment weighs about 27,000 pounds. An owner-operator4 or a driver for a TL firm will pick up the load from the shipper and carry it directly to the consignee, without transferring the freight from one trailer to another. Thus, TL carriers do not need a network of terminals. The TL segment of the industry is highly competitive because there are very low barriers to entry. Key issues for managers of TL firms are the management of backhaul routes5 and driver turnover. Less-Than-Truck Load (LTL) carriers haul shipments that usually weigh be- tween 150 and 10,000 pounds. The average LTL shipment weighs slightly over 1000 pounds. The key economies of scale and density for an LTL carrier come from consolidating many shipments going to the same area. Such consolidation requires a terminal network. Thus, an LTL shipment will typically be picked up 4An owner-operator is a sole proprietorship or other small company whose primary purpose is to operate one or more trucks for hire. 5Backhaul routes: after a load goes from point A to point B. the firm must either find a shipment originating near point B or incur the costs of operating an empty truck (deadheading).

28 U.S. INDUSTRYIN2000 at the shipper' s dock by a pickup and delivery truck and hauled to the trucking firm's local terminal, where it will be unloaded and placed with other shipments going to similar destinations. The process of moving groups of shipments from one city terminal to another is known as line-haul operations. It is usually accom- plished by large trucks, often with tandem trailers, or by rail or some other mode, depending on price and service considerations. Once the shipment arrives at its destination city terminal, it is moved to a pickup and delivery truck at a terminal and hauled to the consignee. Key issues for managers of LTL firms are increas- ing density and linehaul network optimization (Swan, 1997~. Package Express (PE) carriers usually haul shipments that weigh less than 150 pounds. A typical package weighs less than 50 pounds. PE carriers offer at premium prices time-sensitive or other specialized services such as "air express" shipments, many of which are carried by truck and not by airplane. The firms in the PE segment have been experiencing tremendous growth; some of the large firms have been maintaining higher levels of operating income than firms in ev- ery other segment of the trucking industry. Cost and competitive pressures are moderating this success. Key issues for managers of PE firms are increasing customer density and delivering freight on time. The Modern Outlook Globalization, technology, and specialization have combined to bring a new dimension to the trucking industry: logistics. Logistics can be defined as a con- cept to guide economic processes and as a tool of rationalization to optimize purchasing, transport, reshipment, and warehousing (Danckwerts, 1991; Plehwe, 1997~. Logistics uses the right information to move materials to the right place, at the right time, for the right cost. While logistics once belonged in the realm of the manufacturing firm, today trucking firms are seizing the initiative and absorb- ing the logistics function into their value chains.6 As customers focus on cutting costs and developing core competencies, truck- ing firms are restructuring to offer the total transportation solution by including logistics and a variety of other transportation options in their corporate portfolio. The logistics business, almost nonexistent ten years ago, is now approximately a $20-30 billion industry segment and is projected to grow at about 20 percent a year (Industry Week, 1997~. Logistics may not only provide functionality and lower costs to the customer; it may also improve service and increase the customer's perception of value. This is especially true because many customers are focusing on ways to reduce costs and improve quality in response to international competition. Consequently, many U.S. businesses are steadily reducing their investment in inventory. Manu 6A company's value chain identifies the primary activities that create value for customers and the related support activities (Thompson and Strickland, 1996).

TRUCKING 129 facturers are also faced with the need to reduce cycle time. In the past, many manufacturing firms included inbound and outbound logistics among their man- agement activities. Competitive pressures are forcing firms to focus all their energies on their core competencies and primary activities. Support functions to the manufacturing activity, such as the logistics function, are outsourced to spe- cialists in transportation. These specialists might be the firm's transportation provider or a third-party logistics provider. Cost reduction seems to be the primary motivator for outsourc- ing logistics, followed closely by customer service, according to the Exel Annual Third Party Logistics Key Market/ Key Customer survey (Industry Week, 1997~. Some 60 percent of the nation's largest manufacturers use third-party logistics providers, according to a study by Mercer Management, Inc., and Northeastern University (Purchasing, 1996~. The availability of appropriate technology has facilitated the growth of logis- tics. Logistics providers are using large databases, complex software and algo- rithms, supporting hardware, and the latest tracking and communication tech- nologies to track fleets, organize customers and loads, and provide the most efficient way to satisfy the customer. Logistics providers in the trucking industry have unique industry-specific knowledge that can be applied to enhance the logistics function. Through spe- cialization, firms achieve learning curve advantages in leveraging technological and transportation planning knowledge. Typically logistics firms contract with shippers or consignees to assume responsibilities ranging from transportation and material handling to warehouse management and the management of inventory levels and distribution throughout large portions of the value chain. Further, logistics providers may be in a position to leverage freight volume to achieve the gains that accrue to network densities. The logistics firm coordinates information relating to many shippers and consignees in the same geographical area. The firm is then in a position to optimize freight movement by increasing the volume carried by each truck carrying loads to or from a certain location. Firms have used different organizational arrangements to incorporate logis- tics in their arsenal. Schneider, the nation's largest TL firm, is associated with logistics provider, Schneider Logistics. The logistics arm of Schneider innovates and develops products to enable Schneider to compete effectively and efficiently. In contrast, J.B. Hunt, another TL firm and a close competitor of Schneider, has a logistics arm, a wholly owned subsidiary called Hunt Logistics, which provides independent logistics services. J.B. Hunt Transport is but one of the transport companies that are a part of the portfolio of trucking firms used by Hunt Logistics. Hunt Logistics, which has been in operation for three years, has customers in the retail segment, consumer and industrial goods, paper, and automotive industries. Smaller firms specializing in logistics are usually organizing in one of two ways: either as dedicated contract carriers or as non-asset based supply chain management companies. Dedicated Contract Carriers (DCC) are strongly asset

30 U.S. INDUSTRYIN2000 based. Tractors, trailers, and drivers are their focus, along with the management of information. Their core objective is better truck transportation, and they tend to have a trucking perspective. Ryder Integrated Logistics, with a revenue of nearly $6 billion, is the largest DCC firm. Supply chain management companies focus on information technology man- agement through software applications. They emphasize shipment control and visibility. Ideally, these companies manage every part of the host company's inventory as tightly as possible to reduce cost and cycle times. Multiple segment transportation, warehousing, and inventory are their target areas. Logistics and supply chain management have brought about some restructur- ing of the trucking industry. Firms are now offering a variety of transportation services including TL, LTL, logistics, package express, and intermodal as a one- stop transportation solution. They are accomplishing the feat of "one call, one carrier" primarily through acquisitions, mergers, and alliances. For the purposes of this paper we consider the newly restructured firms to be providers of transpor- tation services (TS). TS firms are new organizational forms that are emerging in the trucking industry. They cross traditional boundaries and integrate across segments and modes of transport. These hybrid forms have emerged in response to changing competitive conditions. Firms such as CNF Transportation and Caliber Systems, through mergers and acquisitions, have developed a portfolio of transportation services. CNF transportation has, among its operating units, a package express firm (Emery Worldwide), an LTL firm (Con-Way Transportation Services), and a logistics provider (Menlo Logistics). Caliber Systems7 has in its portfolio of firms a Package Express firm (RPS), an LTL firm (Viking Freight), and a logis- tics provider (Caliber Logistics). CRST International has recently restructured itself into a single transportation services company by combining its six units into one operating unit. In the past, each unit served customers separately in their niche markets. Through the restructuring, CRST International combines CRST in TL, Malone Freight lines and Three 1 Truck line in flat beds, CRST logistics, and an express LTL service. According to company President John Smith, "It didn't take a genius to figure out it was better approaching this as one team of professionals totally focused on the customer and making transportation as easy as possible as our customers" (Traffic World, 1997a). Competitively, these organizations have to contend with the challenges posed in each of the segments in which they participate. Many of the TS firms have yet to find the synergies they were looking for through restructuring and consolida- tion. It is expected that the next few months will produce some of the biggest mergers ever. As more firms present themselves as providing total transportation services, the formidable task that lies ahead of them is to achieve the close coor- dination that is required to capture the benefits of being a single entity. 7Federal Express acquired Caliber Systems in 3Q 1997 in a $2.4 billion bid.

TRUCKING TABLE 2 Non-technological Factors Influencing the Trucking Industry Non-technological factor 131 Area of focus Globalization Intermodalism Changing business practices Standard weight limits Competitive pressures on price and service Labor productivity and workforce skill Environmental and safety considerations Markets and resources spread throughout the world Coordination between different modes of freight transport Just-in-time, Quick Response, inventory reduction Standardization of load limits across state and national boundaries Lower operating costs and relationship-specific assets Training and technology Sustainable trucking NON-TECHNOLOGICAL FACTORS INFLUENCING THE TRUCKING INDUSTRY8 Several non-technological factors have induced innovation and changed the competitive landscape. These factors include globalization of markets and re- sources; intermodal transportation; changing business practices; and competitive pressure on price and service, labor productivity and skill, and environmental and safety considerations. Table 2 provides the area of focus for the non-technologi- cal factors. Globalization The fundamental nature of the overall business environment is changing. With the lowering of trade barriers and advances in technology and communica- tion, the competitive landscape has been transformed into a global economy where goods, services, people, skills, and ideas move freely across geographic borders (Hits et al., 1996~. Since 1969, the number of multinational corporations in the world's 14 richest countries has more than tripled, from 7000 to 24,000. These companies control one-third of all private sector assets and enjoy worldwide sales of $6 trillion (Alden, 1997~. International trade now accounts for 24.7 percent of the U.S. GDP, up from only 11.3 percent in 1970 (BTS, 1997a). Global compe- tition has increased performance standards in many dimensions, including cost, quality, new product development, and service. Globalization increases the range of opportunities for firms in many indus- tries. The implication for the trucking industry is that there is an advantage for a trucking firm to be a single source provider in order to meet a global firm' s trans ~Sections 3 & 4 draw upon our findings in our case studies and field work. Archival sources on the trucking industry are also drawn upon to illustrate innovations and the innovation process. See Ap- pendix A for details of the study method.

32 U.S. INDUSTRYIN2000 portation needs. The emergence of the TS segment of the industry is the industry's response to the global challenge. Firms in the trucking industry are providing freight movement through alli- ances and international operations. Package express firms that have air freight as a critical component of their transportation portfolio, such as UPS and FedEx, have extensive international operations. UPS World Wide Logistics was formed in 1993 and serves North America, Latin America, Asia, and Europe. Logistics firms are now beginning to venture abroad as their domestic customers expand their requirements. In 1996, Schneider Logistics, Inc., entered the European lo- gistics market after being selected to provide inland transportation management services for Case Corporation' s European manufacturing and service parts opera- tions. Schneider Logistics is one of the first companies to engineer and imple- ment a European freight management program to manage across multiple ship- pers, carriers, transportation modes, and countries, according to the company's press release. The company uses engineered solutions and systems technology to perform shipment optimization, electronic date interchange (EDI) with carriers, freight payment, and reporting. Schneider Logistics provides logistics manage- ment services for Case' s eight European manufacturing locations. Its European services mirror the service Schneider Logistics currently provides Case within North America. These services include management of all ground transportation, optimization of Case freight, inbound and outbound transportation from manu- facturing facilities, interplant movements, transportation required for Case's ser- vice parts operation, and engineered solutions. Within North America, there has been significant growth in international trade since the North American Free Trade Agreement (NAFTA) went into effect in January 1994. In 1995, nearly $274 billion worth of goods moved by land between Canada and the United States up 10.5 percent from 1994, according to information from the BTS Transborder Surface Freight Dataset, collected by the census bureau. By value, 68 percent of this trade moved by truck. Over $97 billion worth of goods moved by land between the United States and Mexico in 1995, up 7.8 percent from 1994. By value, 81 percent of this trade moved by truck (BTS, 1997b). To adapt to this new opportunity and to adjust to evolving cabotage9 rules, trucking firms are now engaged in a new process innovation called "sweeping." Analogous to a milkrun,~° the trucking firm sweeps a region for exports and moves 9Cabotage rules are laws prohibiting motor carriers from hauling freight between two points outside of the carrier's home region. For example, Canadian truckers may haul freight from Ontario to Florida, and may return with freight destined for Ontario. It may be illegal to make deliveries from Florida to Michigan along the way. i°Milkrun is a type of less-than-truckload service in which a truck visits several origins in sequence to pick up freight with a common destination. For example, a truck might visit several auto parts suppliers to collect parts destined for an assembly plant.

TRUCKING 133 the swept freight to a single terminal or focal point for line haul movement. The sweep allows a firm to build exports to a critical freight volume and optimize the mode of transport subsequently. Intermodalism Intermodal has been railroads' successful answer to change in the transporta- tion environment. By offering low cost solutions and innovations such as double stack service, intermodal has become dominant in certain corridors of freight movement. In 1993, intermodal shipments exceeded 200 million tons of goods valued at about $660 billion. The classic intermodal combination of truck and rail accounted for 41 million tons and $83 billion. In addition to the $660 billion, about 3 million tons, valued at about $134 billion, is estimated to have moved by truck and air combination (BTS, 1997a). Intermodal shipments are higher in value per pound on average than typical single-mode shipments. The average value of goods shipped by air (including truck and air) was $22.15 per pound, followed by parcel, postal, and courier ser- vices ($14.91 per pound) and by truck and rail combination ($1.02 per pound). Goods shipped only by truck averaged about 34 cents per pound and goods shipped by rail, water, and pipeline averaged less than 10 cents per pound (BTS 1997a). Transportation providers have become more capable of substituting one mode of transportation for another when such a substitution creates an economic advan- tage. Some of this effect can be explained by recent innovations in containeriza- tion. JB Hunt has been a pioneer in the use of intermodal double stack containers. Traditionally, a loaded trailer was put on a flat car, and there was one trailer for each flat car. By separating the chassis from the container, JB Hunt can stack two containers on one special rail car. The cost of moving freight decreases dramati- cally. The use of double stacked containers and other container innovations al- lows firms to offer as many modal choices as possible to lower total transporta- tion cost without compromising time sensitivity. Changing Business Practices Changes in manufacturing and retailing practices (such as "just-in-time," JIT, and "quick response," or QR) recognize that significant value is created when inventory levels are reduced and when goods are produced closer in time to the point when the goods are consumed. Such modern time-sensitive management practices have drastically altered the role of the trucking service provider in the economy by altering the size, distance, and frequency of shipments and by in- creasing the importance of transportation reliability, timeliness, and speed. In general, shipping rates (prices) are falling, while trucking firms are providing an increased level of service to their customers. Trucking firms are becoming more

34 U.S. INDUSTRYIN2000 sensitive to the importance of time and the critical nature of pickup and delivery appointments. For example, one major shipper, an automobile assembler, has reduced the number of trucking firms with which it contracts by over a factor of ten in order to encourage the remaining carriers to coordinate their operations with the assem- bler and its trading partners. That assembler has reduced in-plant parts invento- ries to four hours or less. When an inbound truck is delayed sufficiently to stop an assembly line, this assembler could incur a loss of $8000 to $12,000 per minute for the delay. If the carrier is the cause of the delay, some of this loss is charged to the carrier in the form of a penalty. In general, by reducing the number of carriers they deal with, shippers sacrifice the bargaining advantages that could be obtained from a large set of carriers. However, the shipper minimizes transac- tions costs, in terms of control and coordination, and builds closer partnerships with the few chosen carriers. An increasing number of manufacturers are also engaging in a new process- disintermediation in which they send products directly to retailers or consum- ers. Giant retailers deal directly with manufacturers, eliminating the need for shipments to and from wholesalers. All such disintermediation creates an in- crease in the frequency of shipping activity, while reducing the average size of shipments. For example, the advent of the "world's largest bookstore," Ama- zon.com, on the Internet has provided an alternate method by which books can be purchased. Customers place their orders through the Internet, and publishers directly send them the books via PE firms. The wholesale and retail distributor are no longer a part of this value chain, and consequently neither are the TL and LTL firms. The number of shipments that move directly from plant to customer with no warehousing or middleman will go from 31 percent in 1994 to 36 percent in 2000, according to a survey conducted by an industry expert (Traffic World, 1997b). Trucking companies must therefore be prepared to haul smaller shipments and make more frequent deliveries. Besides expecting their carriers to be effi- cient and cost-effective, shippers now demand on-time deliveries and consistent cycle times, with little damage or loss to valuable freight. The trucking industry has responded to the critical role caused by changing business practices by offer- ing new products, such as time-sensitive delivery, enabled by process innova- tions, such as sleeper teams and enhanced quality standards, including QS 9000 certification. The emphasis on quality and process is changing the business environment. As large shippers such as the Big-3 automotive companies cope with globaliza- tion, they are adopting quality standards, such as ISO 9000 and QS 9000, through- out their organizations. As these large shippers reduce the number of companies with which they will do business, they increasingly require their transportation companies to comply with these standards. As we found among many of the firms we surveyed including Mark VII and TNT QS 9000 certification has

TRUCKING 135 become a competitive necessity for firms hoping to do business with large firms, especially in the automotive sector. Global competition and technological advances are changing business prac- tices including the way goods are manufactured and distributed. Innovations such as time-sensitive delivery, sleeper teams, and QS 9000 are enabling the trucking industry to respond effectively to these changes. Truck manufacturers, in turn, are enabling the execution of these innovations. Competitive Pressures on Price and Service Because switching costs are low for shippers and entry barriers to the truck- ing industry are also low especially in the TL segment price competition has been fierce. Shippers, consignees, and third parties seem increasingly sensitive to the price of transportation. Consequently, the operating costs for the trucking firms have often exceeded operating revenues. The squeeze on revenue has led trucking firms to focus on costs as their means to greater profits. Asset produc- tivity is critical to operational efficiency. The source of competitive advantage lies in the ability of the firm to cut costs, to increase productivity, and to adapt to the customer's specific environment. CF Motor Freight (CFMF), now Consolidated Freightways, redesigned its hub-and-spokeii network in late 1995 for a directional loading system in order to maintain a focus on costs. The new system uses fewer break bulk terminals with regional hubs that cover greater areas. Results of this change include a reduction in the firm's 24 former hubs to 14 flow centers and a reduction in its 21,533- person work force by 670 drivers and 440 dock workers. According to the claims, the new load planning program, called the Business Accelerator System, has sliced a day off average transit time, reducing it from four to three days, and dramatically improved on-time delivery. The Business Accelerator System also has eliminated excessive freight handling and cut claims, according to company reports. CFMF, using the new system, can deliver to 70 percent of the United States in two days or less, compared with 42 percent before this initiative. Only half the freight requires intermediate handling, compared with three-quarters be- fore the system was implemented. The current firm goal is to reduce the percent- age of intermediate handling to one-third. To implement the new network, CFMF invested about $25 million in new facilities and another $25 million in 370 sleeper tractors equipped with Qualcomm Hub-and-spoke is a network structure in which an LTE carrier operates one or more major termi- nals (known as hubs) and a larger number of smaller terminals (known as spokes). Freight is taken from its origin terminal to a spoke terminal, where it is consolidated with other freight going toward similar destinations. It is then moved (by line-haul truck or another mode of transportation) to a nearby hub, possibly for forwarding to a hub closer to the destination. Finally the freight is moved from a hub to a spoke near the destination terminal, and ultimately to its destination.

136 U.S. INDUSTRYIN2000 satellite communications units. It also persuaded Teamsters union officials to approve what the company said was the largest change of operations in trucking industry history, which resulted in the transfer of 850 employees in a single week. Under the hub-and-spoke system, freight heading from Detroit to Boston took 77 hours to travel 1041 miles. Four intermediate stops added 53.5 hours of non- driving time to 23.5 hours of driving time. Under the Business Accelerator Sys- tem, the same load now takes about 43 hours to travel 716 miles with only one stop in Buffalo. Nondriving time was reduced to about 26 hours and driving time to 16.5 hours. An organizational innovation to control costs and enhance service the in- troduction of cross-functional service teams was implemented at TNT Express. The company has five service teams. Each team is assigned a geographic area. Each service team typically is comprised of a dispatcher, a representative from safety, finance, and operations, and a recruiter. The service teams are assigned key performance indicators, and the teams are responsible for control and con- tinuous improvement of those key performance indicators. These teams foster teamwork and cooperation while keeping focused on achieving best business practices. Trucking firms are also calling for greater productivity through the use of longer, heavier trucks traveling longer routes. Between 1982 and 1992, the num- ber of trucks operating weights above 80,000 pounds increased by 180 percent from 18,000 to 50,000 (BTS,1997b). The total number of vehicle miles traveled by this weight class rose by 193 percent. Trucking firms are finding innovative ways to deal with the pressures of cost containment and service enhancement. The use of new network systems and service teams indicates an attention to process improvements to contain costs. Increasing asset productivity and investing in relationship-specific assets have also addressed the need to create competitive advantage. Labor Productivity and Workforce Skills Measured by output per worker, labor productivity for trucking rose 2.8 per- cent annually from 1954 to 1989 considerably higher than the annual average rate of 2 percent for the overall business sector from 1954 to 1994 (BTS 1997a). Enhancements in truck technology and process improvements in the manner in which freight is moved indicate that labor productivity in the trucking segment of the transportation sector is likely to increase. Important segments of the industry such as TL have long experienced a driver shortage because of high employee turnover at individual firms. However, a recent study by the Gallup organization, commissioned by the ATA, suggests that the problem may lie elsewhere. The study found that roughly 320,000 drivers switch jobs within the industry every year. This phenomenon, also known as "churning," presents a different challenge than one posed by driver shortage.

TRUCKING 137 Firms are working hard to retain their drivers so as to minimize recruiting and training costs. JB Hunt has recently boosted average driver pay by 34 percent, to about $0.38 cents per mile on average, and early results indicate that this move has cut driver turnover in half and has reduced recruiting, insurance, and training costs almost enough to offset the high wages (Traffic World, 1997c). The increased availability of information and enhancements attributable to advances in truck engineering are changing the job descriptions of drivers and dispatchers in the trucking industry. Drivers must become more skilled in the use of technology, especially information technology. In response to the increase in skill required of drivers, firms such as Roadway Express have moved from hiring at multiple locations to a single recruiting and training center. The resulting coordination and monitoring benefits enable the firm to attract and train quality employees and develop essential human capital. Dispatchers are increasingly able to rely on computer systems for routine parts of their work. Each suitably equipped dispatcher can now track more ve- hicles through the use of AVL systems. Innovations have transformed the job from routine activities to planning and anomaly management. New systems are designed to automate routine inquiries. For example, if a load is picked up on time, the information goes directly into the database. The dispatcher is informed only if expected events do not occur. Innovation and new technology adoption offer an opportunity for employees to enhance their skills and earn higher wages while increasing job mobility. However, the firms are unable to either find or attract appropriately qualified individuals. According to a study by the Informa- tion Technology Association of America, U.S. industry in general is short about 190,000 knowledgeable workers (Traffic World, 1997d). The challenge for the trucking industry is to find and retain a workforce that can interpret information and react rapidly. Environmental and Safety Factors Environmental impacts, particularly air pollution, has been a concern for the trucking industry. Federal regulation of heavy-duty trucks has proved to be quite effective, and the Environmental Protection Agency (EPA) is currently proposing more stringent emissions standards. EPA estimates that these standards could initially increase vehicle retail prices by $200 to $500, but this cost is expected to decrease rapidly. EPA has also required onboard diagnostic systems on all new light-duty ve- hicles and trucks since 1994. These systems monitor emissions control compo- nents for any malfunction or deterioration that would cause certain emission thresholds to be exceeded and alert vehicle operators to the need for repair. The issue of safety has always been paramount in the trucking industry. Safety becomes a greater concern as the industry moves toward using longer trailers and carrying heavier loads. While drivers of trucks account for only 3.3

38 U.S. INDUSTRYIN2000 percent of drowsy driver crashes, they are generally involved in accidents with more severe injuries and property damage. Among workers as a whole, the rate of occupational fatalities in the United States remained fairly constant from 1992 to 1995. Truck drivers alone made up 12.1 percent of all occupational fatalities, with 749 killed. Of the 150,000 truck drivers involved in traffic accidents in 1994, an estimated 22,000 sustained injuries (USDOL, 1996~. To provide safety training to its drivers, Ryder Integrated Logistics is using an innovative instruction package. Developed by Vortex Interactive, it contains generic programs on hazardous materials, hours of service, and drug and alcohol awareness. Ryder's customized programs include "Ryder Backing Techniques," Ryder "Policies and Procedures," and "Your Back at Work." The entire program is on CD-interactive equipment and does not need a computer; it can be hooked to a regular television monitor. According to the company, drivers significantly prefer this new system to the old video and lecture format. The need for safety enhancements in trucks is also being met through aggres- sive innovation among the truck manufacturers. For example, major improve- ments in safety are incorporated in the recently announced Volvo VN Series. The hood, sloped at an angle of 18 degrees, and a large, one-piece windshield, in combination with a new mirror system, provide better visibility around the ve- hicle than do current Volvo tractors. The cab material is High Strength Steel (HSS), found to have the best strength-to-weight ratio of any material evaluated by Volvo GM Heavy Truck. While the overall weight of the Volvo VN Series is less than comparable current Volvo models, the new tractors have passed the Swedish Impact Test and the Volvo Barrier Test. The Swedish test, recommended as a standard by the Maintenance Council of the American Trucking Associa- tions, has been determined by industry researchers to be the most severe impact test in the world (SAL, 1993~. TECHNOLOGICAL FACTORS INFLUENCING THE TRUCKING INDUSTRY At the foundation of much of the technological innovation in the trucking industry lie five basic building blocks: telecommunications; computer hardware and software; navigation and positioning systems; surveillance, sensing, and tag- ging technologies; and data exchange and fusion capabilities. The rapid pace of technological change in these building blocks presents a quandary to firms. They may procrastinate to see how technologies evolve and may be less likely to adopt technologies that might become quickly obsolete. However, the new technologies present opportunities for new products, processes, and services that could not have been conceived, developed, or commercialized a few years ago. i2The categorization and descriptions of the technologies are drawn in large part from the Bureau of Transportation Statistics: Transportation Statistics Annual Report 1997 Mobility and Access.

TRUCKING TABLE 3 Technological Factors Influencing the Trucking Industry 139 Technological factor Area of focus Telecommunications Computer hardware/software Navigation and positioning Sensing and tagging Data exchange Data fusion Onboard diagnostic system Internet Wireless and wireline communications technologies PC and mainframe computer systems Computer-aided dispatch, automatic vehicle location, and route guidance Electronic toll tags and marking Data interchange between the trucking firm and outside customers or partners Integration of data from multiple documents, databases Computer system built into power unit that helps monitor vehicle performance Provides interconnections between firms' computers and/or customers' computers Bar codes Support tracking of freight Sixth axle Mechanical design that allow higher weight loads Sleeper cabs Power units with specialized living facilities Larger trailers Longer, wider, or taller Soft-sided trailers Vinyl sides simplify loading and unloading of trailer and increase variety of freight Table 3 lists some relevant technological factors, along with the area of focus for each factor. Telecommunications Advances in telecommunications facilitate many innovations that enhance value to the customer and increase the control and flexibility of the trucking firm. An especially powerful tool is the ability to make real-time operational informa- tion available to a dispersed transportation network. Trucking firms are improv- ing traditional wireline communications with advances in satellite, cellular, and fiber optic technologies. Satellite systems have been popular because they provide coverage of a wide area. However,satellitebandwidthis quite expensive. Asaresult,freightmobil- ity systems based on satellite communications typically rely on short, infrequent bursts of data transmitted between a data center and the vehicle. Wireline com- munications such as telephone or leased-line service are used to transmit data from a dispatch center to the data center. Cellular telephone is relatively inexpen- sive, and bandwidth costs are falling quickly. Cellular is considered ideal for applications with infrequent position reporting rates and modest need for voice communications, such as applications where a trucker is required to report posi- tion data only a small number of times per day and only occasionally needs to speak directly with dispatcher or to call home. Increasingly, communication in support of trade between firms uses some means of Electronic Data Interchange (EDI), the paperless exchange of business

40 U.S. INDUSTRYIN2000 documents via computer. EDI systems support electronic commerce. Trading partners send computer messages, rather than paperwork, for their routine trans- actions, such as quotes, orders, and shipping notices. Trucking companies have moved into the role of technology integrator by coordinating their computer systems with the computer systems of their custom- ers (shippers and consignees). Wireless, vehicle-to-roadside EDI communica- tions can also occur over a very short range: for example, between trucks and wayside inspection systems and toll collection systems. Network linkages such as the Internet are being combined with electronic data interchange to offer innovative new service enhancements. For example, CFMF exchanges EDI shipping information through the Internet with one of its customers, Westinghouse Hanford. Typically, EDI information is exchanged between CFMF and the customer either directly or through a third-party Value- Added Network (VAN). Through EDI, customers have access to financial data, bills of lading, shipment status, and freight invoices. Use of the Internet to ex- change EDI information is less costly because the electronic documentation is sent through a public network, as opposed to a private phone line; it is also a more efficient means of transferring documentation, according to company press releases. In most cases, the response time is shorter through the Internet, giving users opportunity to interact with one another in a more timely fashion, compared to time-delayed, batch-style interactions. The process vastly improves the reli- ability of the data and reduces the time needed to transfer EDI files. Computer Hardware and Software The price of computer processing power has dropped by approximately 30 percent per year for the last two decades. Such dramatic cost decreases permit highly sophisticated sensors and control systems to be built into transportation vehicles. Digital electronics and computer chips have become commonplace in truck braking, engine control, security systems, and climate control. Fleet management systems use combinations of microprocessors and other computing and location devises that allow data to be gathered and processed for strategic and operational decision making. These systems may be grouped in three categories (Hubbard, 1997~: · Trip recorders are data-gathering devices aboard the vehicle that gather information about the truck's operation. Data are recorded about such events as whether the engine is on, when the truck is idling, how it is shifted, and how quickly it accelerates and decelerates. Such information can be collected when the truck returns to its base, and managers can use the data to determine how the truck was driven. Such information aids management with many activities, such as determining fuel economy, monitoring tire wear, identifying good and bad driving practices, assessing responsibility after an accident, and performing pre- ventive maintenance.

TRUCKING 141 · Electronic vehicle management systems are onboard computers that com- bine the functions of trip recorders with automatic vehicle location and two-way communications. Information about the vehicle's activities is communicated be- tween the vehicle and a central dispatch center. The Omni-Tracs system from Qualcomm is an example of such a system. Approximately 200,000 Class 8 trucks in the United States approximately one in every six such trucks are equipped with electronic vehicle management systems. · Computer-aided dispatch and freight management systems support the operations of the trucking company office. Such systems are more traditional office-based data processing applications, rather than vehicle-based systems. They support the assignment of freight to vehicles, the assignment of drivers to vehicles and routes, the tracking of shipments, as well as such traditional data processing functions such as accounting, bill-of-lading processing, payroll, bill- ing, and claims processing. Activity-based costing systems are increasingly com- mon. Such systems help trucking firms determine which customers and what locations are profitable and align their freight rates with their costs. The availability of low cost, high-powered computer hardware and software is providing the trucking industry with an information-rich environment. The new focus therefore turns to the management of information in all facets of the trucking business in order to effectively and efficiently move freight (Bander et al., 1997a). Navigation and Positioning Systems For the trucking industry, near real-time tracking of dispersed assets is a critical function. Technology has moved the trucking industry from the use of pay phones to relay location information to automatic vehicle location (AVL) systems that permit the central operations to be aware of the location of the entire fleet automatically at all times in real time. Navigation systems use location aids and computerized maps to provide route guidance. When combined with real time traffic, weather, and construction in- formation, these systems are becoming critical assets in the increasingly time- sensitive trucking environment. Location and navigation systems are also used along with computer-aided dispatch systems for route optimization. One satellite-based vehicle location technology, the global positioning sys- tem (GPS), has the potential to make vehicle location and navigation a universal practice. GPS was designed as a dual-use system with the primary purpose of enhancing the effectiveness of U.S. and allied military forces. The growing de- mand from military, civil, commercial, and scientific users has generated a U.S. commercial GPS equipment and service industry that is a world leader. GPS receivers cost only a few hundred dollars, with prices falling rapidly. GPS works anywhere in the world where there is a direct line of sight from the receiver to the satellite. This makes it an appropriate service for commercial freight applications

42 U.S. INDUSTRYIN2000 except while the truck is traveling in an urban canyon or tree-covered area. Dur- ing those periods, GPS can be combined with other navigation techniques. GPS is not a communications system; it is a satellite-based navigation (posi- tioning) system. Many current satellite-based fleet management systems use a constellation of satellites and other communication technologies GPS for posi- tioning with a different medium (such as cellular or low-earth orbit satellite) for communications in order to provide full positioning, navigation, and communica- tion capabilities. Surveillance, Sensing, and Tagging Technologies rl~hese technologies identify a vehicle's location, characterize its environ- ment, or permit the exchange of information. Tagging freight-carrying vehicles and cargo is revolutionizing logistics. Tags are capable of storing situation-spe- cific data, such as container contents and destination, and of being read over long distances by satellite in some cases. These technologies are also being applied in an innovative manner to en- hance processes and improve truck safety. Bar code technology (and, to a lesser degree, radio frequency ID tags) have advanced the practice of item-level and shipment-level tracking. RPS is using two-dimensional bar codes that can repre- sent significantly more information than traditional linear bar codes. UPS is us- ing three bar codes for package tracking: two linear bar codes plus a circular "bulls-eye" code that can be read at any angle. UPS has also recently introduced ring scanners, which are worn in the hands of sorters and allow workers to cap- ture more precise information about packages. Imaging systems are used to store paperwork electronically. Such systems consist of databases that store images of documents that have been scanned or faxed. Imaging systems are being used to help reduce the tremendous numbers of freight bills and other shipping documents that are handled by shippers. Sensor technologies are also being used to improve truck safety. The Eaton Vorad system is an example of a radar-based collision warning device that has been used on some trucks and buses. In general, the sensors are coupled to com- puters and displays that provide warnings and sometimes suggested responses. Surveillance, sensing, and tagging technologies are providing intelligence about the trucks' environment while also enabling process improvements. Data Exchange and Fusion Capabilities The broad impact of information technology (IT) on transportation is to pro- vide a more knowledge-rich system that is interoperable and can be used for decision making. The combination of disparate information from diverse sources is central to many IT applications. Beyond technical interoperability and the establishment of institutional and organizational relationships for effective data exchange, the new discipline of "data fusion" has emerged. Data fusion is the

TRUCKING 143 design of computer systems that can facilitate the convenient, flexible, secure, and adaptable blending of information from a wide range of independent sources. A significant innovation enabled through data exchange and fusion capabili- ties is real time Internet package tracking. Package express firms such as Federal Express and UPS pioneered Web-based shipment tracking. Now several express freight companies, including Airborne Express, DHL Worldwide, Emery World- wide, and Roadway Express, offer on-line tracking via the World Wide Web. The ability to locate a package or load in real time appears to be as important to the shippers as it is to the trucking firm. The availability of computing power and data exchange and fusion capabili- ties is also spurring innovation among truck manufacturers. For example, Freightliner Corporation recently introduced a new milestone software package, CustomerLink, an electronic inventory replenishment system connecting Freight- liner dealers and their customers. According to company reports, the Customer- Link package is the first phase of supply chain integration at Freightliner, a fully automated and integrated parts distribution network designed to facilitate inven- tory planning and replenishment along the entire line of supply: suppliers, parts distribution centers, dealers, and customers. CustomerLink allows Freightliner dealers to relieve customers of the burden of inventory management by providing the tools to automatically poll customers' parts usage data to maintain their in- ventories at predetermined levels. CustomerLink incorporates bar code technology and telecommunications links to capture the usage of parts at a customer' s site. Each time a part is taken from inventory, its bar code is scanned and other critical information, such as vehicle ID, repair order number and quantity, is entered into the CustomerLink system. At non-peak times, the Freightliner dealer can electronically retrieve this information to generate a restocking order and pull the needed parts for delivery by the next morning. Sleeper Cabs New, advanced technology is being used to improve driver comfort, espe- cially in sleeper cabs. Sleeper teams use sleeper cabs, which allow one driver to sleep while the other drives, so that the vehicle can keep moving over long dis- tances in spite of hours-of-service regulations and human limitations. Sleeper teams are not new to the industry. They are reemerging, since the Master Freight Agreement of 1994,13 as a solution to the need for speed, timeliness, and long distance hauling. One of the early proponents in the use of sleeper teams is Roadway Express. When Roadway began implementing sleeper teams, manage- ment played an active role in ensuring driver satisfaction. The sleeper cabs are i3The Master Freight Agreement governs major unionized LTL carriers and their employees.

44 U.S. INDUSTRYIN2000 built for luxury and comfort, and on their return to the terminal, the cabs are cleaned thoroughly. Management regularly conducts on-site inspections, often solicits the driving team's opinion on improvements that could enhance the effec- tiveness of the process, and takes any needed action. In one case, an on-site inspection resulted in a negligent supervisor being fired, and this action by man- agement reinforced the drivers' view of the firm' s commitment to the drivers and the new sleeper team process. Truck manufacturers are catering to this new process by making comfort a top priority. Freightliner Corporation recently introduced the Penthouse sleeper option, which features a single 50-inch-wide upper bunk, or loft, that can be raised by an electric motor to the ceiling of the sleeper or lowered to its standard sleep- ing position. It features a flat panel display, which has several locations available for use as either a monitor for the built-in computer or as a television screen. The mounting options allow the screen to be seen from either the bunk or the seating area. A kitchenette is provided on the driver's side, featuring a sink, refrigerator, microwave oven, coffee maker, countertop, cutting board, and fluorescent light- ing. The water system is equipped with a fresh water reservoir, a sink, a water heater, and a "gray water" tank, so a driver can not only cook a meal, but also clean up afterwards. Closets, storage drawers, and even a pantry for food storage are included. Packaged into a new sidewall cabinet, is a novel integrated com- puter and entertainment package. This system interconnects the stereo, the tele- vision, and a computer together into a single unit. A modem connection through a Highway Master communications module allows the driver to make computer contact with home base or even the Internet while the truck is in operation. A separate headphone system is provided to allow the user of this system to operate without interfering with the driver's radio choice or to allow silent operation when the other partner is sleeping. Products such as the Freightliner Penthouse improve the work environment for innovations such as sleeper teams. Larger Trailers Productivity gains are also being made through the use of longer trailers, such as 48 foot and 53 foot trailers. Some states allow 57 foot trailers; however, some firms are reluctant to use them since their operation is restricted by region. Trucking firms have also begun to use wider 112-inch trailers. These enhance- ments in length and width increase the volume of freight that can be carried within the same weight and height limits, increasing productivity without increasing direct cost significantly. The use of doubles and triples combinations of two or three 28-foot trail- ers has also been on the increase. These combinations allow the firm to avoid the expense of labor and time to load and unload freight since smaller trailers increase the probability that a trailer can be filled with freight for a single destina- tion. The volume per driver is also increased by this process. Drivers are using

TRUCKING 145 terminals or meet-and-turn pointsi4 to exchange trailer loads. Reengineering the freight movement process allows the balance of equipment and trailers while allowing the drivers the opportunity to get home and improve their quality of life. According to Don Schneider, president of Schneider National, "As we pay our drivers more, one of the ways (to cope) is to make them more productive. If the driver does more on the highway, that benefits the customer and the industry benefits from those kind of productivity adjustments" (Traffic World, 1997e). Sixth Axle To increase productivity, the president of the National Private Truck Coun- cil, John McQuaid, recommends raising the standard weight from 80,000 to 97,000 pounds per semi-trailer via a sixth axle (Traffic World, 1997f). This ac- tion could save shippers $2.6 billion annually, according to a 1990 report by the Transportation Research Board. Adding a sixth axle and increasing the payload would also better align U.S. truckers with those from Canada and Mexico. Canada currently has a 107,000-pound weight limit while Mexican truckers are allowed 119,000 pounds.~5 Soft-sided Trailers The introduction of soft-sided trailers at Trans-National Freight Systems is an example of an innovation that came about in response to specific customer needs. The soft-sided trailers are being built to carry vinyl siding and cost nearly twice as much as regular trailers. However, Trans-National Freight Systems sees this as a business opportunity. The company is also providing reverse logistics for its customers by contacting the consignees and picking up empty pallets as they make deliveries. This provides a win-win situation for the two companies. The customer does not need to buy more pallets to keep supplying the market, and Trans-National has the opportunity to capture backhaul without waiting for uncertain loads. By investing in transaction specific assets and providing value- added services through pallet management, the company describes itself as not just a trucking company but an asset to their customer. In summary, advancements in a variety of technologies have made a plethora of data available to managers in trucking firms. However, trucking firms need to i4Meet-and-turn points are another means of keeping the freight moving quickly. At companies like CCX, two drivers (in two different trucks) will start at origins 500 miles away from one another. They will meet at a point roughly halfway in the middle, swap trucks, and each return to their origin. That way, the truck moves 500 miles at a time, but the drivers wind up back at home after a full day's work. i5Heavier trailers could impact the highways adversely. However, according to the Federal High way Cost Allocation study (Department of Transportation, 1997), the more axles a vehicle has, the lower its cost responsibility at any given weight and the more nearly it comes to paying its share of highway costs.

46 U.S. INDUSTRYIN2000 have the financial and human capital to convert these data into information. The corporate culture has to become conversant in the strategic use of information technology. The management of information may be a critical success factor in the new age of trucking (Bander et al., 1997b). The vast capabilities of computer and communications technology too often cause companies to lose sight of the main purpose of innovation and new technology adoption the fulfillment of business needs. In the successful cases, the innovation push created by emerging technologies is matched by the innovation pull created by non-technological fac- tors in the business environment and technological advancements in truck and trailer production. RELATIVE CONTRIBUTIONS OF TECHNOLOGICAL AND NON TECHNOLOGICAL FACTORS TO FIRM PERFORMANCE The trucking industry appears to be on the rebound, and the future appears to be bright. General freight rates were up 3.5 percent in 1997, compared with 2.2 percent in 1996. Table 4 presents some other encouraging data about recent trends in the industry. The improved performance of the trucking industry can be attributed, in part, to the agility and innovative behavior of the firms in the industry. The growing economy and the rationalization of capacity have also contributed to the trucking industry gains. Table 5 lists several services and process innovations already described above. Many of these are responses to recent competitive and environ- mental challenges. Accordingly, the impact of these innovations will be difficult to measure with any accuracy until more time has elapsed. Innovations can create new markets (for example, the soft-sided trailer), cap- ture additional market share (UPS second day guaranteed delivery), increase cus- tomer loyalty (QS 9000), increase revenue, and/or reduce costs (the Business Accelerator System). These innovations can have industry-wide impact, such as the growth of third-party logistics companies. They may also have impact out- side the industry, such as the growth of trucking industry-focused information TABLE 4 Trucking Trends 1997 1996 1995 Increase in LTL rate5.7% 4% 2.5% IncreaseinTLrate1.0% 0.2% 2.4% Average operating ratio93.6% 97.1% 96.9% Collective net profits3.65%a 1.18% 1.54% aSecond Quarter 1997. Source: Traffic World (1997a).

TRUCKING TABLE 5 Some Innovations in Trucking 147 Innovation Innovation Category Next day delivery/time-sensitive delivery Supply chain management Customer package tracking Electronic data interchange (EDI) Package tracking (within firm) Service teams (interdisciplinary teams empowered to service important customers) Sleeper teams Redesigned consolidation termunals Meet-and-turn points Flexible backhauls (designed to reduce the number of trips a truck makes empty) Service Service Service Process and service Process Process Process Process Process Process technology systems integrators and software houses and an increase in labor pool skills and wages. There are complex interactions between the factors that have been presented in sections 3 and 4 and a large number of innovations. Many factors, both tech- nological and non-technological, motivate innovations, while other factors en- able innovations that are motivated for other reasons. Figure 2 presents an illus- tration of the interactive influence that technological and non-technological factors have on the innovation process. Non-technological factors, such as the changing customer and competitive environment, organizational restructunng, and globalization, are playing an im- portant role in motivating new service innovations, thereby allowing firms to be G localization Changing Business Practices Non-Technological Factors T. e~ecommun~cat~ons Computer Hardware and Softweare Technological Factors _ _ _ Supply Chain ~ Management / ~(Service Innovation) Network Optimization (Process Innovation) Enables Motivates Increases in Market Size and Share Decreases in Cost FIGURE 2 An illustration of the influence of some technological and non-technological factors on innovation and firm performance.

48 U.S. INDUSTRYIN2000 more responsive to customer needs and specifications. Service innovations, of- ten motivated by non-technological factors, are enabled through the use of tech- nology. Technology plays a dual role in innovation. As an enabler of service innova- tions that interface with the customer, technology plays a role in enhancing the revenue stream of the firm. Technology also provides the means to introduce process improvements that reduce the cost and/or cut the time of providing ser- vices. Thus technological factors can also enhance firm profitability through strategic cost management. Sometimes innovations motivate other innovations. Many of these innova- tions improve processes within the firm. The robust management of the business processes within the firm is critical to providing effective and efficient service. Innovations motivated by other innovations provide a means to this end. More- over, these innovations are often key to the eventual success of the innovation that motivated them. For example, in order to provide time-sensitive delivery, firms have invested in technology to track trucks and packages. The ring scanner adopted by UPS, and described earlier, is an example of an innovation that was motivated by the service innovation in time-specific delivery. To summarize, many factors can motivate and/or enable innovation. Non- technological factors appear to motivate innovations that improve market share, while technological factors enable innovations that reduce costs and improve pro- cesses within the firm. Trucking firms look to technology to differentiate them- selves. Already many advanced technologies, such as AVL, satellite and cellular communication, on-board computers, and EDI are becoming commonplace in the industry. Computer-aided routing and dispatch, automated hubs, and load and container tracking seem to be on the verge of widespread adoption. While some of these technologies offer competitive parity at best, they nevertheless offer a means of survival in the tightly contested industry. Technology has brought excitement to an industry that acknowledges that the old way of doing business is no longer feasible. With their low margins and fickle and demanding customers, firms in the industry innovate so as to provide value-added services that attract and retain customers. While the influence of non-technological factors on firm performance appears to be significant in moti- vating the need for action and response, it is technology that is providing immedi- ate solutions for some competitive challenges. Consistent with the findings of Cooper and Merrill (1997), the innovations enabled by technological factors have come from outside the trucking industry, but the innovations have been significantly influenced by the trucking industry's idiosyncratic requirements. For example, Schneider was one of the early adopt- ers of the Qualcomm communication system and the system's design was greatly enhanced through the active interaction between user (Schneider) and developer (Qualcomm). Similarly, the implementation of EDI within a trucking firm is often driven by the trucking firm's customer specifications. The trucking firm

TRUCKING 149 has to ensure compatibility between its internal management information systems and the customer's EDI interface. Often systems integrators are involved in the development and coordination of the process of implementing EDI. The development and adoption of innovation has been motivated by the busi- ness needs of specific segments within the industry. Satellite communication systems have enabled many adopters to know the location and status of the fleet at all times. Information about the whereabouts of a specific truck are especially critical to the TL segment and, to a lesser extent, logistics providers. Many of the early adopters of the system have come from these two segments of the industry. In contrast, the LTL segment of the industry emphasizes precise information re- lating to the contents of the truck and to network optimization. Accordingly, package tracking and route optimization have been more frequently adopted within that segment. The management of information is becoming as important as the manage- ment of freight for the trucking industry. The ability to provide end-to-end infor- mation services becomes a critical capability for firms in the trucking industry. Recent trends indicate that the Internet and Web-enabled software may provide financial, operational, and structural assistance for shippers and carriers. The acquisition and processing of operational, financial, and related data should di- rectly support higher system capacity, greater labor and capital productivity, im- proved efficiency, more effective resource allocation, and better integration of processes and activities (BTS, 1997a). THE FUTURE OF FREIGHT AND EXPECTATIONS FOR THE TRUCKING INDUSTRY The trucking industry has seen tremendous growth, and that growth is ex- pected to continue. Table 6 shows some of the predictions of a study commis- sioned by the American Trucking Association (ATA). It is expected that trucking will rise from its 1996 share of 64 percent of the transportation sector to over 66 percent in 2006. The truckload sector is expected to have the largest gains in TABLE 6 Market Share Forecasts Mode 1996 share (%)2006 forecast (%) All trucking 6466.3 Truckload 3034.3 LTL 1.11.3 Private 32.930.7 All rail 1413.5 Intermodal 1.21.4 Note: Totals do not sum to 100%. Remainder is air freight, maritime, and pipeline. Source: Martin Labbe Associates, ATA.

50 U.S. INDUSTRYIN2000 market share, rising from 30 percent in 1996 to 34.3 percent in 2006 (Traffic World, 1997a). To sustain growth and improve profitability, firms in the trucking industry must continue to innovate and adopt innovations. This chapter has presented an overview of innovation and the innovation process in the current trucking envi- ronment. As is typical of other service industries, the emphasis on the customer is a clear imperative for competitive success. Some preliminary evidence sug- gests that innovation is playing a major role in the rejuvenation of the industry. The next few years will indicate whether firms' investments in creating new ser- vices and adopting new technologies will have commensurate payoff. In general, as new technologies emerge, as the rate of technological change accelerates, and as the degree of international competition increases, firms must enhance their ability to develop and introduce new products, services, and processes (Penrose, 1959~. Firms in the trucking industry have had to respond to the challenge of intense competition and demanding customers with new innovations in order to survive. There are several barriers to innovation in trucking. These barriers include the lack of standards in many new technologies, an inadequately skilled labor force, and the lack of adequate capital. When there are multiple technological paths to achieve the same functional- ity, manufacturing firms have to decide on a particular technology path in order to commercialize a new product. When firms choose incompatible technology trajectories, customers are forced to evaluate the relative advantages of each tech- nology as part of their purchase decision. This can inhibit widespread adoption of the product since the customers are often not technological experts and have limited information about the comparative merit of each technology. In an envi- ronment where network externalities exist, customers benefit from large scale adoption of a product based on a single technology. Compatibility standards assure the user that an intermediate product or component can be successfully incorporated in a larger system of closely specified inputs and outputs (David and Greenstein, 1990~. The existence of standards enables product development and innovation diffusion (Nagarajan,1996~. For example, adoption of electronic toll collection tags might save time for trucks. However, the lack of a common stan- dard and problems relating to cost allocation have hindered widespread adoption of this product. For many firms, the competitive circumstances of the trucking industry has created an environment in which profit margins are small. The deci- sion to invest in innovation rather than, for example, trucks is often difficult for trucking firms to make. The introduction of new technology-based innovations in the trucking indus- try has increased the need for individuals trained in computer and other technol- ogy use. The skills required to work in the trucking industry have changed dra- matically across all ranks of employees. All employees, including drivers, dispatchers, administrative, and managerial personnel, are exposed to varying

TRUCKING 151 levels of new technologies. For example, the driver sometimes has an onboard computer system that tells him his next destination. He is expected to interact with the system in order to make the entire network optimization process more efficient. The dispatcher deals with a computer that monitors the status of the fleet and updates routes in response to changing customer demands. The trucking industry must look to educational institutions to provide it with a workforce for the new competitive environment. According to managers, the key success factors for firms in the industry are customer satisfaction, cost management, employee retention, and safety. Tech- nology, such as EDI, GPS, information technology developments, and advanced communications, have enabled many innovations that directly address the key success factors. The role of these innovations in firm survival and profitability requires attention. Our initial conclusion based on the limited information ava~l- able is that innovations enabled by technological factors often appear to en- hance profitability by reducing costs through process reengineenng, strategic in- formation, and cost management. Innovations attributable to non-technological factors appear to be the competitive weapons motivating new ways of doing busi- ness that provide strategic advantage. The growing importance of logistics, as it progresses from being a value- added service to a critical product in the trucking industry, is evident. Industry consolidation has become the strategic response to the demands of the competi- tive environment. Indeed, these are interesting times for firms in the trucking industry. REFERENCES Alden, J. (1997). "Delivering the Global Village." Speech before Friday Group of Dallas, TX, June 20, 1997. Bander, J. L., A. Nagaraj an, and C. C. White. (1997a). "Strategic Management of Technology: The Case of Freight Mobility Systems in the Trucking Industry." working paper. Bander, J. L., A. Nagarajan, and C. C. White. (1997b). "Information and the Trucking Industry." Paper presented at the IEEE-SMC Conference in Orlando, FL. Oct 1997. Bank of America. (1997). "Economic and Business Outlook Transportation," August. BTS. (1997a). Transportation Statistics Annual Report 1997: Mobility and Access, U.S. Department of Transportation Bureau of Transportation Statistics. BTS (1997b). Transportation in the United States: a review, U.S. Department of Transportation Bu- reau of Transportation Statistics. Cooper, R.S., and S. Merrill. (1997). Industrial Research and Innovation Indicators. Report of a Workshop, Washington, DC: National Academy Press. Danckwerts, Dankwart (Hg). (1991). Logistik und Arbeit im Gutertransportsystem. Rahmenbe- dingungen, Verlaufsformen und soziale Folgen der Rationalisierung, Opladen. David, P.A., and S.M. Greenstein. (1990). The Economics of Compatibility Standards: An Introduc- tion to Recent Research. Economics of Innovation and New Technology Vol. 1. Department of Transportation. (1997). 1997 Federal Highway Cost Allocation Study. Hitt, M. A., R. D. Ireland, and R. E. Hoskisson. (1996). Strategic Management: Competitiveness and Globalization. Minneapolis/St. Paul: West Publishing.

52 U.S. INDUSTRYIN2000 Hubbard, T. N. (1997). Why are process monitoring technologies valuable? The Use of Trip Record- ers and Electronic Vehicle Management Systems in the Trucking Industry. Unpublished report. Industry Week. (1997). 246(19):136. Kline, S., and N. Rosenberg. (1986). "An overview of innovation" in The Positive Sum Strategy- Harnessing Technology For Economic Growth. R. Landau and N. Rosenberg, eds. Washington, DC: National Academy Press. Nagarajan, A. (1996). Acquisition of Technology in an Emerging Industry-A Study of the Intelligent Vehicle Highway System Industry. Ph.D. dissertation, University of Michigan School of Busi- ness Administration. Penrose, E. T. (1959). The Theory of the Growth of the Firm. New York: Wiley. Plehwe, D. (1997). "Deregulation and Integration of Transport Industries: The emergence of trans- national transportation systems." Presented at the Council of Logistics Management annual conference in Chicago. Oct. 1997. Purchasing. (1996). "Hype vs. Reality" 120(3):48S2-48S 12. Rogers, E.M. (1995). Diffusion of Innovations. New York: Free Press. Society of Automotive Engineers (1993) Technical Paper 932975, "Tomorrow's Trucks A Progress Review and Reappraisal of Future Needs." Swan, P. F. (1997). "The Effect of Changes in Operations on LTL Motor Carrier Efficiency and Survival." Ph.D. dissertation, University of Michigan School of Business Administration. Thompson, A. A., and A. J. Strickland. (1996). Strategic Management: Concepts and Cases. Chi cago: Irwin. Traffic World. (1997a). "Blue Skies" 252(5):22. Traffic World. (1997b). "LaLonde: Ante Up" 250(1):21. Traffic World. (1997c). "Churning a Problem" 252(4):27. Traffic World. (1997d). "Viking Connected" 252(3):21. Traffic World. (1997e). "The 'R' Word" 252(4):29. Traffic World. (1997f). "Changing Direction" 252(5):23. U.S. Department of Labor. (1996). Occupational Safety and Health Administration, 1996 Census of Fatal Occupational Injuries, Washington, DC. Von Hippel, E. (1976). "The Dominant Role of Users in the Scientific Instrument Innovation Pro- cess" Research Policy 5(3).

TRUCKING 153 APPENDIX A: THE STUDY METHOD This study used a multi-pronged approach to studying the innovation process in the trucking industry. The study began with unstructured interviews with 25 industry stakeholders. Of our 25 initial respondents, 9 were trucking and logis- tics firms from the different segments of the trucking industry, while 16 were experts and regulators from outside the industry. We focused on understanding the changing competitive dimensions of the industry as a context for studying the innovation processes within the firms. Using the discussions as the basis, we developed semi-structured questionnaires for trucking firms and for technology vendors. The questionnaire for the trucking firms consists of three sections. Two qualitative sections focus on the innovative process and the factors enabling or hindering the process. The third section seeks to obtain quantitative information about financial performance and the firm's operational characteristics. Seven firms drawn from a cross-section of industry segments, were interviewed. A second semi-structured questionnaire was developed to administer to tech- nology vendors. This instrument focused on competitive issues in the vendors' industry and the barriers to proliferation of new, advanced technologies in the trucking industry. Seven technology vendors were interviewed.

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U.S. industry faced a gloomy outlook in the late 1980s. Then, industrial performance improved dramatically through the 1990s and appears pervasively brighter today. A look at any group of industries, however, reveals important differences in the factors behind the resurgence--in industry structure and strategy, research performance, and location of activities--as well as similarities in the national policy environment, impact of information technology, and other factors.

U.S. Industry in 2000 examines eleven key manufacturing and service industries and explores how they arrived at the present and what they face in the future. It assesses changing practices in research and innovation, technology adoption, and international operations.

Industry analyses shed light on how science and technology are applied in the marketplace, how workers fare as jobs require greater knowledge, and how U.S. firms responded to their chief competitors in Europe and Asia. The book will be important to a wide range of readers with a stake in U.S. industrial performance: corporate executives, investors, labor representatives, faculty and students in business and economics, and public policymakers.

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