Company overturns trucking industry conventional wisdom by using computers to pinpoint profitable loads.
OTR Express overturns conventional wisdom in the trucking business by using computers to pinpoint at any given time where its most profitable load of freight is most likely to be found
OTR Express is a small trucking company that sits out at the prairie's edge in Olathe, Kans., just southwest of Kansas City, in a neat and tidy one-story concrete building rising out of a windswept industrial park that hardly suggests the grit and brawn of trucking. Inside you'll find no scuffed linoleum on the floor or pinup calendars on the walls, no beefy men walking around in cowboy boots and fringed vests. OTR is more of a CPA's delight: spotless wall-to-wall carpeting, and computers humming on every desk. The company's principal founder, Bill Ward, favors somber ties and neatly pressed oxford shirts. His passion -- which soon burns through in conversation -- is for data processing. His background is in real estate.
Unlikely as it may sound, those two callings thrust Ward into the trucking business in the early 1980s, when the real estate market around Kansas City was beginning to head south in a hurry. He started OTR Express with his wife, Kathy, a former schoolteacher, and Dick Walpole, his real estate partner. The day they opened the doors, they had no customers. They did have one truck but no idea what road fortune would take it down. Walpole recalls heading off to the local library "to read up on trucks and what they looked like."
Ward and his associates certainly could have chosen a less competitive business. There are 40,000 trucking companies in the United States, and as many as 10% of them will go bust this year. Given those numbers, it's not exactly surprising that your average trucking company hardly amounts to a rolling gold mine. If you're clearing 2% or 3% after taxes, you're doing well. A net return of 5% is exceptional.
Today OTR has 230 trucks, and in the first three quarters of 1992, it rang up $15.9 million in sales while earning a net profit of $514,000. And those numbers have not come about because of shoddy equipment or disgruntled, underpaid, and inexperienced drivers. OTR provides some of the best equipment in the industry, to drivers who have an average of 14 years' experience and who earn 20% above the industry norm.
So how exactly did Bill Ward pull this off, given that he didn't know very much about trucking when he started OTR?
A closer look reveals that Ward's mechanism for success was twofold. First, he was an outsider. "We were fortunate to come into this business without a preconceived idea of how to run it most profitably." Ward came into the business, appraised it with a fresh eye, and has gone on to apply novel methods to running a trucking company -- methods that clearly fly in the face of the perceived wisdom about what makes for success in the industry.
Second, and more specifically, Ward, applying his passion for data processing, has brought high technology to a low-tech business, using elaborate proprietary software he and OTR's two programmers have written and refined over the past eight years, programs that now exceed 200,000 lines of code. That software is run on a network of Macintosh computers, giving OTR, by Ward's estimate, as much computing power at one-tenth the cost of -- and with a lot more flexibility than -- the mainframe computers used by other companies. OTR's computers rigorously chart, track, and measure numerous facets of the company's operation, from the amount of fuel each of its trucks consumes to the difference between the cost of spare tires bought in Albany and those bought in Albuquerque.
Most critically, Ward has used his computers' number-crunching ability to position and deploy his fleet in its movements around the country, to ferret out freight in the most efficient way possible and thereby run the business more profitably than the average trucking company.
Bringing computer technology to OTR's operation, Ward stresses, is an ongoing process, as OTR's programmers continue to refine existing programs -- and they currently have another 46 separate programs they plan to write when time and money permit.* * *
In mature industries, management often falls into a mind-set about how to run the business. There evolves, in short, a right way and a wrong way. The relatively insular and conservative world of trucking proves no exception -- and according to conventional wisdom, OTR's strategy, which is very unusual, is also considered the wrong way.
That conventional wisdom says there is one preferred way to run a company in the trucking business. That strategy derives from what is called the core-carrier concept, in which the trucking company develops close ties with a handful of customers, or shippers. It is a relationship founded on loyalty and service. The shipper offers the trucker steady volume and premium rates. In return, the trucker agrees to provide superior service.
Such a relationship creates risks for the carrier. It requires that it have extra equipment because it may have to drop off an empty trailer or two at a customer's plant to be loaded at a moment's notice. It tends to require the running of more (non-revenue-producing) miles without cargo ("deadheading," in industry parlance), because the trucker might have to move an empty truck to a pickup point at the shipper's whim. Last, becoming a core carrier can make a carrier overly reliant on a few large customers and thus vulnerable if one or two should grow dissatisfied and take their business elsewhere.
Enter, then, OTR Express and Bill Ward, who decided not just to pursue the path less traveled but to blaze a new one altogether.* * *
The fact that OTR Express had all of one truck when it started out drove much of its strategy. The company couldn't really be a core carrier, because it simply lacked the resources. But beyond that, Ward saw risks and constraints in the core-carrier concept, and his intent was to avoid that strategy even after his company grew big enough to consider it.
Ward's idea, in this capital-intensive business, was to liberate OTR's assets as much as possible, and that meant not obligating them to a chosen few customers. "The more criteria you set up when you go to find a load of freight, the tougher it is to make money," says Ward. "Once you start removing those criteria, the easier it becomes to find a load and the more profitable your business becomes."
Ward thus decided to pursue the spot, or "intermittent," market, smaller shippers that move freight on a less regular basis. The danger with that market is that it is unpredictable and more sensitive to pricing pressures than the core-carrier market is. But to Ward, the uncertainty offered opportunity -- opportunity he believed he could make good on, given his facility with computers. Recalls Ward: "We said to ourselves, We are programmers. We should be able to use computers to develop information that will let us move trucks more efficiently. We know there's always a load available. The real question is, Can we move that freight profitably?"
Ward, in sum, believed that intensive data processing could do two things for OTR. First, it could impose a measure of order on a chaotic market. Second, it could give OTR flexibility where other carriers lacked it. His strategy was to position trucks where his computer-generated data told him freight was most likely to occur in its most profitable form -- not unlike the way an astute fly fisherman, directed by his observations over time, will favor one pool in a stream over others as the likeliest spot to catch a big fish. Ward's strategy was to, in effect, work the problem backward: to unravel the answer in order to divine the question. "Instead of putting our trucks near our customers as core carriers do, we go out and find customers who happen to be near our trucks at a given point in time," he says.* * *
But what possessed Ward to think his system would work when no trucking business had tried it before? His reasoning was simple: in a capital-intensive business, you use your assets as efficiently as you can. And the computer would let him do just that.
A good rig -- consisting of tractor and trailer -- costs around $85,000, even when bought in volume, making trucking an expensive and risky undertaking, especially for start-up carriers like OTR. By finding customers as close to his trucks as possible, Ward figured, he could allocate his assets more efficiently and, as a result, produce a higher return on them than if he were to adopt a more conventional strategy.
OTR, for example, has 1.2 trailers for every tractor, while the industry average is 2.5 trailers per tractor, since core carriers need to have more trailers available to drop off empty to their best shippers. OTR is much closer to the optimal one-tractor-to-one-trailer ratio than the industry average is.
OTR's ratio of employees per tractor is one to six, compared with an industry average of one to three, again suggesting that the company requires fewer people to support its asset base. Last year OTR trucks ran empty 6.05% of the total miles they traveled, while the industry average was 10%. That means OTR's trucks are running with revenue-producing freight nearly 4% more of the time -- which, in turn, means that at an average freight rate of $1 per mile, the company has a 4¢ edge over the average competitor and thus has that much more flexibility in quoting rates to shippers.
OTR's average haul is 1,451 miles long, versus an industry average of 700. Although shorter hauls tend to produce higher rates than longer ones do, OTR believes it makes up the difference in two ways. First, its computer can ferret out higher long-haul rates. Second, long hauls require less frequent loadings and unloadings, as well as less paperwork -- hard-to-measure costs that can kill profitability if they're not closely monitored.
Meanwhile, OTR's deliberate strategy of tapping the broad intermittent market -- the company has 600 customers -- means that it also spreads the risk. The company's largest customer accounts for less than 4% of total revenues.* * *
So how, more precisely, does OTR's system work?
To begin with, it revolves around Bill Ward's basic belief that the trucking industry is in a state of daily change and turbulence and that the best hope for making that chaos coherent lies in computer technology. Ward says that the market shifts daily for myriad and random reasons. A storm in the Pacific can wreak havoc on the California harvest, hampering the orderly movement of produce from west to east. A strike at a midwestern auto plant can ripple through the community of suppliers and dry up shipments in the region. Hurricane Andrew knocked the system out of balance, creating a subsequent need for many shipments into Florida -- although there was relatively little to be trucked back out of the state.
Ward figured he could use technology to organize this chaos. The program he sat down to write sprang from the idea that while all carriers focus on where a truck is immediately headed, few of them are thinking about that truck's subsequent move. For example, if an OTR truck were carrying freight from Kansas City to Los Angeles, the key to profitability, Ward believed, lay in finding a good load of freight out of Los Angeles. Thus, if the leg from Kansas City seemed marginally profitable, that was irrelevant. What really mattered was making sure that OTR got the most profitable load available out of Los Angeles.
OTR's computer does what Ward calls continuous rate analysis, combing through all the freight the company has moved and all the rates it has received from shippers and brokers over the past 30 days. In the case of the aforementioned Kansas City-to-Los Angeles haul, the computer would then rank all OTR's Los Angeles customers by their "revenue potential." At the top of that list would appear the Los Angeles-based customer that had in the past month shipped most frequently for the furthest distance at the highest rate via OTR. That would be the preferred customer on the list for the next haul going out of Los Angeles, followed by the company's other Los Angeles customers in descending order of their revenue potential.
Ward says the process is one that began "intuitively," yet has "since been tested by reality" -- a reality that becomes more real with each passing day, as the data slowly accrete with every load of freight hauled by an OTR rig. Ward says there is a "decay rate" in OTR's 30-day-old information -- in other words, it is not 100% reliable -- but as time goes on, and as OTR hauls more loads and its database grows, the computer will be able to generate judgments based on increasingly more up-to-date real-time information, which OTR can subsequently use to plan its movements. Notes Ward, "The more business we do, the more observations we have. We can look at information over increasingly shorter periods of time." Soon, in fact, OTR's computer will shift to doing continuous rate analysis on the prior 15 days of shipments, not 30.
After eight years of reality and 200,000 lines of software code, OTR Express has emerged with its technology-driven way of addressing the market and finding business. One side of OTR's offices houses the dispatch department, a roomful of "load planners" seated in front of video display terminals. Once every hour they receive printed updates showing where all the company's trucks are and when they're due to arrive at their next destinations. The planners' job is to find a new and profitable load for each of those soon-to-be-empty trucks.
Each dispatcher monitors a given geographical area of the country, which, in turn, is broken down into zones roughly the size of those encompassed by telephone area codes. The computer then generates a list of its customers in each zone, based on OTR's shipping information from the last 30 days, and ranks those customers in order of potential profitability.
With an OTR truck now heading into a particular area to drop off a load, the dispatcher gets on the phone and starts calling customers in that area, beginning at the top of the list. She inquires if the customer has a load to ship imminently, and if so, to where. She keeps moving down the list until a sufficiently profitable load turns up. If the first list doesn't yield a load, then the computer shifts to an adjacent area and repeats the process until a load is found. A load is always found because the customer list includes freight brokers, who are usually further down the list, since their rates include a commission and hence tend to produce less profit. OTR finds about 40% of its loads through brokers.* * *
A second and equally important aspect of OTR's strategy of finding profitable freight is what Ward dubs fleet management. In short, the computer tracks where OTR's trucks are at a given point in time, so that the fleet can remain continually dispersed relative to its customer base. For example, the last thing OTR wants to see is 25% of the fleet heading into the Pacific Northwest, since historically the region has produced only 10% of the company's loads. Since history tells the computer that New Mexico and Wyoming generate relatively few loads, it limits to one the number of trucks entering those states at any given time.
The computer thus acts as a "traffic cop," says Ward, allocating the fleet along routes and destinations based on a range of variables such as, What percentage of the fleet may already be in the area or may arrive in the next two days? How many trucks are due to arrive in the next three days? Is there a weekend or holiday coming up? What is the current average length of a layover by a truck in the area?
OTR's strategy, based on such intensive number crunching, is not only highly unusual but also downright contrary, because implicit in it is an ethos best summarized as, Here today, gone tomorrow. OTR, in effect, discourages loyal customers, because a customer that's very profitable one month could fall down the list and hence be less desirable the next. And since OTR's computer bloodlessly seeks out today's best-paying customer, the company doesn't want to get bogged down in serving a customer that is ship-ping commodity loads around the corner, when a year ago that same customer was shipping valuable freight halfway across the country.
If conventional wisdom prizes customer service and loyalty, how then can OTR compete? Dick Walpole, OTR's executive vice-president, says, "I can count on one hand the number of customers we've lost." He says customers come to OTR because it provides good rates and good service and is flexible. Customers are often willing to wait for an available truck, or if not, they'll have OTR broker the load to another carrier. (OTR's brokerage division accounts for about 10% of revenues.)
And, adds Walpole, OTR has one other weapon in its arsenal. "Customers see the older drivers and the newer equipment. They like that a lot."
And that speaks to a second major strand in OTR's strategy.* * *
When Bill Ward was in the real estate business, before starting OTR Express, he put together limited partnerships to invest in multifamily housing. He got into trucking because he saw no reason the same investment concept couldn't apply to it. Instead of having partners buy shares in an apartment building, he could just as easily sell shares in an individual truck to be run as a separate and discrete investment, returning to the partners whatever profit that truck produced.
But Ward soon discovered that the business of leased trucks differed from that of apartment buildings in one elemental way: "We found that some of the limited partnerships excelled and others didn't, and the reason for that was that the driver had a high degree of control over the truck and hence the perfor-mance of the partnership."
About a year after starting OTR, Ward realized that running his own freight line rather than leasing trucks to other carriers was a wiser, more profitable way to go. He sold off the trucks, dissolved the partnerships, and paid off his investors. In early 1985 OTR started up again with all of one truck. But there was one element of the original business Ward did not dispense with. Since he knew from recent experience that a driver has a big influence on the operating performance of the truck, he wanted to retain the idea of operating each truck as its own profit center.
Ward also realized that a lot of trucking companies tried to pare costs by buying lesser equipment or deferring maintenance -- and that indeed seemed a tempting way to boost profitability. But experience also told him that good trucks produced more motivated drivers, who in turn earned more money. Taking the strategy to its next logical -- and self-reinforcing -- step, he figured that the better the pay at OTR, the better the quality of drivers the company could recruit. More fundamentally, by investing in and maintaining top-notch equipment and by offering a strong incentive-based program, the company could choose from among older, more experienced drivers.
Gary Hinckle, OTR's vice-president of fleet operations, notes that "the average age of our drivers is 43, with 14 years' experience. I won't hire anyone under 25, and I really don't like to hire anyone under 30. I won't hire anybody who's had an accident in the last two years." That, he adds, has its own payoff -- a lower accident rate and consequently lower insurance premiums. The industry's accident rate, says Hinckle, is roughly three accidents per million miles driven, while OTR's is less than one per million miles driven. Hinckle adds that OTR's customers like dealing with the company because its older drivers tend to be more reliable, more courteous, more punctual, and more careful.
None of OTR's 230 drivers is an owner-operator (a driver who owns his or her own rig and works as an independent contractor). All work full-time for the company and are considered, in company parlance, "managers," since they ultimately are responsible for the profit centers from which they derive all their salary and bonuses. Says Hinckle: "We try to hire people who are smart enough to think for themselves. We don't want 'wheel holders.' " He notes that on a recent weekend he received only three calls at home from OTR drivers reporting some sort of emergency or personal problem they couldn't solve -- a very low number in a high-stress occupation in which driver turnover can approach 100% a year.
Kathy Ward, vice-president of administration and compensation, who oversees the profit centers, says, "The drivers look at this as a game. There's no risk to them, and if they're smart, they can find all sorts of ways to save money." She says the game is played in big and small ways. Heading east to New York State, a driver can stay off the turnpikes in Ohio and Pennsylvania and save $100 in tolls. Drivers can do routine maintenance or wash their trucks on their own time. Most significantly, they can drive smartly and buy fuel wisely to control the largest variable cost of all -- fuel.
Last year OTR's trucks traveled 22 million miles, consuming more than $3.3 million worth of diesel fuel, which accounted for about 15% of revenues. To keep fuel costs down, the company has built five unmanned fuel depots, served directly by pipelines, around the country. OTR trucks can enter the depots using a special access card, and the drivers can fill up, buying fuel at wholesale from the company instead of paying retail at commercial truck stops. The spread between the wholesale and retail price can be as high as 15¢ a gallon. OTR has positioned the fuel depots strategically around the country so its trucks can drive from coast to coast without buying diesel fuel at retail. Each depot, at a cost of about $80,000, paid for itself within two years in the form of savings on the cost of fuel. And fuel consumption serves as the major incentive in determining driver pay.
The company pays its drivers 20¢ per mile for the first 5,000 miles they drive in each four-week period. (OTR expects its drivers to log 10,000 to 11,000 miles per month.) That's below the industry average of about 25¢ per mile. But after the first 5,000 miles, the company pays as much as 37¢ per mile, depending on a driver's fuel efficiency. Bill Ward says that most trucking companies tend to compensate on the basis of seniority. OTR's strategy is to compensate on productivity, enabling its more motivated drivers to earn up to $50,000 a year, against an industry average of about $30,000.
The profit center works like a mini business. All revenues generated from shippers go into the profit center, with the company taking about 13% out for overhead and management fees. The balance stays in the profit center to defray all expenses, from monthly payments on each truck, to health insurance, to oil and tires. If a driver has an accident, that expense also comes out of the profit center. All wages come out of the profit center, with drivers given a strong incentive to earn as much as possible in premium pay (pay for miles logged after the first 5,000). "If a driver can pull high wages out of the profit center, that's money he doesn't have to share with us," explains Kathy Ward. Whatever profit remains is then split equally between the driver and the company. Currently, profit paid to each of OTR's drivers averages about $900 per quarter across the fleet.
Meanwhile, the company has brought the same rigorous computer-based approach to managing its profit centers that it has to finding profitable freight. Drivers call in mileage traveled and fuel consumed weekly, so that every truck's fuel economy can be calculated. All repairs are noted, with parts and labor broken down separately. That information allows the company to guide drivers to where the equipment can be serviced under warranty or can be bought wholesale, while steering them clear of locations that charge a premium for parts and labor. It also enables drivers to schedule routine maintenance or minor repairs when they return to Olathe, where the company can buy shop services at a lower rate from a network of repair shops in the area.
OTR's maintenance supervisor, Mark Hirshman, routinely goes over invoices with the drivers, reminding them which parts of the country have lower labor rates or where parts can be bought under warranty. "Our drivers used to buy four to five tires a day on the road," says Bill Ward. "Now that number is down to three per week." Such small decisions, he adds, are not, in the aggregate, insignificant, since last year OTR spent $3 million on maintenance.* * *
Dan Bearth, a staff writer at Transport Topics, based in Alexandria, Va., one of the few industry trade journals that focus on trucking management, believes OTR Express is one of a kind by dint of its strategy. "We're not aware of any other single company that does business this way, because no one else has gone into the business the way it has," he says.
Jon Braatz, an analyst with the Kansas City, Mo., office of brokerage firm Fahnestock & Co., who follows the company, echoes Bearth. "All trucking companies now use the computer intensively," he says, "but when OTR's managers started the company, they said, 'We're going to adopt a different approach that will make the computer fit well with the use of our heavy equipment.' " Braatz says that while other trucking companies almost invariably start with the same core technology, the truck, and then adapt other technologies to its service, OTR began with computers and an attendant passion for programming to best determine how it would then use its trucks.
Braatz says that for now OTR Express is so small and so unorthodox that it will likely draw little attention from large competitors. That should favor the company. "I think there's a big niche out there for this type of company, if it can execute." So far OTR has executed. In the past five years sales have risen from $5 million to an estimated $22 million as of year-end 1992.
OTR's future hurdles will relate more to questions of finance and management, an assertion Bill Ward does not deny. The company, like many others in similarly capital-intensive industries, is highly leveraged. "They'll need to bring in some more fresh equity in the next 18 months," says Braatz. "The other issue is whether or not they can roll the concept out. Is it viable with 800 trucks instead of 200?"
One thing seems clear judging by OTR's numbers: as Bill Ward asserts, "We've never been restrained by limits on freight." In other words the company has continued to find an increasing amount of business. Less well appreciated, Ward adds, is how OTR's proprietary software, crafted over an eight-year stretch, has created substantial barriers to entry. In theory, OTR's operation should grow more efficient with time, because the more observations the computer can make, the truer the data it will produce, and the better it will be able to guide the operation of OTR's fleet.
Looking back, Ward sees OTR's technology-driven strategy and consequent success less as a function of deliberation and more as one of ideas converging to produce a company. "It has been an evolution for us, really," he says. "Dick Walpole and I were both salesmen, so we were very much used to looking at marketing as a challenge. On top of that, I had a background in data processing. So we just kept brainstorming, always asking ourselves, What can we do to give us an edge?"
OTR has that edge and is now off and running with it.
OTR EXPRESS: DEPARTING FROM THE NORM
OTR Express's approach differs from the norm in the trucking industry in many ways: its pursuit of the spot, or "intermittent," market; its use of proprietary computer programs to pinpoint the most profitable load; and its treatment of each truck as a profit center. So, by the numbers, how does OTR compare with the rest of the industry?
OTR Express Trucking industry
Net profit margin 3% 2%-5%
Trucker's annual up to $50,000 up to $30,000compensation
Trailer/tractor ratio 1.2:1 2.5:1(1:1 is optimal)
Employees/tractor ratio 1:6 1:3(lower is more efficient)
Percentage of total miles 6.05% 10%traveled that are "dead" (that is, by an empty truck)
Average haul 1,451 miles 700 miles
Accidents per million less than 1 3miles driven
TRUCKS AS PROFIT CENTERS
OTR Express treats each of its trucks as an individual profit center and each driver as a manager. The following is a profit-and-loss statement for a single truck for the period from November 1, 1992, to November 30, 1992:
% of total Year to % of total
Current revenues date revenues
Total revenues $6,957.50 100.00 $73,963.77 100.00
Principal payment $654.16 9.40 $6,995.20 9.46
Claims and accidents $0.00 0.00 $1,016.63 1.37
Fuel $1,389.00 19.96 $14,447.00 19.53
Insurance $400.00 5.75 $3,600.00 4.87
Licenses and permits $320.00 4.60 $2,880.00 3.89
Road expenses $0.00 0.00 $978.38 1.32
Wages $2,370.72 34.07 $24,928.50 33.70
Payroll expenses $336.79 4.84 $2,718.38 3.68
OTR distribution $0.00 0.00 $626.48 0.85
Manager distribution $0.00 0.00 $626.48 0.85
Tractor oil $0.00 0.00 $63.00 0.09
Tractor maintenance $110.67 1.59 $1,226.45 1.66
Tractor washing $0.00 0.00 $183.00 0.25
Tractor parts $0.00 0.00 $15.14 0.02
Trailer expenses $460.00 6.61 $4,140.00 5.60
Trailer maintenance $100.00 1.44 $900.00 1.22
Management fees $372.08 4.70 $3,497.60 4.73
Health insurance $75.00 1.08 $412.50 0.56
Total operating $6,543.42 94.05 $69,254.74 93.63expenses
Operating income $414.08 5.95 $4,709.03 6.37
Interest expenses $461.54 6.63 $4,153.86 5.62
Net income ($47.46) (0.68) $555.17 0.75