A Way To Lower Shipping Costs

Nation's Business, Dec, 1998 by Ken Cottrill

Ken Cottrill is a free-lance writer in Yardley Pa.

Small firms are finding that as the freight-hauling industry consolidates, cooperatives can offer shippers increased buying power and convenience.

Kathy Hendrixson used to spend a lot of time calling truckers to get the best deal for delivering the marshmallow ice-cream cones her company manufactures. But since Marshmallow Products Inc. in Cincinnati joined a shippers cooperative last year, Hendrixson makes just one call to arrange for a shipment, and she now pays about 40 percent less for freight services.

When the 50-employee manufacturer was approached by the Cincinnati-based Nationwide Shippers Cooperative Association, Hendrixson says, "we didn't know anything about shipper cooperatives." Now she's a convert: "I think more small companies should know about them."

Cooperatives are nonprofit organizations that leverage their buying power to lower the cost of freight shipments for their customers. They arrange for shipments to be picked up and delivered, and they handle all payment negotiations. Representatives of member companies usually meet once a year to appoint a board and determine operating policies.

The American Institute for Shippers' Associations (AISA) in Washington, D.C., has close to 50 member co-ops. That represents a high percentage of all U.S. shippers cooperatives, says Glen Cella, the institute's executive director. However, there is no national database of these cooperatives, so the exact number is unknown, he adds.

A Swing fit The Pendulum

The popularity of co-ops declined in the 1970s and 1980s after deregulation of the freight-hauling industry. Many small and medium-sized shippers decided they could negotiate effectively as independents, and some co-ops disbanded as a result. Now the pendulum is swinging back in favor of co-ops as the freight-hauling industry consolidates and small companies have fewer choices in deciding how to ship goods- and less room to negotiate good rates on their own.

Says Ron Cobert, a Washington-based attorney who represents shippers cooperatives: "There is no question that cooperatives are growing," enabling small shippers to get better rates by pooling their business and increasing their market muscle.

AISA's Cella says that most of the domestic freight moved by his organization's members is transported by road, a sector of the freight-hauling industry where there has been marked consolidation. Although there are numerous small operators, road freight is dominated by three or four carriers, says Cella.

The dominance of large freight carriers is even greater in the rail sector. In June, the Surface Transportation Board-the federal agency responsible for competition policy in transportation-gave the green light for two railroads, Richmond, Va.-based CSX and Norfolk, Va.-based Norfolk Southern, to swallow the Northeast's biggest rail carrier, Philadelphia-based Conrail.

When the $10.2 billion merger is complete by mid-February, there will be just four major freight railroads in the United States.

Similar consolidation is under way on water. The Ocean Shipping Reform Act, which President Clinton signed into law at the end of October, fundamentally alters the relationship between shipping lines and their customers. The new law is to take effect May 1, 1999.

The measure allows service contracts between carriers and shippers to be confidential. Under current practice, ocean shipping lines are required to post freight rates publicly The large carriers have supported the change, but small shippers are concerned that it will favor large-volume shippers who will be able to secure big discounts in secret negotiations.

Moreover, the act preserves shipping lines' immunity from anti-trust regulations, enabling ocean carriers to operate as large groups, which critics-including many small shippers-regard as cartels.

However, shippers co-operatives may actually benefit from the act, says AISA's Cella. The act prohibits ocean carriers from discriminating against cooperatives by not accepting their business or by denying them the volume discounts they give larger customers. 'That fact could, in turn, help drive smaller shippers to join cooperatives as their surest refuge from predatory carrier pricing," Cella says.

From Slipcovers To Spirits

Cooperatives range in type from those dedicated to serving a specific business sector to generalists that arrange transportation for virtually any cargo.

Bennett Hillman, inventory controller for Hoch and Selby Inc., a Portland, Ore., manufacturer of upholstery fabrics, says his firm is a long-standing member of WOSCA Transportation Services Inc., a shippers cooperative headquartered in Seattle. WOSCA handles almost any type of freight, although "about 85 percent of our business is retail goods," says the cooperative's president, Brian Volkert.

Hoch and Selby, which employs 12 people, might receive 40 to 50 shipments a month, but these are usually small shipments-and small change for many trucking companies.

Hillman says that the volume discounts the cooperative offers usually make it the most competitive choice.