Interview: Tom Hostetler, CEO, Cardinal Logistics

ASCET: Cardinal Logistics is a relatively small company with some
very big clients – KraftMaid Cabinetry, The Home Depot, Best Buy, Office Depot,
IKEA and Georgia-Pacific to name a few. How are you working with your clients
in terms of warehouse, inventory and transportation management? Are you using
RFID, bar coding?

Tom Hostetler (TH): We’re primarily a transportation company, so we’re
only looking at a handful of warehouse locations, most of which are cross-docks
and a couple of standard distribution-center-type warehouses with a couple hundred
thousand square feet and inventory that turns a few times a month. We don’t
have any customers that have gone to RFID yet. We’re linked with our customer
systems and are waiting for them to make a decision on a new system. Typically,
we keep abreast of developments in the field so that we can understand when
a solution is an appropriate fit. We know what the capabilities are, we know
who the leading providers are and we know generally what the cost is.

In terms of being a smaller company with big customers, it is true that we
do have some demanding customers. I think we can do what we do because we can
deliver solutions that are attractive, and we have a professional outlook on
service requirements. But we maintain a small company feel in that we are very
accessible. If you’re a customer of ours, you’re pretty much going to know the
officer and operations group well after we’ve been in business together for
awhile. We don’t have a hundred customers – we barely have 35 customers, but
we offer a highly responsive and personal level of service.

ASCET: What trends are you seeing in outsourcing?

Tom Hostetler (TH): It’s hard to get a global picture. The studies all
say that it’s a growing revenue number, but I don’t know what the actual volume
translation is, because prices are rising so rapidly in certain parts of the
business that if you outsource the management of your surface transportation
in the U.S., that’s going to show a 10 percent increase just based on the current
price increases. There are concerns that the basic truckload capacity, and in
a lot of cases rail capacity, has tightened up to the extent that networks are
being re-engineered to determine how much they tender out to a one-way carrier
as opposed to trying to figure out a way to engineer their system so they can
capture capacity and keep it busy on a full-time basis. I think this effort
is driven by a concern as to whether they will be able to get capacity as well
as one-way pricing, which has a tendency to reflect pricing pressures a lot
more quickly than longer-term dedicated arrangements.

So you’ve got a pricing element where just common carrier truckload is going
up at a more rapid rate than dedicated pricing. There are concerns about service
– will the capacity be there and how much can be locked in and effectively utilized.
Where it’s a private fleet, a lot of people are looking at their difficulty
in arranging for outside transportation and re-evaluating whether they want
to outsource or not. So I’m not sure that the volume of outsourced business
is actually growing. There’s never been huge growth when you look at the overall
size of private fleets and the amount that’s been outsourced. But when people
evaluate whether they want to outsource or not, risks emerge, such as whether
the capacity will be there and pricing will remain stable. I would not be surprised
if a study came out that said the actual volume of outsourcing, at least on
the transportation side, was lower this year than in prior years.

ASCET: What’s happening with old-fashioned logistics, aside from
technology, in truck management?

Tom Hostetler (TH): There are a lot of cost challenges – equipment and
fuel cost are going up, and there is an ongoing challenge in terms of finding
quality drivers. A lot of retention issues revolve around quality of life issues,
and I think many transportation companies have made a tremendous amount of progress
on quality of life in terms of facilitating more home time for drivers. On the
truckload side, carriers are re-engineering a more predictable home life for
the driver. For our business, we have a very high percentage of jobs that provide
relatively good quality of life compared to drivers that do thousand-mile runs
and multiple dispatch runs, so that the driver needs to be gone for a week.
We have a driver home every other night on a typical job, and that’s been good
for us on quality of life concerns, but we’re still continuously working through
the demographics to determine how many safe drivers there are in a given market
and how we can find and attract those drivers.

Also, in regard to capacity issues, I suspect people will end up with a scenario
where they have to go back to having more inventory positioned further forward
in the supply chain, and that would be a reversal of a 20- year trend. Inventory
turns have been going up for a long time, and maybe they’ll continue to go up,
but I have a feeling that transportation difficulties throughout the supply
chain may translate into a decrease in that trend or maybe an end to the trend
of inventory turns in the economy in general going up.

ASCET: What’s changed to transform capacity over the last few years?

Tom Hostetler (TH): It starts with the ports. Port capacity doesn’t
change very much, but the volume of imports has gone up incredibly. It’s the
same situation with rail – once it’s moved off the port onto rail, rail capacity
hasn’t changed, but the volume of product has.

On the truck side, there’s more flexibility. But the truck guys are generally
not building; the full truckload guys are not adding capacity anywhere near
the rates that they have in previous business expansions. And the LTL market’s
going through a consolidation, so I can’t imagine that the overall capacity
is doing anything but declining. So across the board, you’re just trying to
jam more stuff through a limited set of channels.

ASCET: Why do you think capacity hasn’t increased on the roads?

Tom Hostetler (TH): Well, capacity has gone up; I just don’t think it’s
gone at nearly the rate it has in other cycles. Part of that is a maturing of
the truckload industry, which went through deregulation and then through a period
where deregulated companies started their growth track. The industry enjoyed
economies of scale as they grew, and companies went through a process of going
public and being categorized as growth companies, and at some point during the
‘90s, the whole growth formula stopped working because they ended up, in reality,
being cyclical companies.

If you don’t think you’re getting a lot of stock market value out of growing,
but you’re having a lot of success in the stock market from increasing your
margins, the truth is you’re just a lot less enthused about growing your business
by 15 percent in terms of capacity every year, when maybe, if you grow it at
3 percent and raise prices 5 percent, it’s a heck of a lot better formula as
a public company.

They’ve been tremendously successful in the results they’ve gotten from not
adding much capacity, and it’ll be interesting to see how that plays out. I
also think there’s just a demographic problem in that I don’t think great numbers
of people want to go into transportation jobs. Therefore, there’s a flat-out
demographic constraint, so that even if the transportation companies wanted
to add that capacity, I think the situation makes it very difficult for them
to do that; the people to do those jobs just aren’t there.

ASCET: How have you improved the package you’re offering to employees?

Tom Hostetler (TH): Well, we try to avoid business where it’s clearly
going to be unfavorable job content. We’re trying to make it so that we’re working
with customers that are able to have the freight ready when it’s supposed to
move and have the appointments at the other end be ones that the company can
keep. We need driving jobs for drivers, not jobs where they’re waiting in line
or they have to hand unload the truck or they have to go out on the road for
extended periods of time and be down for 16 hours a day 500 miles away from
home. And of course, you need to be paying good compensation that’s attractive
relative to what other kinds of jobs are available in that market. We offer
a good benefits package, and we try to do some other little things that help
them out with their families, and hopefully they find Cardinal to be a good
place to work. We like to create a long-term scenario where a driver can be
at a place that he or she enjoys working and will want to stay.

ASCET: Is there anything interesting happening on the technology
side of the industry?

Tom Hostetler (TH): There is some neat stuff in geopositioning technology
that we can put in the trucks and good messaging can support a lot of EDI activity.
We always thought that EDI would go away and be replaced with just Web-based
messaging systems, but it hasn’t, and the demand we’re getting for more EDI
elements surrounding any particular transaction seems to be going up, which
is an unexpected trend. We’re going to more advanced truck systems, not just
in the handhelds but the whole communication device on the dashboard. We’ve
made a substantial investment in PeopleNet units, and we are probably going
to continue that rollout.

ASCET: What type of geopositioning are you using, and what does it
do?

Tom Hostetler (TH): Well it gives you an update on where the truck is,
of course, which we’ve been able to do for 20 years, but you don’t have to go
through a satellite any more, so that’s cheaper. There is messaging and informational
content as well that tells you what’s going on in the truck and gives you specific
information about the engine and the mechanics of the truck, and then you’ve
got your messaging on top of that. Plus it can support your EDI, so that you
have preset communications. The technology’s not that new; it’s just coming
in a new way and the cost is going down.

ASCET: How about your corporate strategic position – what’s your
approach?

Tom Hostetler (TH): Everything we do is under a long-term contract with
volume- adjusted pricing. We don’t want to be a common carrier, even though
it’s a great business to be in right now; we’re just not that comfortable with
operating that kind of a business. We’re expanding our facilitybased services
with additional consolidation centers, crossdocks and DCs. We’re adding to our
carrier management and brokerage capacity. We want to be the “go to” company
for regional inventory management, movement and delivery.