The LTL sector is so saturated with e-commerce and at-home consumer demands that Old Dominion Freight Line is feeling the pressure on service center doors.
It’s literal pressure, and not necessarily a bad kind. Old Dominion uses a “door pressure report” to look at how often the loading doors are used each day and how many loads are pushed through a service center, said Dave Bates, Old Dominion senior vice president.
Excessive door activity and pressure, measured by higher numbers per door, can burden operations. And Bates said throwing manpower at it doesn’t help, because then workers and forklifts bump into each other.
When Old Dominion sees door pressure starting to build, it knows it’s time to add capacity. Old Dominion officials said door pressure is the primary metric they use to assess the need for expanded or new service centers.
“You have to run a fluid dock,” Bates said, comparing the busy service centers to a Black Friday at an overwhelmed Walmart. “You start pushing harder than you can and you start losing your efficiency.”
These inefficiencies can also mean linemen stuck at docks and late deliveries from hubs to receivers.
To avoid too many loads coming through the doors of an overburdened service center, Old Dominion announced that nine new centers will be opened. The centers are located in Brooklyn, New York. Edinburg, Indiana? Grand Island, Nebraska; Louisville, Kentucky? Mansfield, Ohio; McDonough, Georgia; Mesa, Arizona? Milton, Pennsylvania; and Olympia, Washington.
The company currently has 246 centers, including nine, which are operational. That’s up from 117 centers in 2002. But as Old Dominion grows while maintaining the best LTL operating ratio in the business, challenges remain.
One is the acquisition of the land on which a new service center will be located. Another is getting government approvals for zoning, a lengthy process. And on the business side, Old Dominion sees a growing landscape populated by more e-commerce users, who demand more shipments, faster and faster customer service and quick deliveries.
Old Dominion adds 9 service centers
Earth, said my father
As Old Dominion plans to add more service centers, it faces a problem with land availability. The land for a service center must be close enough to the populations served by Old Dominion and its customers.
More expensive land means higher costs. Old Dominion has a capital expenditure budget of $245 million for properties in 2021. This includes the purchase of properties, construction, renovation or additions to the network of service centers.
Each service center may vary in size, depending on the market. Old Dominion builds each facility according to market needs and with future growth in mind. They range from 15,000 square feet to more than 300,000 square feet.
But the best metric in the industry isn’t square footage, but the number of doors, according to Old Dominion. Each of the nine new facilities range from 30 doors to 105 doors.
“We try to buy land and acreage with future expansion in mind, so often our lots range from 10 to 20 acres,” Bates said.
Buying this land and getting it approved is a task. And other strategies, such as purchasing leased facilities, can be cost prohibitive. Old Dominion asked a New Jersey landlord if he would sell a building. The owner wanted $80 million for the New Jersey facility. Old Dominion came through, Bates said.
Sometimes land can be found, but then another problem arises: trucking is considered heavy industry by many jurisdictions. Therefore, many properties facing Old Dominion need to be renewed. The design of the building also highlights the municipal strengths.
It’s an issue, CEO Greg Gantt spoke to Transport Dive about December. In the past, Gantt said, Old Dominion has been able to pick up leftover properties sold by other carriers. But that strategy is fading, as there are only so many such buildings left.
“As time goes on, all of a sudden, they’re gone,” Gatt said.
“Truck transportation is not something everyone wants in their cities.”
Dave Bates
Senior Vice President of Operations at Old Dominion
States with more land and less regulation tend to welcome the Old Dominion and let the doors open for new development, Bates said.
“If we wanted a large service center in West Virginia, they would welcome us with open arms,” Bates said. “When we get to New York, New Jersey, California — it’s a lot harder.”
Old Dominion wants to work everywhere. But company officials said it finds challenges in densely populated areas like New York, New Jersey and California because real estate costs more. And in those states, near population centers, it can be difficult to find a facility that fits her needs.
Most municipalities try to house businesses on parcels that are zoned exclusively for business. Old Dominion has even received pushback from some industrial centers because light industrial companies don’t want to be near service centers.
“Trucking is not sexy,” Bates said. “Truck transportation is not something everyone wants in their cities.” (Unless, he notes, their shipments are delayed.)
The land question has the Old Dominion “turning over every stone” in its search for sites. In the Indianapolis area, for example, that meant expanding on both ends, but outside the borders of the Hoosier capital. Old Dominion placed its service centers in Lafayette, Indiana, which is north of the city along Interstate 65. And the other center in Edinburg, Indiana, which is south of the city along I-65.
E-commerce creates the pressure
Bates said e-commerce is part of the demand that is creating the need for more service centers.
As people stay home, even when working, stocks must be closer to where the population livesand consumers are picking the shelves cleanly at a faster rate.
Retailers and warehouses, once satisfied with one week’s demand, now want two to three weeks of product, said Peter Stefanovich, managing partner of Left Lane Associates.
The expansion of Old Dominion’s service centers is helping the company speed up the time frame for deliveries, he said.
“We have a network that allows you to get to the end user sooner,” Stefanovic said.
Stefanovic said the “Amazonization” of the economy and consumer needs have created more pressing needs for efficient and fast deliveries.
“Our psyche has changed to expect things sooner,” Stefanovic said.
A commitment to service
As demand for fares increases, so do costs. On Monday, Old Dominion announced a general interest rate increase of 4.9%, effective March 1.
“To meet our customers’ expectations and deliver on the promises we’ve made, we must continue to improve our network and systems for high-quality service,” said Todd Polen, Old Dominion’s vice president of pricing, referring to the rate hike. . adding that part of the GRI would offset rising real estate costs.
Despite the expansion challenges, analysts seemed bullish on Old Dominion. David Ross, Stifel’s managing director of global transportation and logistics, wrote in his Feb. 4 report that Old Dominion is again the LTL leader in the operating ratio.
“As the sun rises each day, we believe it is now safe to say that Old Dominion will report the best margins in the LTL industry, every quarter,” Ross and staff wrote in the report.
Old Dominion’s operating ratio is improving
Stifel noted that Old Dominion hasn’t always had such a stellar ratio or as many service centers as it does in 2021.
“When we started covering the stock, the company’s operating ratio was 91.9%. [Q3 2002]vs. 76.3% [in Q4 2020]and had a much smaller geographic footprint (117 service centers in 2002 vs. 245 today and growing),” Ross wrote.
The efficiency gains have confused investors, in a good way, Ross said.
“THE [No. 1] The question we get from investors at Old Dominion is some variation of “Why is their profit margin so much higher than peers?” … or “What’s the secret sauce?” or “How do they do it?” Ross wrote.
Gantt answered this question in December when he shared a lesson the LTL fleet learned in the Great Recession of 2007-2009:
“We’ve been remarkably consistent even going back to the 2009 recession,” Gantt said. “We didn’t cut the service.”
“As the sun rises each day, we think it’s now safe to say that Old Dominion will report the best margins in the LTL industry, every quarter.”
David Ross
Managing Director of Global Transportation and Logistics at Stifel
When the pandemic hit, there was a temptation to cut prices and services. LTL competitors have lowered prices and customers have taken notice.
“We lost some business early because of price,” Gantt said. “Suddenly, everyone had extra capacity.”
But customers noticed that some factors outside of price were missing, Gantt said — factors like on-time delivery, quality of customer service, shipment care. Old Dominion said its on-time LTL service is 99%, and has been for several years.
Eventually, the customers who left came back.
Bates said the service center plan means keeping service high and not letting deliveries linger too long at the centers.
“In a perfect world, we get it today and it goes out tonight,” Bates said. “We want to deliver it the day it arrives or the next day.”