Q&A: Tom Schmitt, CEO, Forward Air

Logistics Management Group News Editor Jeff Berman recently interviewed Tom Schmitt, CEO of Greenville, Tenn.-based asset-light freight and logistics services provider Forward Air. In a wide-ranging conversation, Schmitt provided Berman with an overview on various supply chain- and logistics-related topics, including: the freight economy, inflation, taking steps to manage driver turnover and Forward Air's road map for growth, among others. Their conversation follows below. 

LM: How do you view the current state of the freight economy?

Tom Schmitt: The economy and the freight economy are softer than they were six months ago. There is no question about that. There was a lot of inventory hoarding taking place, and there was lots of uncertainty as to whether inventories actually would arrive on time or at all. And now we're actually probably heavily stocked. You see some of the announcements by some of the retailers, and the economy and demand is softer. So that's the first headline, yes, the economy and the freight economies are softer than they were a year ago or six months ago. The second one is when you dissect the softer economy, there are two things that are kind of happening and almost cancel each other out and is like a headwind versus a tailwind.

LM: In what ways?

Schmitt: You see much less of the kind of home-based economy at work. What I mean by that is that 2.5 years ago, we all shifted and adjusted our behaviors, in which people bought things like new appliances and stocked up on other home goods, for example. We all would have loved to experience something, whether it's a cruise, whether it's a flight, whether it's a concert, whether it's a trade how, and that has been changing.  So now we're actually seeing the shift back more to an events-based economy and experience-based economy, and perhaps a little bit initially, even making up for it where the home-based economy part is stepping a little bit back and the other one is basically coming to the forefront, because there is pent-up demand. We all want to be out and in front of people and experience things we missed for 2.5 years.  The last part is when I say the freight economy is softer, that is true, but it is not true for all pieces equally. Experiences are going up, and events are going up, whereas things like appliances and the home-based economy are going down. The last thing is you still control what you control, which means if you cannot win a huge kind of size of pie game where the whole economy is booming, and you're just riding with it, then we need to win a slice of pie gain, meaning the pie may be flat or may even be slightly shrinking. That is what is called a recession. But the best companies will find a way to win, even in that type of environment, by having a value proposition that's so compelling that you gain share. So that's in essence what we've been doing at Forward Air.

LM: How do you the current state of the 2022 Peak Season? Will things look more normal than the last few years, which were clearly impacted by the pandemic.

Schmitt: It really is based on our collective experiences. People will be fortunate to experience things like events together around the holidays. At the same time, there will be consumer goods being shipped to kids at home. So, I think you will see a bit more from a pure behavior perspective, a bit more of a normal combination of people gathering and people giving gifts to each other like the way it used to be. That will be more the case. From a freight economy perspective, where some of these goods come from may be a bit unnatural, because there are heavy consumer inventories in many consumer goods territories and de-stocking will be taking place. Some of these Peak Season shipments will be happening inside the U.S. to consumers—and may already be in the country. They may not have to be flown in and be shipped over the ocean and may already be here. Based on what we have experienced, this year’s Peak Season will probably be the most normal one we have seen over the last three years.

LM: How do you view the current high inflation situation, in terms of how it is impacting things like your customers’ operations and how do you work with them to better handle it?

Schmitt: The first that comes to mind is that it is impacting every single person individually. So, I mean, it stinks when everything becomes more expensive, with people having also seen gas prices they have never seen before in some cases, and people are concerned and they're afraid. And I think we just need to make sure we are aware of that. We have thousands of teammates at Forward Air, and I do need to understand that their lives have become more expensive. We make up for that where we can, whether it is merit increases, or driver pay—we have made some of the largest increases in driver pay over the last 18 months in the history of our company. But I mean, I think, this this notion of has become more important. You need to understand. I mean, people have been in a weird space for 2.5 years, psychologically first being concerned about their own health and safety, and their lives all got upended for more than two years, and now are in a high inflation environment, with everything becoming more expensive. I think we need to appreciate this from a purely personal perspective and then there is also obviously a business perspective.

LM: How do you address it from a business perspective?

Schmitt: It takes straight talk with customers. I am in quarterly business reviews with customers and our sales leaders every single week, and this topic of “hey, you are charging us 7%-to-10% more, and it is hard for us to carry,” is something we need to acknowledge as it is a reality. The second thing is we have to make sure that we understand ourselves, and then we communicate with our customers openly, transparently. We are investing in trailers and trucks, and [ours and yours] safety, and we also invest in making sure that we keep our customer commitments. So, that means if it costs us more to haul your trailer out of Los Angeles, we are going to make sure we pay that. However, we're not a nonprofit we need to make sure we get compensated for that. So, I think the number one thing is, first, we all need to acknowledge it like, as life has gotten more expensive. That's true for every single one of us personally, and it's also true for us as we deal with each other in our businesses. And then you have to be very factual and transparent about what drives that. In our case, it typically is two things in that priority order: we're investing a ton of money, as we should, into our people safety and other people's safety; and, secondly, we invest in keeping customer commitments. As long as that's valuable to those customers, and as long as we help them actually win more business, even at those elevated prices, we can sell through that. I always say “when I can buy it, I can sell it, and I understand it. I can actually sell it. That has to be the case here, too. But again, very clearly, the best way to get through this is by open, straight talk, face-to-face conversations with customers, so that they understand that we are still committed to providing the value that they expect. Yes, there is a cost to that that is higher than what they are we are used to.

LM: There has been a fair amount of talk about whether there was a freight recession earlier this year especially, given the myriad economic indicators out there. Where do you think things stand as they relate to that?

Schmitt: The first thing I think is that facts will replace opinions. When we look back at the second and third quarters, at some point, there will be numbers telling us whether we had two consecutive quarters of negative growth and therefore a recession or not. It is kind of a moot point to debate it. It will be a matter of fact once the numbers come in. Going back to the beginning of the year, in terms of the talk regarding a recession, my thought was that if there is a recession, please just bring it on. The reason for that is I find the talk and being scared about it much more paralyzing than actually just getting through it and working through it. Great companies find a way to come out of recessions stronger. So, let's just bring it on, get through it, and get back out stronger. If there is a recession, let’s not wait for it. Let's just assume it's there, and then let's manage it…and find ways to get together and stronger. So, the short answer is that probably technically is one [now], and you'll probably get the fact with the numbers, you know, in a couple of months, and secondly, I'm pretty enthusiastically saying let's bring it on and just get through it and get out of it stronger. Great companies get stronger when things get tougher, and I think we should all just embrace it.

LM: With things getting back to normal over the course of the last several months, coupled with services economy-based activity picking up, what does that mean from a freight flow perspective, in that services spending takes away from goods spending?

Schmitt: We tend to control what we control, and we tend to chart our own path. And let me just describe this a little bit. So, at Forward Air, three years ago, we put a program in place called Grow Forward. It may not be the most original title, but it actually fits quite well. Go Forward in essence, it was us saying, we're going to go for more high value freight that we learned half a year later we all “called essential,” like medical equipment, high-tech goods that actually keep the industries going, and automotive parts versus wicker furniture, patio, furniture, kayaks, and rugs. So, even for more high value freight, we priced accordingly, and we also cleaned up our network to make sure we have smooth flows that we can actually deliver the value of no damages, on-time performance, and hitting time windows. So, for us, whether it is more consumer goods or more business goods, we basically, said “let's be in charge of our own destiny.” We believe that we should be the most compelling partner for high value freight. I think every company needs to figure out what game they should be in, and which game they should be playing and winning. In our case, we believe we can win the game for high value freight that is much more essential, less discretionary. So, the fact that consumer spending is going down to some extent actually impacts us less than it would have two or three years ago, because we played more towards a high value freight game that's more an industrial and more business-to-business game. There's probably more of a pre-pandemic status, however, I think the best companies charted their path over the last several years, as they always do in their own way, to win their own game. That's what we did. Our game is in the more B2B industrial space essential game, and therefore, whether or not consumer spending is going down is probably less impactful to us today than it would have been two or three years ago.

LM: Forward Air’s driver turnover rate is low compared to industry averages. If one was to take a page out of the company’s playbook, what can be done on an industrywide basis to lower it?

Schmitt: When I started at Forward Air about four years ago, in all fairness, if you asked me to how I spend my time and energy, I would never have thought that I would be spending as much energy and time on the “war for talent” in all categories, in terms of the role for talent, for people like you and me, office support people or the wall for talent in the terminals or the war for talent for drivers. On the driver front, there are some. Some must-dos, like you have to make sure that you pay competitively. We have had very good driver retention rates, and we also had very good driver attraction rates. We said, this year will be a year of a growing fleet for us, and it is. The team does do a few things that may not be rocket science, but they are really high impact things to do. Let me just point out a couple. Our drivers are, for the most part, independent contractors who run their own businesses. At the same time, we do a driver engagement survey every other year the same way we do an employee engagement survey. So, we have thousands of them tell us here's the five things that are most important to us. Obviously, pay is in there, but also predictable home times and being able to run our own business. And, so, we went to work. Three years ago, we put a so-called driver board in place, where 12 drivers and fleet owners represent the thousands behind them. I meet with them and lead them as a senior team once a quarter. We actually look at the top priorities that you said in the in the engagements already that are most important to you. Here's what we've been doing. For instance, wait times, when they call this batch for when this was minutes versus seconds, it feels like an eternity when you call, and you need something. And, so, we have been driving down that wait time quite significantly over the last couple of years, and we tell the drivers what the baseline and what the starting point was, and how far we've come. They use their Facebook communities, and they blast this out to the thousands that they represent. So, we have some of our drivers on the board, as in when we do our job the way we should be doing it, making things lighter for them. We have them be great ambassadors basically for the company, saying, “hey, these guys are actually doing what we're saying…and what they're saying they're doing are the things that matter most to us.” So, that's when we say, like every day should be driver appreciation day, it comes down to how we actually are doing the rolling up our sleeves and doing the things that matter to them most, and we do. We have a driver board. We have job engagements where we work on these things, and now we also have some creative new tools. A couple of weeks ago, we launched our Dock to Driver school, so we hired people to be dark workers, and then we actually survey them. Hey, here's the job of a driver who want to get into the journey from a basically turning from a dock worker to a driver over the next couple of years, and also be our first in classes that we just launched. There are things that we are doing that kind of make us stand out. So, these retention rates and attraction rates just don’t happen. The actually are earned.

LM: What are some of the key growth initiatives for Forward Air?

Schmitt: The first thing is we expect to get better every single year. We had a record year last year and expect to have a record year again this year. That is harder when you have headwind from a softer economy and also from fuel coming down. The flipside of fuel is that is hurts all of us personally, but for freight companies, higher fuel prices are actually a good thing. As for other things, one is we are doing more high-value freight with the customers that have known us best and the longest, domestic forwarders, international forwarders, those are companies we have known and worked with for a long time. And the beautiful thing is that we have found ways over the last year to actually go for more high-value freight together, and that will continue to be the case. The second thing is that for smaller- and medium-sized companies, we started selling LTL directly to them. This may, or may not be a well-known fact, but for the 40 years of our existence we basically sold our high value freight to people who sell it to people who make and ship something. We sold to intermediaries exclusively. We're still doing that. As I just said, we are doing it actually more. And we also doing for small medium-sized businesses that do not use forwarders. We are selling to them directly, which is something we added. Another area is events. Events are a huge deal, as are trade shows. So, working with our customers to bring them back fully and to frankly and then some. Because we can go to smaller events we didn't even go to in the past, and we also in in the past, set up events, and somebody else took the conference down and brought it back. So far, we haven't really been focused on the second half i.e., of bringing things back. Now we are starting to look into that also. So, there's more events that we still can go after, and then some of the initiatives, like when the economy becomes softer, we should be paying less for so-called outside miles when we actually use owner operators that are typically not working with us. And when we broker for those miles through a third-party, we need to make sure that price tag comes down by a softer economy. Then we have very, very strong supporting businesses, including: final mile, intermodal, drayage, and truckload. Each one of them needs to make their contribution, and frankly, get better every single year the same way as our high value freight LTL business. We have a mathematical model called Forward 23, where many of these Grow Forward initiatives that I mentioned get aggregated. Now we believe that the sum of these tailwinds and those initiatives will outweigh the headwinds we get from a softer economy and from lower fuel prices.

LM: With the ebbs and flows in the economy, there has been an ongoing shift on the truckload pricing side, with record-high spot rates going down and more shippers locking in contract rates. What are you seeing along those lines?

Schmitt: When you have a super tight economy, which we had over the second part of last year and the first part of this year, people go to unusual ways to access goods. Look at airfreight rates, I mean, in some cases between the lows of the last five years and the highs, you literally are in some cases talking a 10X factor. It's bizarre in terms of what links people went to in order get their hands on goods? It is lots of transactional activity, lots of spot rates, and lots of craziness. I do believe, when you start breathing out when you get to a more normalized economy, actors act more with foresight, with more planning. I do also believe that the best companies tend to be disciplined no matter what. If there is craziness around us, we manage counter cyclically, meaning we take it slow and, we take a measured approach. It's almost like the more craziness, the more rational and the more disciplined we make sure we are. So, you will see some of the best companies not zigzag between all spot market, or contract, back and forth. When you talk about a measured approach, the best companies, like a UPS, a Forward Air, or Old Dominion find ways to be disciplined and steady.