A Quiet Revolution In Logistics

Arguably, logistics is one of the most complex and, at the same time, invisible business functions. And, it's under attack from all fronts. Capacity, capability and cost are on the firing line. Here's a look at what you can expect in the near-to mid-term.

Capacity constraints appear to be easing, but that's a short-term effect. Just as expansions into developing countries invariably lead to discussions of infrastructure adequacy, many of those same questtions are increasingly being raised about the United States itself. Without adequate infrastructure, the United States is not competitive, and the planning horizon alone for infrastructure development stretches long past the rapidly evolving need. Demand is doubling and tripling on a timeline that barely allows for planning and leaves almost no time to execute on infrastructure development.

A recent meeting of the U.S. Department of Transportation Joint Inter-modal Working Group (DOT-JIWG) reiterated a message that has been echoing around meeting rooms and hallways at logistics industry events for years, the United States needs more collaboration between the government and private sector on transportation issues, especially infrastructure. Though the DOT-JIWG showed that some progress is being made, there is a fundamental disconnect between planning horizons in government and the private sector. Bureaucrats admit it's difficult to get a business executive interested in a discussion of needs 10 or 20 years out, and business executives counter that government projects move at a snail's pace next to the just-intime, global supply chains they operate. Within DOT, groups are looking at ways to use technology to get more out of the current and slowly developing infrastructure. Pointing to the amount of time freight sits at terminals waiting to be moved, it's clear there are opportunities to drive out non-value time and get better equipment utilization. The ripple effect includes reduced demands on labor, lower fuel consumption and reduced emissions.

"Coordinated freight congestion mitigation" is one of those high-sounding concepts that has a lot to offer if you can get past the name. If the transportation network knew when demand surges might occur, explains Paul Belella, manager of freight trade and international borders for Delcan Inc. (Markham, Ont., Canada, www.delcan.com) highway road management could respond by timing traffic signals and taking other steps to smooth the flow of goods. To achieve this, business would have to share data with government agencies, he points out.

Indeed, panelists at the JIWG meeting repeatedly called for data to be shared between private sector and government entities to improve utilization, security and reduce congestion. Each ocean shipment begins with a booking, the panel pointed out, and bookings are electronic. The manifest data from U.S.-bound shipments precede the load under the 24-hour manifest rules imposed for security purposes. If carriers, ports and the beneficial

owners of the cargo can agree to release origin and destination data, confidential business information can be masked and filters can be applied to help funnel information about which loads are moving in what lanes, and much of what Belella talks about could be possible.

There are a number of critical steps that must be completed for the whole system to work at optimizing transportation and reducing congestion. Among the items members of the group are promoting is use of a universal bill of lading. But standardization concerns aren't limited to forms and data.

U.S. domestic intermodal containers don't move in international supply chains, but international containers do travel inland into the United States. Increasingly, those international containers are moving under legacy rail rates maintained by ocean carriers, says equity analyst Stifel Nicolaus.

On the standards front
The 53-foot domestic container is essentially at odds with the International Standards Organization 20-foot and 40-foot containers (referred to as ISO containers) of international trade. It is important not to violate the 20-foot and 40-foot conventions because they are well established, noted JIWG panel members. Even if those standards were supplanted by a newer form, it took nearly 20 years for the original 35-foot unit introduced by SeaLand to work out of the system. Maersk (Copenhagen, www.maerskline.com), for one, currently operates over 1,000 container ships, noted one panel member. The larger ships, at 11,000 twenty-foot-equivalent units (TEUs) and above, are all designed to carry the current ISO standard containers. To put that into perspective, if that entire cargo were loaded aboard a single intermodal unit train, the train would be 44 miles long.

Railcars can be in service for 20 to 30 years, but ships last even longer—up to 40 years—so any change in intermodal transport is likely to come slowly. Even new materials like lightweight, high-strength composites have to fight an uphill battle despite benefits they could bring to the transport network. The current ISO container is in global service and can be transported and serviced nearly anywhere in the world. Ocean carriers and other container owners are reluctant to adopt a container that might have to be moved empty two or three times to reach a maintenance facility.

As one industry source points out, it's not the ship that makes money for the carriers, it's the container, so keeping "boxes" loaded and moving is the ultimate goal of the entire network—reflecting the earlier statement that developing, maintaining and optimizing the use of transport infrastructure is critical to the global economy.

Structural change is underway in other parts of the logistics service sector. Much of the news centers on acquisitions and divestitures and how they change the structure of the industry that supports supply chain management.

On the transport side, UPS (Atlanta, Ga. www.ups.com) and FedEx (Memphis, Tenn. www.fedex.com) have made significant acquisitions that create national less-than-truckload (LTL) services within their networks. When asked if DHL would enter the LTL arena, Hans Hickler, CEO of DHL North America (Plantation, Fla. www.dhl.com), says the group had no desire to make a trucking acquisition in North America. (This does not reflect on strategies DHL might have in other national and international markets.)

Though 39% of shippers are interested in bundling LTL and parcel services, according to a survey by equity analyst firm Morgan Stanley (New York www.morganstanley.com), some ship-pers aren't enamored of the idea. Bundling is risky in the event of a labor shut down, said one shipper. Others suggested bundling services would be more beneficial to the carriers longer term than to shippers.

While 15% of shippers responded that they would increase with FedEx LTL (FedEx Freight and FedEx National), nearly 12% said they would increase their use of "other" carriers, 5% said they'd increase use of UPS Freight, 5% will increase use of YRC Regional (the former USF), and 4% or more will increase volumes on each of Old Dominion, Yellow Transportation and Roadway. ABF will see the lowest increases (0.9%) as shippers spread some of their freight to other carriers, but it will also suffer the least as freight moves from LTL carriers to the new FedEx service. What shippers seem to value in these major company mergers is the ability to use a variety of more or less time-definite services. Responses to the Morgan Stanley survey suggest some shifts within the FedEx family as shippers migrate some regional LTL freight to the national service or move some parcel shipments to LTL. However, concerns run high on where rates will end up. Some shippers noted Watkins charged premium prices for premium service and that knocked them out of the running for those ship-pers' volumes. Others said they would consider the FedEx National service if rates were competitive or other incentives are offered.

Following Yellow Corp.'s acquisition of Roadway Express at the end of 2003, Morgan Stanley had surveyed shippers on their reaction. A March 2004 survey indicated over 28% would reduce the amount of freight handled by the two companies. A later survey in September of the same year indicated 16% still planned to reduce the amount of freight moving on either of the two entities in coming months.

One reason for the response was reported in shippers' views of service following the acquisition. In March 2004, nearly 22% of shippers said Roadway's service had deteriorated and nearly 13% said service at Yellow was worse. Less than 2% said Roadway's service improved, and just over 3% said Yellow's service had improved. Those numbers looked better by the September survey.

Rates and risk played into decisions in the Yellow/Roadway deal and also in the current FedEx/Watkins and UPS/Overnite acquisitions. Some shippers said during the Yellow/Roadway acquisition they would continue using one or both carriers as long as they remained separate entities. Others were concerned that lower negotiated rates on one carrier might migrate up to the level they were paying to the other carrier. Many of the same concerns are still driving shippers' carrier selection in the wake of current acquisitions.

On a broader perspective, shipper concerns over fuel surcharges continue. Those costs are beginning to roll into base rates, so some of the variability shippers experienced in the last year or two may be moderating, but shippers still feel carriers are using fuel surcharges and other accessorial charges as revenue sources rather than simply as offsets for increased costs.

More, smaller facilities

Fuel costs, and other energy-related issues, have caused shippers to reexamine their networks and could lead many to create a domestic U.S. network of more, smaller facilities, says Curtis Greve, executive vice president of Genco (Pittsburgh, Pa. www.genco.com). The issues there revolve around balancing controllable and non-controllable expenses. One way to do this is to contract out many of the physical operations and avoid some of the fixed costs of owning facilities.

Access to labor becomes one of the critical success factors in a network strategy, and this includes not only the transport side—using carriers who can attract and keep drivers—but also the distribution operations. Greve admits that access to drivers will be critical, but he broadens the argument when he points out that the U.S. labor pool will see over 70 million people retire and be replaced by 45 million workers. These new workers will generally be more technically savvy, he says, but English may not be their first language. That adds up to more use of technology.

Greve sees a confluence of events including the smaller labor pool, increased pressure to keep inventory levels down, a need for total strategic visibility and event management—the ability to identify events in the supply chain and respond quickly. Keeping the cost of the facility in line will increasingly fall to a third party, he says, as companies seek the flexibility to follow demand that moves with demographic shifts. Those smaller facilities will have some automation, but won't perhaps be as customized and they won't require massive sortation systems, because they will be serving smaller markets. Still, they will need the scalability to grow within those markets and the design will have to be portable enough to be applied elsewhere without creating a hodge podge of systems.

Here too, the names of the players are changing. As FedEx and UPS become giants in transport, they appear to be devoting less to growing third-party logistics operations. Dutch-based TNT (Amsterdam www.tnt.com) recently divested of its logistics unit and then its international freight forwarding unit to concentrate on parcel and express markets. This is in stark contrast to DHL's parent Deutsche Post, which acquired Exel, the world's largest third party logistics company.

Peter van Laarhoven, director of corporate strategy for TNT, described the company's entry into contract logistics in the late 1990s, saying it was a market where they thought they could achieve a number one position globally. It was still a highly fragmented industry, says van Laarhoven, and TNT wasn't far behind Exel, then the world's largest third-party company.

At the time, most of the customers in contract logistics were still new customers and it wasn't difficult to create value for the customer, van Laarhoven continues. But now, it is a business where 80% to 90% of the contracts are renewals and, "In virtually all cases, we see tariff pressure in contract renewal negotiations, so your margins are continually under pressure." For the large logistics providers, margins are about half what they were in the late 1990s when TNT was ramping up its third-party operations.

In the end, logistics professionals are looking at how to manage more rather than less. This is beginning to show up in the increased number of transport companies many shippers are electing to include in their routing guides to balance cost, service and risk. Outsourcing solutions with the need for flexibility and agility may conspire with market developments to require use of more providers as well. New products, new customers, new markets, new service demands and new security requirements, all contribute to the complexity of the job.

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