Logistics Today looks at logistics Tomorrow
Shippers are responding to cost pressures by moving freight to lower cost modes. Carriers have streamlined their networks in their own efforts to control costs. These and other factors mean capacity is low relative to demand in most modes, and this will put upward pressure on prices.
New truck orders remain low among truckload carriers, tracking below replacement rates. This will keep capacity lean as the economy recovers slowly and demand increases.
New emission requirements have been a challenge for carriers. Replacement vehicles must incorporate lower emission engines, but the reliability of early units raises questions for carriers, delaying new equipment purchases.
Hours of service rules will negatively affect private fleet and for-hire truckload efficiency and add costs. Truckload carriers warn of a developing driver shortage. All of this spells rate increases and stricter enforcement of detention fees.
Increased background screening, especially for drivers hauling hazardous materials, will constrain the pool of eligible drivers and increase the cost for carriers and private fleets to recruit and keep qualified drivers.
Less-than-truckload (LTL) carriers benefit from some aspects of the hours of service rules and could lengthen their linehaul capability and thereby become more competitive with regional carriers in more lanes.
Surcharges will increase as a mechanism for carriers to recover costs. Fuel surcharges have been up and down as diesel prices fluctuate, but carriers have also instituted security charges and, most recently, Con-Way added a 2% surcharge to cover rising labor costs, including healthcare.
The Teamster contract was signed and ratified in 2003, so the labor scene should remain calm. However, two wild cards exist. Non-union LTL carrier Overnite won its three-year battle with the union to remain independent, but the carrier was recently spun off from its parent Union Pacific. And, though the Teamsters have been relatively quiet about the Yellow-Roadway combination, expected consolidation on the operations side could raise serious issues with the union if cuts are deep.
The cost of congestion delays in major U.S. cities has risen from $8 billion in 1982 to nearly $70 billion in 2001. Congestion affects transportation productivity and could add hard costs if road-use fees are adopted in congested cities and regions. A recent study in Europe says 14% of cities are already proceeding with road pricing schemes and another 9% are “very interested.” Positive results could lead to more widespread adoption of road-use fees in the U.S. (These would be in addition to highway-use taxes.)
Choke points for goods moving into and out of the U.S. include ocean ports. Efforts to reduce congestion and air pollution at West Coast ports include imposing idle fees that charge trucks fines if they sit in line longer than 30 minutes. This could force more off-hour pick-ups and deliveries at ocean terminals, a practice that has seen slow progress to date.
Extended gate hours at ports could alleviate congestion. Southern California ports are working with terminal operators to extend hours. Exemptions from fines exist for terminals with longer hours of operations. Consignees will need to adjust their operations to receive goods processed during extended hours.
Unattended and off-peak deliveries at consignee distribution centers are possible answers to congestion problems and driver hours-of-service issues. Some carriers offer these as value-added services to shippers/consignees where the relationship has developed trust. Security issues and cargo loss concerns must be addressed.
Shipping/receiving operations will have to improve efficiency or risk running drivers out of hours under new hours-of-service regulations. Carriers are already less tolerant of shippers/consignees who don’t honor appointments or delay drivers in other ways. Use of advance ship notices to schedule receipts and solid performance measurements will be the best defense against added costs and delays.
The size and weight debate was put on hold when the Association of American Railroads and American Trucking Associations agreed to focus on infrastructure funding reauthorization. Any studies of efficiency, safety and other factors have also been delayed. The debate won’t be taken up again until TEA-21 (Transportation Equity Act for the 21st Century) reauthorization is complete — if then.
Longer combination vehicles and other efficiency improvements from larger/heavier highway trailers will be increasingly important given hours-of-service rules, congestion, a looming driver shortage and other factors. However, the debate has lost its momentum at a critical time.
Air cargo growth in Asia is partly the result of recovery in high-tech shipments from Taiwan, Korea and China. Outsourcing manufacturing to China is another trend that is driving demand.
Inward investment in China has slowed, but it hasn’t stopped. Other areas receiving attention for sourcing include Eastern Europe, Southeast Asia and Turkey. All pose some challenges for logistics.
Growth in domestic air will slow as shippers use lower-cost ground transportation to substitute for air. Improvements in regional motor carriage have moved more short-haul freight to ground services.
Parcel depends on non-durable goods for the bulk of its traffic. Domestic ground package volumes increased just over 3% in recent quarters. Carriers are seeking greater efficiencies, and both FedEx and UPS have found opportunities with the U.S. Postal Service.
Air cargo security has come under greater scrutiny, including requirements for random inspections of cargo. Even shipments scheduled to fly on cargo-only aircraft could be covered by rules requiring 100% inspection.
Capacity and yield have the full attention of airline management, and carriers are becoming master jugglers. Bargains for air shippers could be harder to find as airlines employ yield management tools to reduce empty miles and get more for the capacity they do employ.
Airlines don’t have to merge to make gains in cargo efficiency. Air France and KLM will strengthen the Sky Team Alliance and start a domino effect as Continental and Northwest fall in line through long-term agreements with KLM. Delta is already a Sky Team member with Air France. Sky Team will rank behind Star Alliance (which includes United Airlines) but ahead of the oneworld alliance (which includes American Airlines). International air cargo shippers in the U.S. should see their reach extended through the efficiencies of these alliances.
Consolidation may not be finished with the integration of DHL and Airborne Express. Once the German-owned DHL has negotiated the U.S. regulatory obstacle course, will long-time “bridesmaid” British Airways renew efforts to link up with a U.S. carrier? Or will a U.S. carrier seek reciprocal rights to expand in Europe?
Don’t expect instant competition from the DHL push into the U.S. market. It will take time to digest the Airborne acquisition and become a contender in the domestic air and express market, but its global network will become a factor with its increased reach and awareness among U.S.-based shippers.
As Chicago goes, so go the nation’s railroads. One-third of rail and truck cargo moves to, from or through the Chicago region. Handling over 37,500 rail freight cars per day and projected to handle 67,000 per day by 2023, Chicago’s problems with congestion are representative of larger issues facing railroads and rail shippers. A major public/private project calls for spending $1.5 billion in Chicago alone to develop rail corridors.
Rail/intermodal freight traffic is up and continues to rise as cost-conscious shippers shift some truckload freight to intermodal and as truckload carriers look for opportunities to reduce their own linehaul costs.
Southern border crossings for intermodal freight avoid some of the major congestion and delays at road crossings into Mexico. A security initiative modeled on FAST (Free and Secure Trade) at the Canadian border should alleviate some congestion, but in the meantime, rail remains the most efficient method for moving into or out of Mexico.
Mexico’s railroad, Transportacion Ferroviaria Mexicana (TFM), is a strong link to the U.S. and Canada, and that link could be further enhanced once the debate over Kansas City Southern’s efforts to acquire the railroad are resolved. KCS wants to create a “NAFTA Railroad” that would have further links to Central and South America.
Rail links at ports face some of the same challenges as trucks. The sheer volume of containers moving through major U.S. ports has created bottlenecks. A hard-fought effort to improve technology at West Coast ports led to a labor dispute. Railroads and ports will have to work together to improve information links and operations efficiency.
Infrastructure constraints face railroads and the intermodal network as a consequence of growth and lack of a coherent approach. The physical life of rail and port infrastructure projects may be shorter than their economic life, reversing a common assumption.
Global supply chains rely on ocean shipping as a mainstay. Improved speed and efficiency and larger ships have helped, but some of those gains have been lost to increased security requirements and landside infrastructure constraints. Moving larger, faster container vessels to slow, congested ports negates the benefit of linehaul improvements.
Congestion at ports is expected to get worse as demand increases, outpacing investment in infrastructure. Even the much-touted Alameda Corridor project has been described as moving the congestion rather than eliminating it.
Growth in Asia may have increased use of air cargo, but shippers are extremely cost-sensitive and are keeping shipments on the water where possible.
Ocean carriers shifted capacity to trades that were booming, including Asia-Europe, providing more balance in other lanes. Vessel sharing is a mature practice and will help keep capacity in line with demand.
Construction of mega-container ships continues, but shipyards are crowded, delaying deliveries. Some large container ships on order may not be available until 2006.
Logistics execution technology
Technology without process change is a recipe for disaster. The good news is the tight economy has forced many organizations to look for improvements that don’t require heavy investment or long implementation time. Execution systems fit the bill, and many companies have been successful at getting a fast return on investment (ROI) without sacrificing future integration potential.
Keeping an eye on integration, many of the logistics solutions such as warehouse management systems (WMS) are being planned for and implemented with consideration of how well they integrate with enterprise resource planning (ERP) and other supply chain systems. Transportation management systems (TMS) and WMS will have to be linked to coordinate pick-up and delivery schedules for carriers and dock labor.
Radio frequency identification (RFID) has gotten widespread attention in retail and government markets as Wal-Mart and the Department of Defense (DOD) announced initiatives. Careful planning has ensured these are largely open standards and these efforts will help establish industry standards, not proprietary technology. Standards and supplier certification will gather momentum as these initiatives roll out. More retailers and other supply chains will begin to adopt RFID and the Electronic Product Code (EPC) as the installed base increases and prices come down.
Electronic data interchange isn’t dead. EDI has a vital role to play in inventory management, transportation planning and security. The standards are well established, and EDI needs to link to applications that support the current round of information initiatives (like RFID).
A standard bill of lading and other uniform documents have been on many wish lists, but even with a boost from information initiatives and security requirements, progress has been slow.
Extended supply chains
One-third of manufacturers failed to achieve their goals for return on capital/assets, according to a global benchmarking study by Deloitte and Touche. Despite global sourcing to reduce costs and global marketing to expand sales, manufacturers tend to optimize on a local rather than global level. While these companies are producing more new products to remain competitive, they are not innovating at the same pace in logistics and supply chain management.
New product introductions lead to a proliferation of stock-keeping units (SKU), which add complexity and cost to inventory management. Logistics can play a vital role in helping to identify obsolete inventory and establish policies for eliminating slow-moving and dead SKUs.
Postponement strategies have proven successful where final configuration of a product can be delayed. This adds a role of light manufacturing to distribution, but it helps manufacturers to be more market responsive and reduces financial risk from product obsolescence.
Stretching supply lines to source globally requires improvements in forecasting, information and transportation. Without these improvements, the inability to match demand to supply in a timely manner will sacrifice the benefits of product innovation and sourcing in low-cost markets.
A total cost approach is necessary to manage product life cycles. Failure to assign full overhead to products (including fully allocated logistics costs) gives a skewed measure of the product’s viability.
Better visibility is a must if supply chains are to function efficiently. Access to forecasts, production schedules and product status should be universal, but management must be by exception. You must be able to find materials and products, determine where they are and get them where they are needed when they are needed. That said, watching everything all the time is unproductive.
Trade compliance is certainly not off the table at U.S. Customs and Border Protection, despite that agency’s shift from the U.S. Treasury Department to the Department of Homeland Security. In fact, closer scrutiny of shipments for security purposes has identified lapses in trade compliance sufficient to pay for many of the multi-million-dollar container scanning devices Customs has had to purchase.
Global trade disputes involving the U.S. could add to the headaches importers and exporters face as various aggrieved governments act and retaliate with restrictions, tariffs and fees.
Security is paramount in the minds of importers, and compliance with voluntary initiatives and a plethora of regulations is a major challenge facing logistics. This could slow the flow of goods along extended supply chains.
Customs-Trade Partnership Against Terrorism (C-TPAT) will continue to be a company’s ticket to play in the global trade arena. Importers and exporters need to ensure every partner along their supply chain is compliant with C-TPAT and other initiatives like the Container Security Initiative and rules on bioterrorism governing imported food products.
Initiatives outside the U.S. will mimic C-TPAT as the European Union and other individual trading countries identify terror risks and seek to address them. Even close coordination among the governments won’t ensure rules are in total alignment, so exporters will have to watch developments for themselves, and logistics will need to comply with any initiatives governing pre-notification, packaging, supplier/carrier selection, etc.
Risk management takes a new shape in the extended supply chain. New risks result from too much concentration in organizations, locations and flows. Cost-saving strategies like off-shore sourcing carry additional risks and potential costs. Lane disruptions like port closures can carry a heavy price. Logistics will be asked to provide better risk assessments of market strategies.
“Move beyond function” is the message from logistics professionals to third-party logistics (3PL) companies. Though every study of 3PL activity focuses on which functions are most frequently outsourced, logistics professionals who do outsource are pushing for total solutions that provide visibility and control along their entire supply chain. The realization that a single solution doesn’t play in every market is coming along slowly.
Defining clear expectations ranks right up there with an incomplete picture of product volumes and flows as leading challenges for logistics professionals who are trying to make a 3PL relationship work. Logistics needs better data and stronger ties to corporate strategy or the fundamental criteria for successful outsourcing won’t be met.
Supply “lanes” have different needs and challenges. There is not one supply chain but a series of lanes that feed into a virtual hub of activity. One solution or one model 3PL contract won’t adequately address differing needs for every supply lane or customer link.
Lead logistics providers (LLP) may be able to fill some of the gaps in supply chain management that aren’t covered by one all-encompassing 3PL through the ability to coordinate geographic coverage, perform multiple functions, and implement and link technologies.
Consolidation in the 3PL market will continue as smaller players combine capacity and capability, and mid-sized to large 3PLs expand functional infrastructure and geographic reach. In the most successful 3PL relationships, the 3PL will provide service in its areas of strength and manage partnerships with other 3PLs to deliver the rest.
All logistics solutions are regional. Each warehouse or distribution center serves a market with defined customer service requirements — next-day delivery to 80% of customers, for instance. Balancing transportation costs and distribution requirements demands flexibility. Tomorrow’s network won’t look the same as today’s.
Leased and 3PL distribution centers (DC) allow for more rapid reconfiguration, but property developers and 3PLs look for the DC tenant to share some of their risk.
Logistics campuses have enjoyed limited success. Places like Rickenbacker Port Authority in Columbus, Ohio, centralize resources and offer capabilities like direct air cargo service. The site must have good transportation access and a concentration of logistics services along with proximity to customers/consumers. Variations on the logistics campus or logistics park include concentrations by vertical industry or by end market.
Warehouse automation and mechanization will continue as companies wring out more efficiency from their operations. More productivity from smaller labor forces is often the goal. Responsiveness is the key.
Reverse logistics and returns management are adding another level of complexity to distribution centers. Visibility on returns is as important as it is on inbound product. Systems and services are developing to cope with returns, and they will become more important in loss prevention and asset recovery.
Growing numbers of SKUs plague logistics as manufacturers and distributors attempt to provide custom products to diverse markets. Automatic data collection and warehouse management systems help keep the items and quantities straight, but the next challenge is identifying when a product has reached the end of its life cycle.
Real-time warehouse management promises to improve efficiency by ordering tasks and directing workers to minimize “deadheading.” It’s really dynamic routing using radio frequency terminals to acknowledge completion of a task and direct the worker or lift truck to the next task in his/her area.
Automatic identification may avoid repeating its history. Efforts to expand the use of radio frequency identification (RFID) tags are starting with open standards and phased introduction at Wal-Mart. Years of experience with bar codes in the retail sector could help reduce the learning curve and hasten the return on investment for new equipment suppliers needing to implement the technology.
Enhanced security and loss prevention are byproducts of automatic data collection and automatic identification technologies. Positive identification and near real-time tracking can help compliance with security requirements while making it more difficult for theft to go undetected.
Physical security and background checks are coming to warehouses and distribution centers, but the U.S. government’s voluntary Customs-Trade Partnership Against Terrorism (C-TPAT) initiative has a long list of priorities before it specifically addresses domestic warehouses. Physical security is part of the broader program, so it can’t hurt to start early. LT