Break don't bend your supply chain

Sept. 1, 2004
at a glance This article looks at how major West Coast importers are improving responsiveness and reducing costs in their global supply chains. Trends

at a glance

This article looks at how major West Coast importers are improving responsiveness and reducing costs in their global supply chains.

Trends take on a rolling motion, and one of the latest trends in logistics is definitely picking up momentum. Lengthening supply chains and rising costs (including interest rates) — combined with congested ports and transportation networks — are making it imperative for manufacturers to strip days of inventory out of the pipeline. Though few will go on record, the big importers are using deconsolidation centers near ports to improve time to market and reduce their safety stocks. They're breaking their supply chains at the port to improve flexibility. Here's how and why it works.

The mechanics of deconsolidation are fairly simple. Arriving containers are received to a transload facility near the port, where they are stripped and the contents are reconsolidated into full trailer loads and transported to a customer or a regional distribution center. The value-add in the process is in reconsolidating those goods according to updated demand. The improvements in time to market, customer service and inventory reduction can be astronomical.

Chuck Odom, vice president of supply chain for motor carrier Averitt Express, points to a West Coast import operation for apparel manufacturer OshKosh B'Gosh. OshKosh imports 50 million units a year, he says. Using a deconsolidation center, the company was able to reduce its time to market by six days. That translates into savings of three cents per unit. It doesn't sound like much on a per-unit basis, but that's $1.5 million per year stripped out of the company's supply chain costs.

Mike Ledyard, a partner with consulting firm Supply Chain Visions, takes an even bigger view. Looking at all elements of production lead time, including transit time, he found reducing variability in acquisition time could help one importer strip out as much as 10 days of safety stock inventory. If six days of inventory represent $1.5 million per year for OshKosh, Ledyard's example of 10 days of safety stock reductions starts to look pretty attractive for any major importer.

Two things will improve costs by reducing the amount of inventory in the pipeline: reduced time to market and more accurate demand forecasts. Typically, system forecasts are good 70 to 75 days out, says Ledyard. Using a transload or deconsolidation facility in the port area, an importer can adjust inventory allocations 10 to 15 days out, while the goods are still on the ship.

If the ability to fine-tune forecasts and align inbound inventory with current demand can reduce forecast error from 50% to 30%, an importer can shed as much as 22 days of safety stock inventory. If you can do both, in Ledyard's example, the total reduction in safety stock adds up to 27 days.

There's more to the story, of course. Shipping lines have been jealously guarding their containers for the last couple of years, demanding that the containers stay on the port or charging substantial fees for those boxes that move inland to a distribution center or other point of consumption. That's an added cost for importers whose containers are loaded on a rail car or truck chassis and hauled inland to a distribution center.

If you hold the container for a return load, or if your carrier holds the container, costs go up. In addition to any charges the shipping line may add, that backhaul load will likely return to the port at a non-compensatory rate, adding to carrier costs. In a market that has been complaining about capacity constraints, carriers aren't likely to eat those costs.

Volumes through West Coast ports have been high even ahead of the heavy late-summer/early-fall shipping season. Los Angeles and Long Beach are the busiest ports in the U.S., handling volumes approaching 6.5 million containers. (Los Angeles-Long Beach is also ranked # 5 in the Southwest region; see rankings chart on p. 36.) Approximately 27% of import cargo stays in the area, estimates Odom, based partly on the population density.

Odom reports operations at those ports are running seven days a week, 24 hours a day just to keep the containers moving. His third-party operation takes importers' containers as soon as they have a chassis under them and drays them seven miles inland to a large deconsolidation center.

Averitt can strip three 40-foot containers and reconsolidate them into two 53-foot trailers. Using team drivers, Odom says he can “surge” the freight through his facility and deliver them to a domestic destination faster than some of the large distribution centers in the area.

Typical operations at a DC would include receiving and put away. Transload facilities avoid those steps and merely crossdock the goods based on updated demand forecasts and haul them to regional distribution centers. The additional “touches” are typically offset by inventory reductions and better inventory allocation. In many cases, the deconsolidation can grab local freight before it moves inland, thereby avoiding having that freight log unnecessary miles coming back to the markets near the port where it entered the U.S.

Though the goal of a transload facility is to act as a crossdock, goods can be staged and some minor value-add steps performed, such as attaching store labels. The time at the third-party transload facility can be offset by delivering direct-to-store and getting the goods in front of buyers faster. Similarly, small safety stocks of finished goods can be held at some deconsolidation centers to help respond to market changes.

Growing in importance, the rail/ intermodal component will provide an important link if fuel prices rush to the $3 per gallon level following the presidential election, predicts Odom. He expects to be using more rail despite the railroads' current problems with congestion.

The trend to deconsolidation centers near ports isn't limited to the West Coast. Odom is conducting similar operations through ports in Mississippi and he likewise anticipates increased demand for East Coast ports.

For the current year, some significant volumes of textiles and apparel shifted back to Mexico and Central America as a result of the planned discontinuation of quotas. Odom explains that importers typically “buy forward” into the next year's quota. With China quotas set to expire, they couldn't buy into 2005 quotas, so they shifted those volumes to Mexico, Honduras, Guatemala and the Yucatán Peninsula, says Odom.

One ship operator specializing in container moves from the Yucatán is running at capacity and has had to charter another ship, Odom points out. Those conditions should remain through the end of the year, but remain in doubt after that. Given that it is an election year, voter sensitivity to offshore outsourcing could push lawmakers to leave the quotas in place.

Already-congested West Coast ports may be sighing with relief that the textile volumes have temporarily shifted as the peak retail shipments start to arrive. However, if quotas are suspended, those volumes could return to Asia and to the West Coast ports, allowing little relief from current levels of imports.

Both Odom and Rick Moradian, president of Asia/Middle East with APL Logistics, a global third-party logistics provider (3PL), believe Africa will emerge as one of the next major developing regions. The companies Moradian deals with are in 13 countries and 47 factories, coming out of 22 ports, using seven shipping lines and three airlines. Allowing for some exaggeration, companies with broad experience will look for new opportunities and move cautiously to build relationships and infrastructure ahead of the crowd.

That's one reason East Coast ports need to prepare, says Odom. As Africa develops and becomes a sourcing region for the U.S. market, more goods will be flowing through East Coast ports and into deconsolidation centers. It's not that far in the future.

Moradian and Odom are seeing companies move into Africa now, taking advantage of incentives like the African Growth and Opportunity Act. According to Odom, Chinese companies are setting up plants and training their African workforce (he declined to identify specific companies), suggesting that even China is looking elsewhere for cheaper labor.

Even before the African industrialization adds volume to East Coast ports, Odom says he is working with companies that bring goods from Europe and other markets, through deconsolidation centers near East Coast ports and even move some of those goods to deconsolidation centers on the West coast. There, goods from domestic sources mix with imports to form the truckloads that move into local and regional markets.

The concept of the crossdock facility has evolved and, whether you call it a transload center or a deconsolidation center, and whether or not it is located near a port, 3PLs are promoting dynamic routing to reduce inventory and add agility to supply chains. As the capability expands on the West Coast, along the Gulf, up the East Coast, and even to inland port operations, where you source will be less constrained by logistics capabilities — at least once you enter the domestic U.S. market. LT

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