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Delivering the Goods

It has never been simpler to move your merchandise. At the same time, the processes of logistics are more complicated than ever.

Steve Stackhouse-Kaelble (Aug/Sep 06)
A variety of trends - from globalization of the supply chain to skyrocketing fuel costs to security issues to increasingly powerful technology - has created a paradox in the world of logistics: It's now both easier and harder to get the goods from place to place. As is the case in most industries, customers are always demanding better and faster service. And as has happened in nearly every business, industry consolidation is changing the face of logistics.

Heading East
"Domestically, one of the biggest trends is the demise of the land bridge in the U.S.," says John Vande Vate, Ph.D., executive director of Georgia Tech's executive master's degree program in international logistics. "More and more people are bringing their goods around to the East Coast rather than coming into West Coast ports and trying to bring them across the country by truck or rail."

That certainly doesn't mean West Coast ports are hurting for business. Many companies continue to view them as the primary front door for bringing in goods produced in Asia. But an increasing number are pointing at least some of their North American shipments toward ports on the opposite coast. "These will be mainly big-box retailers bringing goods over from Asia," says Vande Vate, who believes several factors are driving the trend. There are limitations on the capacity of busy West Coast ports, plus increases in the cost of land transportation, thanks to rising fuel and insurance costs. It is also, in some cases, becoming more difficult to secure transportation between the coasts, given limits on the hours drivers are allowed behind the wheel each day as well as the overall supply of drivers. "It's harder for an owner-operator to survive anymore," says Vande Vate; and the field of long-haul trucking is not attracting as many young drivers as it once did. "The average age of a union driver is 57."

The eastward trend is good for ports serving the Atlantic Ocean and the Gulf of Mexico, he says. The ports of Savannah and Houston are growing, and Charleston and Norfolk also stand to gain, among others. That, in turn, says Vande Vate, is a positive for landowners in the general vicinity of the ports: "People are building their East Coast distribution centers almost on the ports."

Also observing this view toward the east is Mark Vonderembse, Ph.D., director of the Intermodal Transportation Institute at the University of Toledo. But he foresees a day in the not-too-distant future when East Coast ports will become clogged with shipments. "Projections I've seen are that if you take all of the North Atlantic ports, [and] look at their capacity and project container demand for 10 or 12 years, capacity available and planned for the East Coast will be entirely consumed," he says. "If you take any trend line and project it out over 12 years, the number of containers is huge, even if the growth rate drops off. The ability for us to handle that volume of traffic will be severely challenged."

Given that, don't be surprised to see logistics-related activity not just in the vicinity of ports but also further inland. "You're going to see efforts to develop inland port operations throughout this country, where we can bring these goods into a port and ship containers by rail to an inland port," says Vonderembse. "We're looking at a major intermodal port in our region here."

Clearly, no one expects trucking to go the way of the horse-drawn carriage, and in fact, there are plenty of studies suggesting that truck transportation will continue to boom and grow in spite of the challenges of getting enough drivers behind the wheel. The American Trucking Association's long-range forecast suggests that trucking will increase its share of the nation's freight pool between now and 2016 and will continue to dominate freight movement. The report suggests that trucking's share of total freight revenue will be nearly 88 percent by 2016, and that trucks will carry nearly 70 percent of all goods when measured by weight.

The Need for Speed

"What we're seeing is that service is becoming increasingly more important than it seems to have been previously," says David Thomas, president of Atlanta-based Top Flight Concepts, a logistics information-technology firm that consults with companies and provides logistics-focused software. "Before, price was more important, but service seems to be taking a larger role in decisions of what carriers to use, where to locate, things like that."

When he says "service," Thomas means "speed": "One of our larger customers has a vision of being able to serve all points across the country next-day." There are plenty of next-day options available for that client, he says; the trick is devising a strategy that is both speedy and cost-effective. "You can get freight from A to B as quickly as you want, but how do you set up a system to serve customers with reasonable costs?"

For this particular client, the answer has been opening additional locations along the supply-chain route. While some companies have pursued efficiency by consolidating some of their distribution operations, others like this company have found it necessary to move in the opposite direction in order to make speed the primary driver. "It has caused them to open up a couple of satellite warehouses, where they might be working out of a public warehouse," says Thomas.

"You can interpret the need for speed in a broader context," says Vande Vate. "For many companies, really what you mean is to reduce inventory. You want to move your product through your supply chain faster and have less inventory." That has, indeed, happened for many companies in recent years, he says, with many recording a dramatic drop in their days of inventory. "But a combination of things is turning that around and some companies are actually adding days of inventory," he says.

For one thing, congestion in the transportation system can add to the number of days a product spends navigating the supply chain. Beyond that, global sourcing strategies are changing for some companies, causing goods or components to be tallied as being within the company's inventory when in the past the same goods at that point in the supply chain were considered to be the property of a different entity. "Globally, they're bringing things from farther away, and for some of these guys they're increasing their direct international sourcing," says Vande Vate. "They're taking possession right at the factory in Asia."

Energy, Technology, Security, Consolidation
"Fuel is definitely having an impact on shipping," says Thomas. Carriers are commonly tacking on fuel surcharges to cover their increased expenses at the pump, and those surcharges are climbing steadily. "Less-than-load fuel surcharges are ranging from 15 to 20 percent, and truckload rates are even higher than that, as high as 30 percent," he says. "It has been a steady increase, and that has a direct result on profitability." Adds Vonderembse, "I don't expect fuel prices to go down dramatically. High energy prices are here to stay."

That reality adds new complexity to the equation when considering how best to configure a distribution system. For some, it may be another argument for a more decentralized model, with a greater number of distribution facilities that allow larger and more cost-efficient truckloads or trainloads to be shipped that much closer to their final destination before being split up for local delivery. Fortunately, improving technology is helping companies as they make such decisions. "Technology is becoming more of a factor than it was before in helping people to determine which way to go and who to use, and a lot more people are holding players accountable for their service," says Thomas.


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