Resolve To Keep Up With These Logistics Trends
Yogi Berra was only referring to baseball at the time. However when he allegedly said that watching something was like “déjà vu all over again,” he could just as easily been summing up today’s major logistics trends, because many have a familiar ring to them.
Intermodal Sites 2015
Area Development recently caught up with Frentzel to discuss which items are likely to be making a repeat appearance on your companies’ transportation and warehousing agendas this year — and why it’s best not to take the same old approach to addressing them.
AD: Over the years, we’ve talked trends with numerous logistics professionals. During the 1990s, those dialogues often centered around Mexico or the growth of online shopping. In the 2000s, they frequently touched upon China, India, and other emerging markets. Now, given the buzz surrounding both the omnichannel and nearshoring to Mexico, it seems like we’ve come full circle. Do you ever feel like Bill Murray in Groundhog Day?
The many jobs created by China’s decade-long manufacturing boom have created huge numbers of new consumers with discretionary income and the desire to spend, which is why it makes sense for companies to at least consider keeping some of their China-based manufacturing there.
Frentzel: In some ways, yes, because I’m one of the many executives who ate, drank, and slept these concerns the first time around. But in other ways, no, because we’re looking at a very different Mexico and a far more significant e-commerce channel than we were then.
AD: How different are we talking?
Frentzel: Since 2007, Mexico has made huge strides toward improving its infrastructure thanks to two multi-year plans to invest in updates, upgrades, and expansions to its highways, railways, ports, and airports. Although such plans clearly aren’t guarantees — for example, many of the projects in the first plan had to be tabled or postponed due to the economic decline — they still represent a much more fluid transportation network than businesses had to work with during the early post-NAFTA years.
Mexican warehousing options are also significantly improved. When our company opened its first Mexico warehouse in 1992, the start-up team encountered a number of hurdles, including a lack of modern warehousing space, limited phone service/IT connectivity, and long waits to get the same. Today, there are far more state-of-the-art distribution centers available, and many of them offer access to the latest information systems.
AD: What kind of role have these improvements played in attracting more manufacturing to Mexico?
Frentzel: They definitely haven’t hurt Mexico’s case. But low costs and superior speed-to-market are the true drivers.
Mexico and India are currently the least expensive international manufacturing venues for U.S.-bound products.
In the early 2000s, many U.S. companies moved production to China because its labor costs were far lower than anywhere else in the world. Now, thanks to steadily increasing wage rates in Asia (they’re rising 5 to 10 percent annually in China), that cost advantage has significantly narrowed or disappeared altogether. In fact, Mexico and India are currently the least expensive international manufacturing venues for U.S.-bound products.
AD: We noticed you stressed that they’re the least expensive international venues. Was that distinction intentional?
Frentzel: It was. Reshoring — bringing production back to the United States — has become an equally powerful trend, especially now that our country is getting closer to achieving manufacturing cost parity with China. Plus, there’s often a lot to be said for manufacturing goods in the same country where you’re selling them.
AD: Speaking of selling goods and China, that country has become a major consumer market in its own right. Is that a promising sign for its continued manufacturing success?
Frentzel: It’s one of many reasons we shouldn’t assume that we’ve seen the last of “the world’s factory floor.” The many jobs created by China’s decade-long manufacturing boom have created huge numbers of new consumers with discretionary income and the desire to spend, which is why it makes sense for companies to at least consider keeping some of their China-based manufacturing there. That way, they can have quick and easy outbound transportation access to Chinese consumers.
On a different but equally important note, companies shouldn’t overlook the fact that for certain kinds of products, China still offers a decided manufacturing edge. AD: What about those companies that never moved manufacturing to China or another nearby Asian location? Should China still be on their radar screen, too?
Frentzel: At the very least, they’ll need to consider having a solid distribution center network there, because otherwise they’ll risk missing out on the country’s significant sales and e-commerce growth opportunities.
AD: E-commerce growth opportunities seem to be big everywhere these days.
Unlike the early days of e-commerce — when most companies kept e-commerce inventory separate from their other inventory and in a single central location close to major parcel carriers’ hubs — most are now adopting a decentralized, omnichannel approach that spreads that inventory across more locations.
Frentzel: That’s definitely true. Although e-commerce disappeared from the headlines in the early 2000s, it never disappeared from the competitive landscape. It just continued to quietly grow and assume greater significance. But lately, as people have gotten more comfortable with carrying out an increasing amount of their personal and professional lives online, its growth has really taken off. Today, it’s expanding approximately five times faster than other forms of retail sales, and in some cases it’s the only retail sales channel that’s growing at all.
AD: What does this mean from a logistics planning perspective?
Frentzel: The kind of small package shipping that e-commerce fulfillment requires isn’t a new concept. However what is new is just how important it has now become for companies to perform small package logistics well — and we’re not just talking in terms of shipments to consumers. Many retailers are now looking to their business partners to make smaller, more frequent deliveries to their DCs or retail outlets, too — and requesting that suppliers customize cases or inner packing to be more conducive to e-commerce fulfillment.
AD: In your opinion, what are some key enablers of these shipments?
Frentzel: Choosing the right carriers is a major part of the equation, as is having the right data and systems to manage product flow. But so is making sure your company’s DC network has been designed and optimized with omnichannel speed and proficiency in mind. And this is true even if you’re not a retailer, because retailers are frequently asking their suppliers to ship goods directly to consumers for them.
AD: Describe how that DC network configuration might look. Is it going to represent a marked departure from what companies have traditionally looked for in terms of the ideal warehouse?
Frentzel: For one thing, there will be even more emphasis on proximity to end customers. Unlike the early days of e-commerce — when most companies kept e-commerce inventory separate from their other inventory and in a single central location close to major parcel carriers’ hubs — most are now adopting a decentralized, omnichannel approach that spreads that inventory across more locations. That way they can more easily meet expectations of same- or next-day delivery.
Also, e-commerce and brick-and-mortar inventory will be far more likely to occupy the same facilities, with different parts of facilities designed to serve the shipping requirements of different channels. This shared approach — which also includes the growing concept of using stores as mini fulfillment centers — makes all inventory available to all channels, so that items can be swiftly deployed when and where they’re most needed. Additionally, companies may need to think in terms of having bigger warehouses — not only because their operations will now be combined but also because e-commerce activities generally require up to three times more space than other logistics functions.
As the (truck driver) shortage continues, reasonably priced, reliable trucking space could be considerably hard to come by, and rail intermodal services will become increasingly attractive.
AD: Do you mean “bigger” facilities as in wider or longer?
Frentzel: “Bigger” as in higher — warehouses with greater clear ceiling heights that will allow for the use of multiple mezzanine levels. In fact, in places like coastal China, where land prices are especially steep, a taller warehouse might be the better choice.
AD: No discussion of logistics would be complete without at least some mention of this year’s good news transportation story — falling oil prices.
It’s undoubtedly a positive development for supply chain professionals. From a cost perspective, lower fuel prices mean that companies have a bit more flexibility and breathing room in terms of which transportation modes they deploy (some are more fuel-efficient than others), how fast those modes travel, and how close their DCs have to be to end customers.
However it still doesn’t mean that companies can afford to be cavalier about transportation access and flexibility either, because there’s also another thing in decline, too: the available supply of truck drivers.
AD: Good point. According to the American Trucking Association there are now 35,000 fewer drivers than the industry needs.
Frentzel: And that number’s likely to get worse before it gets better. Some think the driver deficit could climb to 200,000 drivers within the next five years.
AD: What might this shortage mean from a site selection perspective?
Frentzel: As the driver population continues to drop, trucking companies are going to have to pay considerably more money to attract and retain drivers — and these cost increases will invariably get passed along to shippers. Distribution center locations that enable companies to minimize miles traveled and maximize access to a variety of modes and carriers will continue to be an essential part of companies’ recipe for success — because, as the shortage continues, reasonably priced, reliable trucking space could be considerably hard to come by, and rail intermodal services will become increasingly attractive.
So, to sum things up, Mexico is hot again. But so are China, India, and the United States. The U.S. isn’t the only major consumer market that companies need to consider in terms of outbound distribution. And the omnichannel isn’t a subject they can afford to back burner. Plus the lack of drivers could continue to drive transportation costs up, so choose locations with that in mind.
AD: Any other quick thoughts?
Frentzel: The French have an expression, “The more things change, the more they stay the same.” And obviously some of the things we’ve talked about bear that out. However there is at least one very pronounced supply chain change: Compared with how things were a couple of decades ago, most of today’s organizations are much more aware of just how important warehousing, transportation, and other logistics activities truly are.
AD: And that’s a change you’re happy to get behind?
Frentzel: It’s a change we should ALL be happy to get behind.
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