Executive Briefings

You Should Cut International Logistics Costs, No Doubt. But How?

Companies and their logistics service providers need to reduce their international transport and logistics costs. Despite the uncertainties of the current business environment, they can apply both old and new techniques.

Expansion plans are shelved. Demand for companies' products has become very volatile and uncertain. And yesterday's focus on "agile supply chains" has, for many international companies, shifted to one on "lower-cost supply chains." In this context, international supply chain managers and international logistics directors are asked by their CFOs to "optimize" (or it is minimize?) logistics costs.

This is the agenda for global logistics in 2009. The pressure to reduce international transportation and logistics costs should be addressed by using old, proven techniques as well as new approaches, when opportunities arise.

Techniques and Trade-offs

The immediate "firefighting" measures of running down inventory to reflect slower demand, and seeking price reductions from international shipping lines, local truckers, other suppliers and overseas agents, will probably have come first.

Key methods to reduce transportation or inventory-holding costs will need to target direct costs, working capital and overheads, and can include the following:

• Closely monitoring current freight rates to take advantage of the large, rapid falls in export and import carrier rates (including fuel surcharges), for exporters and importers of containerized freight and airfreight. Review and renegotiate contracts. If you are using a freight forwarder, NVOCC or intermediary, are they passing on the full reduction in carrier rates to your company? Benchmarking is essential to save international transportation dollars.

• Review transportation modes and quantities. In a recession, speed of delivery (even internationally) tends to be less important, although this depends on the products. Could your company trade off faster transit times for lower freight costs? Shipping in lower quantities or shipping to centralized points, when economic, may also reduce your exposure to demand forecasting errors in overseas markets. Can more products be moved in each shipping container with a better loading plan or less product packaging? A thorough review of transportation modes, including sea-air, sea-rail and all-water, could result in lower costs.

• Consider moving logistics value-added activities, such as labeling and pick-and-pack, to the Asian origin warehouse, to reduce labor and handling costs.

• Consider shrinking your supply chain network and capacity when breaks come up in leases of distribution centers/warehouses.

• As always, seek to obtain good forecasts (and maybe more frequent forecasts) of expected sales volumes from your international customers and your customers' customers, to calibrate outbound logistics properly (easier said than done).

• Consider setting up a global, multifunctional, rapid-reaction logistics team of senior executives who can take quick decisions on international inventory, lead-times and optimal transportation routes to run your business in the short term, as conditions change. Do not outsource your real international logistics know-how, even if pressures to cut overheads are high.

The Outlook

The international transportation and logistics world is dynamic, even in a global economic downturn. Some international logistics hubs, like Dubai, are becoming more expensive or even congested (Dubai's Jebel Ali port, for example). More medium-value consumer products will stop using international airfreight, due to margin pressures and costs. New international sea-air routes have appeared and increasingly low container shipping rates make sea-air more attractive than in previous years. The cost of intermodal rail transport from the U.S. West Coast for trans-Pacific shipments will keep going up. By contrast, rail transportation is starting to be used as a serious new corridor between China and Europe, providing faster transit times than container shipping but at much lower cost than airfreight.

Expansion plans are shelved. Demand for companies' products has become very volatile and uncertain. And yesterday's focus on "agile supply chains" has, for many international companies, shifted to one on "lower-cost supply chains." In this context, international supply chain managers and international logistics directors are asked by their CFOs to "optimize" (or it is minimize?) logistics costs.

This is the agenda for global logistics in 2009. The pressure to reduce international transportation and logistics costs should be addressed by using old, proven techniques as well as new approaches, when opportunities arise.

Techniques and Trade-offs

The immediate "firefighting" measures of running down inventory to reflect slower demand, and seeking price reductions from international shipping lines, local truckers, other suppliers and overseas agents, will probably have come first.

Key methods to reduce transportation or inventory-holding costs will need to target direct costs, working capital and overheads, and can include the following:

• Closely monitoring current freight rates to take advantage of the large, rapid falls in export and import carrier rates (including fuel surcharges), for exporters and importers of containerized freight and airfreight. Review and renegotiate contracts. If you are using a freight forwarder, NVOCC or intermediary, are they passing on the full reduction in carrier rates to your company? Benchmarking is essential to save international transportation dollars.

• Review transportation modes and quantities. In a recession, speed of delivery (even internationally) tends to be less important, although this depends on the products. Could your company trade off faster transit times for lower freight costs? Shipping in lower quantities or shipping to centralized points, when economic, may also reduce your exposure to demand forecasting errors in overseas markets. Can more products be moved in each shipping container with a better loading plan or less product packaging? A thorough review of transportation modes, including sea-air, sea-rail and all-water, could result in lower costs.

• Consider moving logistics value-added activities, such as labeling and pick-and-pack, to the Asian origin warehouse, to reduce labor and handling costs.

• Consider shrinking your supply chain network and capacity when breaks come up in leases of distribution centers/warehouses.

• As always, seek to obtain good forecasts (and maybe more frequent forecasts) of expected sales volumes from your international customers and your customers' customers, to calibrate outbound logistics properly (easier said than done).

• Consider setting up a global, multifunctional, rapid-reaction logistics team of senior executives who can take quick decisions on international inventory, lead-times and optimal transportation routes to run your business in the short term, as conditions change. Do not outsource your real international logistics know-how, even if pressures to cut overheads are high.

The Outlook

The international transportation and logistics world is dynamic, even in a global economic downturn. Some international logistics hubs, like Dubai, are becoming more expensive or even congested (Dubai's Jebel Ali port, for example). More medium-value consumer products will stop using international airfreight, due to margin pressures and costs. New international sea-air routes have appeared and increasingly low container shipping rates make sea-air more attractive than in previous years. The cost of intermodal rail transport from the U.S. West Coast for trans-Pacific shipments will keep going up. By contrast, rail transportation is starting to be used as a serious new corridor between China and Europe, providing faster transit times than container shipping but at much lower cost than airfreight.