A lot can go wrong with today's global supply chains that span thousands of miles and multiple modes. Just ask any logistics manager. Each connection presents an additional risk of delay or disruption. Lead times now extend to many weeks with spotty visibility along the way, usually resulting in far too much or too little inventory where it is needed. When disruptions inevitably occur, there are few alternatives, and none of them is easy or inexpensive.
"The growing variability in ocean transit time drives up shippers' total supply chain costs by forcing them to either retain higher safety stock levels, which increases their inventory carrying costs or to resort to airfreight to recover from delays, and that cost is approximately eight to 10 times that of standard ocean freight," says David Hoppin, managing director of MergeGlobal, an Arlington, Va.-based research firm that recently published Coping With Uncertainty, a study dealing with the growing problems global shippers are having with long, unpredictable supply chains from Asia to North America.
It's enough to make a logistician long for the days when all supply chains were domestic. One call to a less-than-truckload motor carrier used to solve most disruption problems with an expedited shipment. But those days are gone. Or are they?
LTL carriers are now finding new ways to integrate themselves into today's global supply chains to speed the movement of goods from ports to inland points. They are again adding the reliability, visibility and value that have long made LTL carriers critical members in inbound supply chains.
Last September, for example, Con-way Freight partnered with APL Logistics to create a day-definite, less-than-containerload (LCL) cargo service called OceanGuaranteed. The program initially provided LCL service from Hong Kong, Shanghai and Shenzhen, in China, through the Port of Los Angeles to all continental U.S. destinations served by Con-way Freight's LTL service. The service now includes shipments from Kaohsiung, Taiwan; Yokohama, Japan; Singapore; and Busan, Korea.
According to Ned Moritz, Con-way's vice president of marketing, the service was prompted by the MergeGlobal study, which confirmed the need for LCL/LTL service that was more reliable and faster than what was offered by freight forwarders and non-vessel operating common carriers (NVOCCs) and less costly than airfreight. Port-to-door transit times for OceanGuaranteed to the East Coast are 19 days versus up to 45 days for traditional NVOCC service.
"There is a premium over the conventional NVOCC rates," says Moritz, "but pricing is magnitudes less than airfreight. Our transit times are a week to 10 days longer than airfreight, which varies quite a bit depending on the destination city. OceanGuaranteed is essentially a cost-effective alternative to airfreight designed to speed shipments from Asia to the U.S., providing cycle time consistency and reliability."
Expediting LCL shipments from the Far East to points throughout the U.S. is not the only way LTL carriers are helping global shippers. Averitt Express is focusing on port handling and value-added services to integrate itself into customers' global supply chains. Over the last three years, Averitt has offered its PortSide service that provides import and export capabilities and value-added functions directly at a growing list of ports.
"More than ever, our customers' supply chains are stretching around the world, and without question, their number one concern is speed to market," says Chuck Odom, Averitt's vice president of global development. "Our PortSide facilities allow us to provide customized solutions that result in maximum velocity and streamlined product flow. And by combining our PortSide capabilities with our domestic distribution network, we can often shave days off of inventory cycle times, affording shippers some very appealing efficiencies.
"It's important for us to always be looking at new markets and alternative solutions that will improve our customers' importing/exporting processes, especially in light of recent congestion issues and disruptions at ports," Odom adds. "Having facilities in Seattle and Oakland provides us with valuable flexibility on the West Coast for goods moving between the U.S. and Asia. Panama City, meanwhile, is becoming an important gateway for us for cargo coming from Central America, especially with the damage inflicted to the Gulf Coast by Hurricane Katrina."
PortSide facilities are all located within five miles of their respective ports and include conventional Averitt trucking terminals and dedicated warehouses. Averitt has a growing list of PortSide distribution facilities in major U.S. ports, including Los Angeles and Long Beach, Houston, New Orleans, Miami, Jacksonville, Savannah, Charleston, and Norfolk. It recently added PortSide distribution centers in Seattle, Oakland, and Panama City.
According to Odom, PortSide was created for customers that do not have time to move containers to inland DCs, which is taking longer and longer and becoming more expensive.
"We cut six days out of transit because we work when the freight is available-seven days a week," says Odom. "PortSide moves LTL shipments from the pier directly to our customers' customers. We avoid multiple handling and provide complete supply chain visibility."
Most of the freight for PortSide service is received in full containers. At the PortSide facilities, the containers are stripped and the freight is handled to meet a variety of customer needs. The value-added services may be simple cross-docking or flow-through distribution for LTL shipments to a series of retail stores. Usually, the service required is more complex. For one retail customer, Averitt receives containers separately loaded with pants, shirts and ties. It assembles matched sets, including one of each item, barcodes its and labels it ready for sale.
Because PortSide service is available at so many ports, Averitt can receive containers for a customer through several ports, build orders for specific stores at each PortSide facility simultaneously, and then merge orders within the Averitt LTL network for delivery to each store.
About half of the PortSide freight moves on a bill of lading from Averitt's NVOCC operations as a planned entry through the PortSide service for special handling and into the Averitt LTL network. The other half of the volume comes from customers that have booked containers with a carrier directly.
"These importers usually have a special program with a customer and the containers are already on the sea," says Odom. "They will often ask us to sort hundreds of SKUs into specific orders for several thousand stores."
The Global Mandate
The business driver for LTL carriers to become more involved with global supply chains is clear. Container traffic to North America from China alone has increased at an annual rate of 15.7 percent since 2000. But while U.S. companies have rushed to Asia for low-cost labor and product sourcing, the cost of transportation and other supply chain operations have increased at an accelerating rate, while transit reliability has suffered, especially for LCL shipments.
"Importers in our study said that reliability is by far the most important factor in selecting transportation, even more important than price," says Hoppin. "To keep their supply chains on schedule, service-sensitive importers are having to use airfreight or full containers, even if the shipment is far less than the amount that would fill a 20-foot box. Only the most price-sensitive and least service-sensitive shippers use conventional LCL now, which is why it is only 5 percent of the market."
A service like OceanGuaranteed is designed to appeal to sophisticated shippers that understand the total distribution concept, which is the sum of transport and inventory-related costs such as excess safety stock as well as the cost of lost sales or disrupted supply chains.
"Today's analytically trained logisticians are not afraid to spend more on transportation to reduce inventory carrying costs and risks," says Hoppin. These sophisticated importers also want end-to-end visibility from the time the shipment is delivered portside in Asia until it arrives at destination.
With OceanGuaranteed, the importer is able to watch each step and change of status from receipt in Asia until delivery in the U.S. through APL's web site. A data interchange between APL Logistics and Con-way makes the entire supply chain and each hand-off transparent to the customer. Within 24 hours, customers can get an electronic copy of the delivery receipt sign by the person accepting the freight.
APL Logistics serves as the overall program manager and the carrier of record for shipments tendered on APL Logistics through bills of lading. APL Logistics handles all in-country shipment management services in China, Japan, Korea, Taiwan and Singapore. Ocean carriage is provided by APL Logistics' sister company, APL. Con-way manages receipt of ocean containers and deconsolidation in Los Angeles and delivery of cargo as LTL shipments to the customer's door in the U.S.
OceanGuaranteed shipments are handled quite differently from typical consolidated LCL freight. At origin, freight has late-gate privileges. Containers have "hot stow" priority stowage on the vessel, and "last on, first off" loading/unloading for rapid discharge at the destination port. Since nearly all OceanGuaranteed customers are certified under the Customs Trade Partnership Against Terrorism (C-TPAT) program run by U.S. Customs and Border Protection (CBP), their shipments are segregated and loaded in dedicated containers entitling them to "green lane" handling by CBP.
Five days before the APL vessel arrives in Los Angeles, the consignee and its customs broker are alerted. The broker must pre-clear the freight to avoid any delay at the pier. APL Logistics drays the container out of the port of Los Angeles into a bonded container freight station under contract with Con-way where the shipment enters the LTL carrier's linehaul system. There, it moves as domestic freight to be delivered on a specified day. Shipments that fail to meet the delivery-day commitment receive a 20 percent discount.
According to Moritz, the Port of Los Angeles is the only entry point for now, but other ports, including ones on the East and Gulf coasts, may be added.
"LTL freight transportation is all about density," says Moritz. "The large volumes entering through Los Angeles allow us to provide the service our customers expect."
The LTL Niche
In providing high-service LCL and value-added handling at ports, an LTL carrier makes itself an integral part of customers' global supply chains, which are becoming the norm for most companies today.
"We need to maintain direct relationships with our traditional manufacturing and retailing customers who are moving overseas," says Moritz. "We want to stay in front of the shipper that will be making the carrier selection rather than allow multiple third-parties to come between us and our traditional customers. There is a customer service boost, as well as higher revenues. They rely on us more for international as well as domestic. It's a world economy, so we want to make it simpler for customers."
LTL carriers also have a huge investment in equipment and terminals that they need to leverage to maintain profitability. With so much sourcing and manufacturing moving offshore, LTL carriers need to develop creative service offerings that add time and utility value for their customers. For instance, Averitt is an NVOCC. Odom says that the primary goal is not to make a big profit on the international move, but to feed its domestic network.
"We have 20,000 customers," says Averitt's Odom. "About a third of these were domestic manufacturers just a few years ago, but they are now global marketers. They want us to help them create a faster distribution system that meets their new global role. They want us to meet ships and move complete orders directly to their customers. Some want us to us to handle the movements all the way to plants in China and consolidate orders for specific customers starting there. It's a new day for LTL carriers."
Southco's Global Sourcing Hinges on OceanGuaranteed from Con-way & APL Logistics
Like most mid-sized manufacturers, Concordville, Pa.-based Southco now has global supply chains that increasingly depend on Asian sourcing. In China alone, the manufacturer of latches, hinges, locks and other engineer access hardware has seven facilities and a number of key suppliers.
"Our products are very small and shipments rarely amount to full containerloads, especially given our need for frequent and on-time delivery," says Steve Paskevich, global logistics manager for Southco Inc. Inbound shipments range in size from 150 to several thousand kilograms, which has required using either standard consolidated less-than-containerload (LCL) service with a non-vessel operating common carrier (NVOCC), or airfreight. LCL is very economical, but shipments can take as long as 45 days. There is also no ability to track the shipments and transit times are extremely inconsistent. Airfreight shipments take less than a week, but are extremely expensive.
"The cost of airfreight became a major factor in the decision of where to source the product," says Paskevich, who adds that customer requirements often required the use of airfreight, regardless of cost. Southco's products are important components for its customers, which are original equipment manufacturers in such industries as marine, automotive, RV/caravan, industrial machinery, enclosures, HVAC, medical equipment, telecommunications and computers.
"Forty-five-day-plus lead times for standard LCL service is just not workable for the just-in-time environment we and our customers must operate in," says Paskevich. "We knew that we needed an option between airfreight and LCL."
Con-way Freight is Southco's primary trucker, so when the LTL carrier introduced OceanGuaranteed last summer in conjunction with APL Logistics, it got Paskevich's attention.
"Shorter, reliable transit times and costs much less than airfreight--exactly what we needed," he says. Southco started using OceanGuaranteed in November 2006. Its lead times from China are now 19 days versus up to 45 days for conventional LCL. APL Logistics receives shipments from Asian suppliers, consolidates the containers and moves them on APL vessels to the Port of Los Angeles, where Con-way brings the LCL shipments into its LTL network. Since Southco is C-TPAT-certified, its containerized shipments are handled expeditiously. The visibility capabilities of OceanGuaranteed also allow Southco to fine-tune its supply chain planning.
"Our buyers can go to the APL Logistics web site and see exactly where the shipment is at any time," says Paskevich.
"Con-way does a great job of getting the shipments through the ports and across the U.S. to our distribution center in Philadelphia."
Paskevich is well aware of the West Coast congestion problems, but with the OceanGuaranteed service he has not seen any delays. With transit times now so consistent, Southco is doing weekly shipments timed to arrive at its major distribution center in Philadelphia every Thursday. Southco also has several manufacturing facilities in the North Atlantic region that source directly from Asia. It does not ship direct to its OEMs or other customers. Southco is now using OceanGuaranteed service from a number of Asian origins, including Taiwan, Hong Kong, Shenzhen and Shanghai.
"Now that we are working so closely on our imports with Con-way and APL Logistics, we may explore having APL Logistics warehouse product for us in the Midwest. For now, we are just shipping to our own facilities," says Paskevich.
"We know we can count on deliveries arriving on specific days, so we have not had to increase safety stock or other inventory," says Paskevich. "The savings over airfreight are significant enough that that we can justify the slightly longer lead times and carrying costs."
When Premium LCL Makes Dollars and Sense
The total distribution cost concept (TDC), which includes both the transportation charge and all inventory-related costs, has been around for decades, but it has gained much greater relevancy as global supply chains and transit times have lengthened from days into weeks.
"Global companies are very sophisticated and know the cost of a stockout or a supply chain disruption," says David Hoppin, MergeGlobal's managing director, who co-authored a study called Coping With Uncertainty. "These shippers will calculate the value of paying more for airfreight, full containerload (FCL) or premium less-than-containerload (LCL) transportation to lower inventory costs and risks."
Partly because of this study, APL Logistics and Con-way Freight developed the OceanGuaranteed day-definite LCL service for importers that understand TDC and are willing to employ the concept. The calculation for how much can be spent on transportation requires the shipper to know its inventory carrying cost and the value of the item being shipped. The higher the value and the higher carrying cost, the more sense it makes to pay for faster, more reliable transportation.
The accompanying TDC chart represents indifference curves by various modes for a 3,000-kilogram shipment from Hong Kong to Chicago. It shows the value of date-definite LCL door-to-door service that is priced at 50 percent of airfreight rates (blue) or 33 percent of standard airfreight.
For example, if the product is worth $85/kg with an inventory carrying cost of 30 percent, the shipper can reduce his costs by using the premium LCL priced at 50 percent of air. If it were priced at one third of airfreight (green zone) premium LCL makes sense with product valued at only $20/kg and with a 30-percent inventory carrying cost. The key to making the right decision is understanding true inventory carrying costs, and that analysis should be broader than most companies appreciate.
"Many companies may say that the weighted cost of capital is around 10 percent," says Hoppin, "but that only looks at the money tied up in working capital and does not take into account the cost of markdowns, production slowdowns, lost sales, and other factors that can take the cost up to 20 to 25 percent."
Timely, incisive articles delivered directly to your inbox.