The production of apparel and other consumer goods has shifted in recent years to low-cost countries like China, but potential savings from this strategy increasingly are being diminished by higher transportation costs as shippers shift from ocean to airfreight to ensure that seasonal and fashion-forward products arrive on time.
Seeing the adverse impact of this trend on their customers' budgets-and sensing a market opportunity-APL Logistics, a unit of Neptune Orient Lines, and Con-way Freight, a leading U.S. trucking company, began in 2005 to explore the creation of a new service that would fill the gap between premium airfreight and slower, low-cost ocean shipping.
The result was the launch in 2006 of OceanGuaranteed Service, the first day-definite, guaranteed ocean service for less-than-containerload shipments from China to any point in the U.S.
Michael Kors Inc., a leading designer and manufacturer of high-end apparel, shoes and handbags, is one of many companies in the retail sector to have recognized the advantage of OceanGuaranteed's faster, fixed delivery schedule combined with costs that are much lower than airfreight, though higher than standard ocean transport. Handbags that previously shipped by air at a cost of $25 each, now ship by OceanGuaranteed at an average cost of $5 per bag, says Jennifer Jordano, senior director of logistics and customs compliance for Michael Kors. "That's a huge savings for us," she says.
These and other lines that Michael Kors used to ship via LCL as loose freight now arrive 30 percent faster via OceanGuaranteed. "Without the guaranteed service, our loose freight would still have the normal transit time (28 to 32 days)," she says. "OceanGuaranteed made everything more consistent in terms of transit time and flow. The service is a little more expensive (than standard LCL) but what I make up in transit time is priceless to me."
OceanGuaranteed cuts time on both ends, explains Bill Villalon, vice president for land transportation and product development at APL Logistics. Shipments are never co-loaded so there is no danger they will be delayed at origin in order to create a full containerload, he says. Moreover, shipments certified to move under the Customs-Trade Partnership Against Terrorism (C-TPAT) program are separated so they can be expedited through Customs.
At origin, OceanGuaranteed containers are loaded last onto ships and are first off once the ship reaches the Port of Long Beach. For Michael Kors shipments that originate at Qingdao, China, ocean transit takes just under two weeks, arriving at Long Beach on day 13. On day 14, shipments are dropped into the Con-way LTL network and delivered to the Michael Kors center in Secaucus, N.J., on day 20. "With this schedule, we cut about a third off the previous transit time," says Villalon.
Since launching in 2006 with three locations in China, OceanGuaranteed has expanded its network to nine origin points in five countries. The other four are Singapore, Japan, Korea, and Taiwan. Additionally, delivery has been expanded to include metropolitan areas in Canada. This expansion has been supported by significant growth in volume, says Villalon. "Month over month we have seen growth as high as 10 percent," he says.
The next step will be to evaluate other trade lanes, especially trans-Atlantic lanes and lanes between the U.S. and Latin America, he says. For now, the service will remain limited to shipments in the retail sector. "We want to keep tight control while we are establishing the brand," says Villalon. "We may revisit that decision at some point."
When first considering this new service, APL Logistics and Con-way Freight took a very methodical approach to evaluating the potential market. The partners commissioned MergeGlobal, a transportation consultancy with expertise in airfreight and other modes, to help arrange two management seminars with a cross-section of approximately 50 U.S. importers. These seminars served as focus groups, with attendees being invited to discuss the pain points they faced in managing global supply chains.
"The findings from these sessions and subsequent research were striking," says Jim Gray, executive vice president of Con-way Freight. First, it became evident that airfreight was being used more than 50 percent of the time for emergency reasons, primarily to avoid long and unpredictable ocean service. It was not being used as much as initially thought for shipping high-value products or to meet unexpected demand, he says.
Second, although the price of ocean transport was a key driver, reliability was what these importers rated as most important. "Reliability in this case meant the consistency of transit time and not the speed of transit, which ranked third," Gray says.
After analyzing customer feedback and commissioning additional research, APL Logistics and Con-way believed they could combine forces to create a breakthrough service that leveraged the power and reach of their respective international and domestic asset-controlled networks. The OceanGuaranteed service they designed provides a new LCL shipping option between ocean and air, combining the cost efficiency of LCL shipping with the certainty of airfreight, but at a quarter of airfreight's price.
Designing the pricing structure was one of the most challenging aspects of this project for APL Logistics and Con-way. "Probably half of our planning time was devoted to the pricing issue," says Villalon. A key criterion for the partners was to have a simple pricing structure that could easily be compared with airfreight rates," he says. The partners came up with a per-kilo pricing system based on 11 U.S. destination zones. "For each of the 11 zones, we have a rate for less than 800 kilograms and a rate for more than 800 kilograms, all charges in," he explains. These rates are approximately 75 percent less than traditional airfreight and offer shippers the advantage of paying a single invoice for all ocean and destination transportation services. Additionally, Web-based shipment tracking provides shipment details, transit updates and Customs status 24/7.
As indicated by its name, OceanGuaranteed provides a money-back guarantee of 20 percent if the shipment is even one day late. "We felt we should have some skin in the game in case we failed to live up to our promises," says Gray.
There have been few such instances. Since inception, OceanGuaranteed has handled several million kilos of freight with an average on-time delivery rate of 98.5 percent, which is comparable to Con-Way's domestic performance. "For a 6,000- to 8,000-mile supply chain, that's a pretty high degree of precision," says Villalon. "We are able to do that because we control the assets all the way from origin to destination, which is not the case with a surface integrator."
In addition to lower charges, OceanGuaranteed also has a lower carbon footprint than airfreight. According to data from the Network for Transport and the Environment, containerships on average produce 97 percent less carbon emissions and use only 1.3 percent of the energy of an air freighter to transport one ton of cargo one kilometer. APL Logistics estimates that a Hong Kong-to-Indianapolis ocean/ truck movement via OceanGuaranteed would result in 318 kilograms of CO2 emissions per metric ton of cargo moved, while the same transit using airfreight would generate 7,093 kilograms per metric ton.
APL Logistics, www.APLlogistics.com
Con-way Freight, www.con-way.com
Michael Kors Inc., www.michaelkors.com
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