Improved service reliability by ocean carriers and truckers is winning them a bigger share of the market for international cargo at the expense of airfreight, according to Ted Scherck, president of the Atlanta-based Colography Group Inc.
In 2006, Scherck predicts, surface transport will account for 65.4 percent of total cargo value, up from 59 percent in 1999. Air cargo's share peaked in that year at 41.1 percent; it is projected to drop to 34.6 percent by 2006.
Scherck expects the total value of international cargo moving by water and truck in 2006 to grow 13.7 percent over expected levels for 2005. The value of each pound of cargo will rise as well, he says.
Meanwhile, the total value of goods shipped by air in 2006 will rise by an estimated 8.9 percent over the previous year. That's still a substantial amount, Scherck says, although the per-pound value of international airfreight will grow by just 0.4 percent. The assumption, he adds, is that a growing percentage of lower-valued items will be handled by air.
One steady trend in recent years has been the movement of higher-valued, lower-weighted goods by air. That's partly due to freight's relatively small contribution to the total price of producing such items. But it's also the result of air's greater reliability over other modes of transportation. In the past, Scherck suggests, shipping lines have not been able to provide consistent service for high-value shippers. Air captured 40 percent of the value of all shipments, although just 8/10ths of 1 percent of the weight.
Once ocean carriers and other modes rise to the challenge of matching air's service record, "the whole world is going to become time-definite," Scherck says. To an extent, that is already happening, as ships adhere to strict schedules and guarantee the acceptance of loads through service contracts. Even railroads, long criticized for their inability to operate tightly scheduled freight services, are beginning to improve infrastructure and service quality.
Shippers need greater reliability in order to reduce expensive safety stocks close to their markets. Scherck cites one company that collects freight from throughout Asia, loads it onto a ship in Japan for delivery to the Port of Seattle, transfers the containers onto double-stack trains for transit to the U.S. Midwest, then breaks out the individual contents for delivery via ground parcel and less-than-truckload carriers. It receives 17-day, on-time service with 95-percent accuracy.
For the most part, says Scherck, manufacturers and distributors have relied on structured, expensive air services for goods with high value and low weight, and slow-moving ocean carriers for cheaper, heavier commodities. Now, he says, companies are beginning to explore a third alternative, employing a combination of the two modes for product that falls within the value and weight extremes.
What Scherck calls the "continental strategy" involves the placement of either manufacturing or inventory on every continent of the world. In this manner, companies can mitigate the impact of supply-chain disruptions such as weather, labor unrest and other unexpected breakdowns in the system. Such problems have occurred at a near-annual rate in recent years, causing shippers to reconsider the value of safety stock.
"Any supply chain that doesn't anticipate a major interruption at least once a year is not a supply chain-it's a Russian roulette exercise," Scherck says.
There is evidence that companies are beginning to stray from their obsession with reducing safety stock and manufacturing close to buyers. Foreign automakers are building more cars in the U.S., Scherck says. And more warehouse space was added in the country last year than in any other year in history.
Improvements within all modes of transportation are making the shift in strategy possible. Freight that once was restricted to air is turning to "premium" vessel services at a lower cost. Intermediaries such as logistics service providers and non-vessel operating common carriers are consolidating the volumes of small shippers in order to obtain discounts that previously were reserved for the largest customers. They are also helping importers to obtain guaranteed space on vessels during peak periods of activity, such as the months leading up to the Christmas shopping season.
The relationship between modes is in constant flux, depending on the ability of carriers to provide quality service, Scherck says. Still, the Colography Group sees a continued trend in which global surface tonnage will expand at a faster rate than air tonnage. Surface is projected to increase by 8.7 percent, compared with 8.5 percent on the air side.
Rising operating expense is another factor that could tip the balance in favor of surface, especially truck. Fuel surcharges and capital costs are much larger for air than for truck, Scherck notes. On the other hand, trucks must grapple with the ongoing driver shortage, although he believes that problem won't prove as dire as some have predicted. Trucking companies eventually will raise wages in accordance with the market, and new hours-of-service rules will improve job conditions for drivers.
Shippers will continue to balance the advantages of premium air versus deferred service. For a number of years now, lightweight shipments have been moving to fast ground parcel services for relatively short distances. A package can travel up to 1,600 miles and still be delivered over the road for second-day service, Scherck says. And 75 percent of all traffic moving in the U.S. travels less than 1,000 miles. But deferred carriers must maintain high service quality in order to lock up that business.
Predictable, on-time performance is the key. "It's always changing," says Scherck. "Supply chains have to be flexible."
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