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What do shippers need to be ready for in 2010? The answer can be summed up in a word: anything.
Manufacturers, distributors and retailers are positioning themselves for a recovery that might not happen until late in the year - and possibly not even then. They're preparing for the eventual return of consumer demand while struggling to cut costs and keep inventories low, in case it doesn't materialize in 2010.
The mood is generally optimistic, at least compared with last year, says Rick Blasgen, chief executive officer of the Council of Supply Chain Management Professionals (CSCMP).
Consumer packaged goods companies are starting to think about replenishing inventories, which they've allowed to deplete since the recession hit in late 2008.
No one wants to be caught out with insufficient product when recovery comes. Equally important is having the infrastructure necessary to move those goods to market. So logistics managers are on the spot, as they attempt to remain loyal to their best carriers while taking advantage of the low rates and glut of capacity that characterize much of today's transportation market.
"Right now there's ample capacity," says Blasgen. "But what happens when it starts to dwindle and carriers start to have driver shortages?" In fact, the driver issue has plagued trucking companies for years, only to ease up during the economic slump. Carriers expect a recurrence of the problem when the ailing construction industry recovers, and begins siphoning off drivers for jobs that pay workers more and allow them to go home at night.
Manufacturing strategies are also under the microscope, says Blasgen. Labor rates in China remain low when compared to those in the West, but they're rising. Another spike in fuel prices could further burden supply chains that serve U.S. markets with product made in Asia. The situation has many companies thinking hard about how to reduce both cost and exposure to disruptions in the chain. "Distribution networks are going to maximize efficiency and minimize miles," Blasgen says. Such efforts could lead to a major shift in where certain products are sourced.
For now, Blasgen believes, there's enough capacity on hand in meet an uptick in consumer demand. In particular, the railroads have said they have ample space and equipment for intermodal moves, another potential source of savings in long-haul transportation costs.
More worrisome is the situation at major U.S. ports, especially on the West Coast, which experienced severe congestion in the first half of the 2000s. That's when a rise in offshore manufacturing led to an unanticipated surge in finished goods coming from Asia. Ports haven't made any major changes to their infrastructure since the current slump, Blasgen says, suggesting that a new round of delays at marine terminals are likely.
Mitigating factors include the addition of a third set of locks at the Panama Canal, doubling its capacity when the project concludes around 2014. That will likely result in a greater number of containerships from Asia bypassing the U.S. West Coast in favor of ports on the Gulf and Atlantic. In addition, carriers today are spreading their business around, relying as well on ports in Northern California and the Pacific Northwest. Finally, there's the possibility that manufacturers will relocate some of their production to Mexico and Central America, reducing the need for space on trans-oceanic containerships.
Blasgen cites further uncertainties on the legislative and regulatory front, including a possible new tax on banks, a cap-and-trade regime for reducing carbon emissions and a comprehensive bill for improving motor-carrier safety. They make it even tougher for companies to predict the near future with any degree of accuracy, he says, and are yet another reason why business is hesitant to resume hiring.
Preparing for Instability
For Brian Hancock, vice president of supply chain with Whirlpool, the key lies in preparing the company "for what I think is going to be a very unstable transportation and logistics industry." Profitability is proving elusive for carriers of all modes. And today's rock-bottom rates could lead to a spate of bankruptcies tomorrow.
Hancock says it's vital for Whirlpool to have options for moving products to the marketplace. "As the winners and losers get decided, we're going to have to go in and out of providers and modes," he says. "We've got to make sure that we're able to serve our customers."
Whirlpool is getting more creative in its transportation strategies. It has added modes on critical lanes, relying on truck, intermodal and pure rail out of Mexico. Four years ago, all of the company's loading facilities were exclusively served by truck; now seven are equipped for rail. Hancock says the new capabilities are essential to moving a product that is bulky, expensive and delicate in nature.
Shippers love low freight rates, but Hancock is focused on the longer term. "My concern is whether those [carriers] are going to be viable," he says. "This is their third year in a bad space from an earnings perspective. At some point you say, who's going to lose?"
On the other hand, he's not entirely receptive to the notion of a huge and sudden increase in the price of ocean transport. Whirlpool's rates were fixed by a two-year contract which began in January of 2009, and "we're not opening [it up for renegotiation]," Hancock says. That's precisely what ocean carriers have been asking shippers to do, as they attempt to impose an "Emergency Revenue Charge" of between $320 and $505 per container.
Hancock isn't unsympathetic to the carriers' plight. "We understand it," he says, hinting that Whirlpool will be amenable to some degree of rate increase in the next round of negotiations.
A believer in long-term contracts, Hancock isn't averse to the possibility of deals extending as much as five to 10 years. "I'm going to make sure that we are covered as much as we can possibly be, on those elements of our business that are essential to maintaining a good cost structure and flow of product."
Even in the most cost-conscious of times, the ultimate customer can't be ignored. True Value Co., a cooperative of nearly 6,000 individually owned hardware stores, is guided by seven customer-service satisfaction scores. They cover fill rate, maximization of retail margins, the right variety of products for each geographic area, the right orders, order lead time, reliable and on-time delivery, and competitive wholesale pricing, according to senior director of transportation Gary A. Palmer.
The best-laid strategies can be undermined by the need for tactical responses to problems of the moment. Palmer notes that some stores are reducing inventories because of credit issues. True Value's job at the corporate level is to ensure that store owners aren't compromising on selection and producing unhappy customers. It sends in retail consultants to ensure that the stores are stocking the right amount of "A" inventory, defined as the items that people most frequently buy. At the same time, True Value must ensure that it's providing the stores with what they need in a prompt and accurate fashion.
True Value maintains a network of 12 regional warehouses from which orders are filled. Each is tied to a group of member stores. The catch is that the stores don't have to rely on the company's network; they can buy direct from manufacturers. In the case of the latter, however, they must adhere to order minimums, so they're likely to buy more product and be at risk of not selling it all.
The direct-buy option seems more attractive in that the unit price is lower, Palmer says, but it comes with the possibility of higher inventory carrying costs. So True Value works hard to convince store owners to go through its own warehouses, arguing the wisdom of buying "what you need when you need it."
Owners are happy to comply, as long as they can be certain that their orders will be filled. Such expectations increase the pressure on True Value to accurately forecast what it needs to buy. The company must have good communications links in two directions - upstream to manufacturers, and downstream to in-store sales systems. To achieve that goal, it has been working on improving the expertise of inventory planners, through the recruiting of highly eligible individuals and a reliance on proper training once they're hired. At the same time, says Palmer, the company needs a better picture of what has been produced and shipped. "We're somewhere between 80 to 90 percent there in inbound visibility," he says.
The Big Question
Carrier capacity remains the shadow lurking at the back of many shippers' minds. Space on trucks, ships and planes is virtually there for the asking today, "but you can see things tightening up and starting to turn," says Kevin Kilcoyne, senior manager of logistics with Welch Foods Inc. "All indications are that there will be a slow and steady decline in available equipment [in line with] an increase in the economy."
Welch's will be keeping a close eye on the capacity issue over the next 12 to 18 months. Typically the company has worked with a number of smaller regional entities, in addition to its long-standing contracts with core carriers. Kilcoyne puts a premium on loyalty, even in tough times. "We weather the storm with each other through the ups and downs," he says. "It has helped us over the long haul."
He doesn't expect to confront any capacity issues until summer at the earliest. Oil, too, seems to be at relatively stable levels of around $70 to $80 per barrel, although that component could change dramatically with little notice. One way or another, says Kilcoyne, freight rates will likely go up. The trick lies in coming up with a reliable figure that can be worked into budgets for the year.
Welch's is mostly a truckload shipper, either direct to customer or via multi-stop consolidations at its own facilities, but it does a fair amount of intermodal as well. Kilcoyne says he has real concerns about the viability of major trucking companies, even as his own customers impose tighter service requirements. Some of the nation's largest retailers, themselves caught in a margin squeeze thanks to the recession, are devising new policies for suppliers that could threaten overall supply-chain reliability. The trend has forced producers like Welch's to craft more structured guidelines for measuring service performance.
Just being able to predict one's logistics costs is enough of a challenge these days, says Terry L. Bunch, director of transportation and distribution with Rayonier, the big forest products company. High on his list of concerns is the precariousness of the ocean carriers' financial position. A consolidation of lines could lead to big reductions in capacity, raising issues of both cost and service.
Making matters worse, in Bunch's view, is the antitrust immunity that allows ocean carriers to agree on common guidelines for rates, service and capacity. Members of the discussion agreements controlling much of the freight crossing the Pacific aren't bound by those decisions, but the groups do provide a benchmark for individual negotiations. And they increase the likelihood of a wholesale reduction in tonnage.
"From my perspective," Bunch says, "antitrust immunity doesn't work. It protects the weakest in the herd and drives irrationality. When you manage capacity [jointly], there's a pretty close relationship with rates, even if we do negotiate one on one with carriers."
Bunch agrees with other major shippers that some level of rate increase for ocean carriage is justified. "As shippers," he says, "we definitely want all of our service providers to earn a reasonable return on capital."
On the domestic side, transportation markets remain soft. But Bunch worries about that sector as well, in particular uncertainties surrounding the funding of infrastructure improvements. Debate continues over a comprehensive new highway bill, as freight vies with passenger and public-transit interests for a limited pool of money. Bunch would also like to see a liberalization of weight restrictions for trucks on American highways. The current limit of 80,000 pounds compares with allowances of 95,000 to 120,000 pounds in other countries. The discrepancy "negatively impacts the competitiveness of U.S. shippers," he says.
It also results in higher levels of fuel consumption and carbon emissions. "From a highway congestion standpoint," Bunch says, "we're not making the best use of the infrastructure that we've got."
Everyone Is Hurting
Consumer products companies aren't the only ones feeling pain and uncertainty in these difficult times. "Business is down everywhere," says Keith Kennedy, manager of transportation and logistics with Howard Industries. His company is the world's largest manufacturer of transformers for power companies.
Unfortunately, that role ties Howard directly to the embattled construction industry. But the company isn't just waiting around for things to get better. In slow times, says Kennedy, "we tend to focus on the small details that don't get much attention otherwise."
In the area of logistics, that means taking a close look at the company's service partners, and Kennedy doesn't like what he sees. "The LTL [less-than-truckload] world's in a mess - at least a goodly portion of it is," he says. Carriers are closing terminals and raising doubts in shippers' minds about their ability to provide acceptable levels of service.
The problem is extending into the truckload sector as well. "They've always had access to short-term credit markets, and those have pretty much dried up now," says Kennedy.
Howard is a major truckload shipper, moving several hundred loads a day out of its 6 million-square-foot manufacturing plant in Laurel, Miss. LTL carriers bring in pieces and parts. The company also has a few hundred of its own trucks, relying on a broker to handle loads for outside providers. Special service requirements include the need for large numbers of drop trailers. "If all those companies went out of business," Kennedy asks, "where would I get 150 trailers [at a time]?"
Carrier viability, then, is Kennedy's number-one concern for 2010. "My whole focus this year is to reevaluate my carriers and make sure we are using people that are not drowning too quickly."
At American Gypsum Co., a maker of gypsum wallboard, service tops the list of priorities for the coming year. And that means working with the most reliable carriers, says director of logistics Wayne Johnson.
American Gypsum ships mostly on flatbed trailers. Johnson says capacity isn't an issue, and rates aren't expected to change much in 2010. "There are more than enough carriers out there," he says.
Whether they can meet the company's service demands is another matter. American Gypsum is working to focus its carrier base on service issues. Even a 99-percent on-time delivery record could lead to a bad experience that disqualifies the supplier from serving a valued retailer, Johnson says. So the company closely monitors both pickups and deliveries.
New information systems for tracking freight aren't the answer, he says. In fact, American Gypsum is looking to spend less on software applications technology in today's uncertain economy. It already has a transportation management system for handling dispatching, and relies on a third party to handle payables. "The technology for our company is already in place," Johnson says.
He doesn't expect recovery in the wallboard sector until the second or third quarter of this year at the earliest. Even then, he predicts an increase of no more than 2 to 3 percent. But when real recovery comes, the company will be ready. "We've got 32 to 34 billion feet of capacity that we can turn on immediately," he says, noting that the company only produced 18 billion feet of product for all of last year.
In the meantime, Johnson is determined not to take his eye off the customer. "If you don't give them proper service today," he says, "they'll be gone tomorrow."
Council of Supply Chain Management Professionals, www.cscmp.org
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