These are strange times for global shippers and their logistics service providers. By many accounts, the worst of the Great Recession of 2008-09 is over. Yet evidence of solid, sustainable recovery is hard to see. Call it that hour of the night when there's the barest sign of light in the eastern sky. So what are LSPs doing to prepare for the sunrise?
The usual, for one thing. "It will sound generic," says Jim Butts, senior vice president of transportation with C.H. Robinson Worldwide Inc., "but we try to understand what our customers are trying to do, and provide the resources to support their success."
Fair enough - every provider labors to remain customer-focused, even in the toughest of times. But LSPs like C.H. Robinson also recognize the uniqueness of this time. The most committed vendors can't dismiss their customers' need for strict cost control, while they await a resurgence of global trade.
"Everybody's looking to save money," Butts acknowledges. Supply-chain managers, still feeling the pain of the previous year, are mounting "a general attack on inefficiency." Key strategies include load optimization, mode conversion, inventory reduction, network analysis, lead-time lengthening and a push to sharpen order accuracy while gaining better visibility into demand.
An obsession with cost doesn't always jibe with the mantra of "customer focus." In fact, it can have the opposite effect, shearing away the resources needed to keep major accounts happy. An attack on top-line expense doesn't automatically lead to better bottom-line results - especially when it results in a flight of disgruntled customers.
Hence the need for continued expertise within the ranks of successful LSPs. In recent years, Butts says, their clients have had a tough time hanging on to staffers with deep knowledge of general supply-chain management, not to mention specific industries. Layoffs and hiring freezes are the rule. Survivors are expected to cover the shortfall through higher levels of productivity, but they often lack the time or ability to attend to the endless details that make up a global supply chain.
The problem, says Butts, is that most companies continue to view their logistics, transportation and supply-chain processes as cost centers. "And the tendency is always to reduce those costs as much as possible." It falls to LSPs to make up for the loss of qualified personnel through value-added services that go far beyond the booking of freight from point A to B. A skilled LSP might be asked by a client to consult on overall supply-chain design, distribution-center placement and carrier choice, to name a few examples.
More specifically, says Butts, LSPs can help shippers to hack through the tangle of carrier surcharges that complicate the rate-making process. At a time when every dollar counts, shippers need to know that the money they're paying over and above the base rate is really going to cover a carrier's variable expenses. At the same time, they want assurances that their dealings with carriers will be kept confidential from rivals. In the absence of a well-staffed internal logistics department, such niceties become the responsibility of outside experts.
A Twofold Approach
John Williford, president of global supply chain solutions for Ryder System Inc., agrees that service and cost must go hand in hand. In the case of the latter, he says Ryder has been "rolling out a new system that makes it quicker and easier for us to share resources across our different accounts in dedicated contract carriage." The effort relates to such elements as management, back-office resources, hourly employees and even the occasional truck.
Williford says the program also can help clients to fill in the gaps caused by their reluctance to invest in new IT projects in 2009. "Lean" concepts are yet another part of Ryder's push to eliminate waste and lower costs.
Bad economic times are supposed to prompt businesses to look for every opportunity to shed costs. But a number of companies held back from entering into outsourcing arrangements last year, evidently because they lacked the IT or management resources necessary to launch such projects. According to Williford, "there's a sharp increase in projects this year that were postponed [in 2009]." Budgets appear to be loosening up, and executives seem once more willing to engage with outside partners in areas such as logistics.
The work involves much more than just negotiating with carriers. Increasingly, says Williford, clients are asking LSPs to help them cut inventory levels through the use of event-management and visibility systems. The rush toward manufacturing in Asia has caused many companies to increase safety stocks in order to offset the risk of longer supply lines. For its part, Ryder is offering help in the form of two new transportation-management centers, initially focused on automotive clients and later expanded to cover aerospace, retail and consumer packaged goods. The provider is also doing more consolidation and deconsolidation of Asian containers in Canada, a result of its purchase of CRSA Logistics Ltd. in 2009.
For shippers, one positive side effect of recession is easy access to capacity. Many sectors that were constrained prior to 2009 - ports, trucks and warehouses among them - are now begging for business. But Williford warns that the glut won't last forever. He says capacity could begin to tighten up in the second half of the year. To prepare for that eventuality, shippers and LSPs need to forge good relationships with carriers now, based on more than just scoring the lowest rate. "Carriers are loyal to the companies that value their service," he says.
Gary Kowalski, chief operating officer of Menlo Worldwide, says a capacity crunch could reappear in the truckload market by the end of this year. Overcapacity will likely level off in the second quarter, then gradually erode as various sectors of the economy show signs of life.
Less-than-truckload carriers could be in for a tougher time. Supply exceeds demand in that mode by 20 to 40 percent, Kowalski says, and several of the largest carriers are struggling to survive. Any number of external factors, especially a rise in the price of fuel, could provide the tipping point. Other potential headaches for carriers in 2010 include tight credit markets and a recurrence of the driver shortage.
Kowalski draws a direct parallel between economic performance and the popularity of logistics outsourcing. "In these turbulent times," he says, "we tend to see more projects being looked at by customers who might not [otherwise] consider outsourcing." Some will issue a request for quotation merely to test the market, but an increasing number are willing to enter into new partnerships, "once they see the results. When we get deeper into their supply chains, we see a higher rate of return."
At Menlo, the most popular service sought by clients is still warehousing, followed by transportation. Kowalski says LSPs can aid businesses that are looking to expand into new parts of the world, reexamine their warehouse layout, or supplement volumes that aren't big enough to earn the best deal from carriers on their own. Menlo is also seeing stepped-up demand for projects involving wholesale supply-chain re-engineering, as part of a strategy to slash overhead. "This is generally where they gain the most in efficiency," he says.
In today's uncertain market, there's no single role for an LSP. Possibilities range from transactional activities to that of lead logistics provider (LLP), which oversees multiple third-party entities. In the past five to seven years, Kowalski says, customers have been asking Ryder to adopt a more global approach to its services on their behalf.
He recommends that his own customers take a broad look at their supply chains, with an eye toward optimization of the entire network. Things to watch for include the types of packaging used in products, the way pallets are deployed, and which modes are favored in various lanes. "Physical design can lock in a higher amount of cost," he says, adding that possibilities for improvement lie in such tactics as reduced truck moves, more reliance on the direct-ship model, and an awareness of "green" issues at every point of the chain.
More of the Same?
There's always the potential for surprise, but shippers aren't likely to see a major shift in the balance between capacity and demand in 2010, says Matt Ryan, president of the Americas for CEVA Logistics. "At this stage, we're cautious," he says. "but capacity is certainly not of concern right now." He expects "continued stabilization" of the economy as the year progresses.
Still, he's keeping a close eye on the logistics landscape. Routes from Asia, where capacity can tighten with little warning, are of particular concern. Speaking in late January, Ryan was expecting to get a clearer view of the future following the conclusion of Chinese New Year activity.
LSPs and shippers alike should expect to pay a lot more for ocean transit this year, if carriers get their way. Members of the discussion pact known as the Transpacific Stabilization Agreement (TSA) have called for steep rate increases, to ward off a spate of carrier bankruptcies caused by earlier rate concessions in a slumping market.
Ryan says shippers will have to go along. "If people were honest with themselves, they knew there was going to be a surge [in ocean freight rates] in order for these companies to sustain themselves going forward. None of us in the industry is in the business of killing major players."
One big change on the horizon is the return of some manufacturing to the western hemisphere. Ryan says companies are currently evaluating their sourcing options, as they deal with the risks inherent in a reliance on low-cost production in Asia. Once focused exclusively on labor rates, they're now looking at the bigger picture. High-volume consumer electronics such as cell phones will continue to be made in Asia, he said, but there could be a move to relocate production of bulkier, more configurable products to Mexico and Central America. "We went to the opposite of the pendulum," Ryan says, "and now there's a bit more balance of people looking at total cost."
Transplace, an LSP formed in 2000 by six big U.S. freight carriers, expects to benefit greatly from the growing popularity of manufacturing to Mexico, says chief executive officer Tom Sanderson. The company chalked up strong results in 2009 and expects another good year in 2010. A couple of years ago, it launched a subsidiary to manage customers' freight within Mexico and over the border into the U.S. "That business has been booming for us," he says.
Another potential source of new business is smaller accounts. Like many of its major rivals in the marketplace, Transplace has focused its energies on Fortune 500 organizations. Now, it sees opportunities in companies with freight bills of $1m to $5m a year. The emergence of software as a service (SaaS), providing applications in a hosted mode, has made outsourcing more attractive to smaller companies.
Transplace, meanwhile, is growing larger. Late last year, it was acquired by CI Capital Partners LLC, a private equity firm. Sanderson says the deal gave the LSP a fresh infusion of capital to grow internally, as well as acquire other businesses. "When times are tough," he says, "it's great to be a buyer."
It's not so great to be a service provider that depends for business on the construction industry. Transplace handles a large amount of building products for its biggest customers. The number of new homes for sale in the U.S. has plummeted, Sanderson notes, and existing homes "are sitting on the market at extremely low prices." Still, he sees the possibility of a pickup in residential construction later this year. Retail sales and manufacturing in other sectors are already showing signs of life, he points out.
While it awaits full economic recovery, Transplace continues to pursue Lean and Six Sigma efforts for boosting quality and reducing waste within its own operations, Sanderson says.
LLPs Step Forward
DSC Logistics, which has roots in warehousing, is taking on the LLP role for more accounts. It recently won several new customers asking for that service, says chief executive officer Ann M. Drake. The trend is prompting all LSPs to amass more "intellectual capital" within their organizations, she adds.
The LLP option is a boon to providers looking for more profitable opportunities in a historically low-margin business. But it's also good for the customer, Drake argues. DSC and its counterparts are able to advise on "how the work is done and how the communication, products and dollars flow." In the process, companies can shed unneeded overhead, turning over to experts a number of value-added services. Drake sees a "huge movement" to outsourcing by those seeking to re-engineer operations in a down economy.
Fortunately for the buyer of transportation services, the current bonanza of capacity offers great flexibility in logistics planning and execution, she says. LSPs can fulfill their role as intermediary by crafting partnerships that combine low rates with a high level of service.
"It's a good time from our point of view, to be able to pick and choose," says Drake. At the same time, the lull in activity has allowed DSC to scrutinize its own processes. "It gives us a chance to rebid our operations, be more metrics-based, and sharpen both the cost and service sides of the equation."
Drake expects the situation to remain constant during the remainder of this year. "From everything I read and the people I talk to, I don't think this year is going to see much of a recovery," she says. Companies like DSC hope to capitalize on the trend by attracting more business from clients ready to cede authority and control in exchange for cost savings, outside expertise and service reliability.
How the year shapes up from a logistics perspective depends on carriers' ability to refrain from flooding the market with capacity at the first sign of recovery, says Chuck Cocci, vice president of global airfreight services with UPS Supply Chain Solutions. On the air-freight side, about 15 percent of freighter capacity was removed from the market last year. Whether or not those planes stay parked in the desert "is going to be a significant factor in determining where the price is going to be."
Cocci sides with the industry consensus in his expectation of a steady but modest rise in freight volumes as the year wears on. Demand for airfreight could rise as manufacturers roll out new consumer-electronics items and begin to replenish exhausted inventories, he says. The pricey mode will continue to be hampered, however, by the shift of some goods to lower-cost ocean.
Some experts are predicting a 7- to 10-percent increase in the air freight market by year's end, Cocci notes. Assuming carriers don't bring their parked capacity back on line too quickly - and he believes they won't - the result should be a marked increase in rates. In place of freighters, carriers will rely on combination craft and belly space in passenger planes. Before service providers reactivate idled equipment, "they want to see sustained growth, not a one- or two-month spike in the market."
For LSPs, the trick lies in being ready for whatever happens. One of UPS's biggest challenges is obtaining accurate demand forecasts from its customers, Cocci says. The numbers tend to change many times before being nailed down. In the meantime, air forwarders find themselves vying for space based on questionable projections. For all its advantages, outsourcing puts the burden of booking just the right amount of space on third parties.
"This year will be better than last year," says Cocci. "That much we know. How much better is an unknown. We're cautiously optimistic that we're going to see continued growth in 2010."
CEVA Logistics, www.cevalogistics.com
DSC Logistics, www.dsclogistics.com
Menlo Worldwide, www.menloworldwide.com
C.H. Robinson, www.chrobinson.com
Ryder Supply Chain Solutions, www.ryder.com
UPS Supply Chain Solutions, www.ups-scs.com
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