Its been a challenging year, and the complexity of life in logistics is only growing. Here's a preview of the major trends that will shape the logistics world in 2005.
The changing face of logistics
The adoption of new Hours of Service rules in January 2004 has led to numerous changes in the logistics operations of shippers throughout the U.S. There are more 24-hour operations, shippers and consignees have worked to reduce dock time for motor carriers, and they are setting appointment times with reasonable windows that allow the motor carrier to get in, make the pickup or delivery, and get out.
Trailer and chassis manufacturers
have brought idle production facilities and workers back on line to cope with increased demand. Carriers have been buying trailers and power units at a rate lower than the replacement rate for a number of quarters, choosing to keep existing equipment on the road a little longer and avoid the capital investment. Higher freight volumes and improved financial performance have sparked increased orders, but manufacturers are at or near full capacity.
Pop-up fleets is the term Ruan Transportation executive Mark Murfin uses for a concept retail giant Wal-Mart Stores Inc. has employed and others have been requesting from dedicated contract carriers. It flies in the face of the efforts since deregulation to develop fewer but deeper and longer-term contractual relationships between shippers and carriers. The way it works is the logistics manager asks a carrier to contract for a short period — usually a few months — to manage a peak. It is effective in locking in capacity during a surge in demand, but the short duration of the contract places a lot of demands on the carrier. Given the ongoing capacity crunch, the practice could continue to spread among shippers but it is not likely to find favor with carriers.
Reauthorization of the Transportation Equity Act for the 21st Century (TEA-21) — the surface transportation bill — can't come too soon. The U.S. Congress has extended current infrastructure funding repeatedly and now it must resolve the differences between the Senate and House versions and the Bush Administration's budget goal.
Trucks and trucking equipment
Motor carriers are stepping up equipment buys to meet growing demand and beat deadlines for governmentmandated cleaner-burning engines due in 2007. Over 80% of fleets are planning to purchase power units by midyear 2005, representing an average of 16% of the fleets' current inventories. Carriers are making some fleet buys early to avoid potential problems with new engines. Another side of the issue relates to the higher cost that will certainly come with the new engines.
The new engine requirements will be more expensive than the mandated emissions goals of 2002. According to Jerry Moyes, CEO of truckload carrier Swift Transportation, 2002-compliant engines cost fleet owners about $5,000 more than previous engines and about half-a-mile per gallon in fuel efficiency. The 2007 engines have fleet owners stepping up current buys because the expectation is they will add $12,000 to the purchase of a tractor and consume 4% more fuel. That doesn't include any increased maintenance costs, and the industry is concerned because no one knows how reliable the new engines will be. A bestcase scenario, according to Moyes, is a 2.6 cent increase in per mile costs. Worst case is a 3.8 cent rise.
Expect the American Trucking Associations (ATA) and Association of American Railroads (AAR) to lift their moratorium on the size and weight issue once TEA-21 is passed. The two groups agreed to hold their tongues on size and weight in an effort to speed the transportation funding legislation through Congress.
Size and weight issues are a complex web of state and federal rules and responsibilities. States regulate trailer size while the federal government watches weight on interstate highways. Longer combination vehicles (LCV) are a federal issue, but discussion of double-and tripletrailer combinations has been frozen since 1991. The earliest change would have to wait for the next round of highway funding reauthorization, probably around 2010. The battle to have changes incorporated in that bill will begin when the current surface transportation bill is approved, and will run until the next one is passed.
The driver shortage didn't go away after wages increased 2.8% in the early part of 2004. Wages were expected to rise again before the end of the year. This is the biggest gain in 10 years. Despite the increases, motor carriers — especially long-haul truckload carriers — continue their struggle to recruit drivers. This situation is not expected to change significantly and will continue to limit carriers' ability to add capacity into 2005 and possibly beyond.
The Transportation Security Administration (TSA) posed an additional challenge for carriers and shippers of hazardous materials (hazmat). Fingerprint-based background checks for drivers hauling hazmat will cost about $100 per person. This will cause some current hazmat drivers not to renew their hazmat endorsements. This raises an interesting question — are those drivers foregoing the hazmat endorsement because of the cost or because of the background check? If the latter, isn't that a good thing? Either way, if the pool of hazmat drivers contracts further, it will translate into higher costs for carriers and shippers.
If a shortage of hazmat drivers leads to recruiting less experienced drivers to fill the gap, the background checks could result in sacrificing safety for security. How will insurance companies view this?
Efforts to lower the age for commercial drivers could be redoubled due to the prolonged driver shortage. Some in the industry argue that the younger workers get involved in other careers before they would be eligible for a commercial driving license and thus are lost to the profession. The counter argument says the additional maturity and experience are necessary before entrusting-80,000 pounds of powerful rolling stock to a new driver. Given some of the massive settlements carriers (and 3PLs) have paid out for accident claims, insurance companies and many carriers may be more willing to bear the pain of a shortage than the risk of young drivers.
Insurance premiums and liability issues will continue to plague carriers and, where the carrier isn't the "deep pocket" defendant, shippers. Carriers can't afford "first dollar" coverage so many self-insure for as much as $1 million. The past year saw some settlements that even got the attention of shareholders and investment research firms. One notable settlement involved a third party that had arranged transportation. Based on how it described itself — it appeared to hold itself out to be a carrier — it got swept up in the litigation and the settlement. Carriers complain there is no relief in sight for insurance costs — even with demonstrated safety improvements since new Hours of Service rules went into effect.
State of the economy
Transportation and logistics always get attention when costs rise dramatically, but the opportunity and the goal for logistics professionals who are enjoying some new-found popularity (or notoriety — depending on their message to management) should be to create a liaison role that connects logistics to other functional areas. This is a good time to get cooperation and collaboration to control high supply chain costs.
Capacity is expected to remain tight for the next four or five years based on the mix of issues surrounding equipment, drivers and infrastructure. This is not limited to domestic surface transportation, though the timeframe for resolution of the capacity crunch in ocean is shorter. New ships are being built that will come on line in the next 12 to 18 months. NYK Line split two orders for 12 vessels evenly between postpanamax and panamax ships, allowing it alternatives for port calls.
Economic growth continues, driving increased freight volumes. Though economists expected a 4.3% rate of growth in the Gross Domestic Product (GDP), the annualized rate of growth in the third quarter was 3.7%, on top of a 3.3% rate of growth in the second quarter.
Consumer spending, which is more than two-thirds of the U.S. economy, rose 4.6% in the third quarter. Business fixed investment rose at an annual rate of 11.7% in the quarter, down from the 12.5% rate posted in the second quarter.
The trade deficit rose by $598 billion as the country imported more goods than it exported during the quarter. Taking a 12-month view for the year ended Sept. 30th, the economy grew by 3.9%.
The canals could begin feeling more of a pinch on capacity. The Panama Canal has suffered some backlogs as it tries to mix daily operations and muchneeded infrastructure improvements. Ships have begun stacking containers higher going through the Panama Canal since they can't go wider. The canal's operator has responded to demand by adding surcharges and increasing fees.
The Suez Canal is another option for Asia-U.S. and Asia-Europe traffic. In addition to the time and size constraints any canal has, its location can be an issue. The death of Yasser Arafat could certainly threaten what stability there was in the Middle East. At the very least, insurance premiums and war risk exclusions could be on the rise for vessels using the Suez Canal. The worst case would be that hostilities could close the canal.
Volume is not always a lever for efficiency and low cost. It can be a liability if the volumes are too concentrated. That's exactly what's happening with continued expansion in China. Security requirements are adding to the complexity at origin along with a desire to perform "pre-distribution" at origin. With a shift from lessthancontainer load to full container load, shippers want some of the benefits of smaller shipments even though the loads are consolidated. The idea is to configure loads for final distribution at origin.
Container supply is so constrained that ocean lines and container lessors don't want the equipment to leave the vicinity of the destination port. They would prefer the containers be stripped at or near the port so they can be returned to origin for another load. The other factor is time. Forecasting out to the manufacturing and transportation lead times involved in Asian sourcing stretches the accuracy of the forecast.
More than a cottage industry is developing in the vicinity of major ports centered on stripping containers and reconsolidating them into truckloads for final delivery. Deconsolidation centers are essentially a cross-dock for imports and some are showing up further inland.
Another benefit to domestic distribution operations is that the third parties operating deconsolidation centers have little difficulty working multiple shifts — especially if the infrastructure is employed for more than one client. This fits with some of the solutions being proposed to deal with port congestion.
The Ports of Los Angeles and Long Beach are, arguably, the most congested ports in the U.S. They have begun adding labor and are building towards a regular second shift operation at every terminal. Next, they have to get extended gate hours rolling and be sure they have a consignee or third party willing to receive shipments in off-peak hours.
Off-peak operations at the Ports of Los Angeles and Long Beach carry a controversial incentive. The port is actually charging a fee for every containerhandled and offering a refund of that fee for those containers that move in off-peak hours. Shippers and consignees who must pay the fees are concerned about how the process will be administered, when they would have to pay and when they'd receive their refund. The key to making extended hours work at the ports may be off-peak deliveries.
Radio frequency identification (RFID) will continue to be of major importance to any retail-centric shipper, thanks to Wal-Mart's requiring its top 100 suppliers to be in compliance as of January 2005. Between Wal-Mart, Target Corp., Home Depot Inc. and a host of other retailers who have required or will require RFID on inbound shipments, as well as the U.S. Department of Defense requirements, shippers will need to closely follow developments in RFID technology to ensure the cost benefits don't remain entirely on the retail/DOD side. Getting beyond the "slap and ship" mode of satisfying the customer requirement will take time.
Security requirements have given a small boost to RFID applications by demonstrating they can function along complete supply chains. Operation Safe Commerce demonstrated how positive identification and full monitoring from origin to destination works. The barrier is cost. A massive amount of infrastructure must be upgraded to be RFID capable.
Warehousing costs are on the rise.Interest rates are climbing, making inventory more costly to hold. Security and data collection requirements (such as RFID) are adding to some basic costs in warehouses. And, many companies are starting to add warehouses as the regionalization of distribution continues. One factor in this is the Hours of Service rules. But, the driver shortage has also had an impact in that the carriers with the least amount of difficulty recruiting drivers are those that operate regionally or in hub-and-spoke systems that allow drivers to get home regularly.
Automation in distribution is gaining some ground. It's not for everyone, but data collection requirements, fast turns and labor issues are helping to justify more automation in many settings.
Warehouse labor — like truck driving — faces a challenge on wages and professionalism. The perception that warehouse jobs are hard work, low pay and without opportunities for advancement makes it difficult to recruit.
Industry consolidation continues to exacerbate the capacity crunch. In one of the best markets for motor carriers since deregulation in 1980, some carriers have gone out of business. The Northeast region, for instance has seen two major regional carriers — USF Redstar and Guaranteed Overnight Delivery — shut down in 2004, bringing the total to five in the last 10 years.
The rate of trucking company failures had actually been on the decline up until recently, but with high fuel costs and high insurance premiums, added security requirements and costs and other factors at work, shippers should not be surprised to hear of more closings in 2005.
Off-peak deliveries are a possible solution for metropolitan congestion. A recent study of the New York City area concludes the concept won't work without cooperation from consignees. Carriers can adapt operations and would see some benefits (delivery trucks pay as much as $2,000 per vehicle per month in parking fines). Shippers see very little impact, but are willing to support the concept. Most consignees see the need to add hours and/or labor as a cost with no benefit. They will need some sort of incentive to participate.