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Ocean sea change? 30The new China 34Strategic inventory moves 38

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SEPTEMBER 2009

ON EQUALGROUND

Page 24

18th Annual Masters of Logistics Study

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September 2009 | WWW.LOGISTICSMGMT.COM LOGISTICS MANAGEMENT 1

■ DHL ordered to pay up. Media reportsindicate that DHL Express USA will handover $9.4 million amidst claims it shippeditems to Iran, Sudan, and Syria, which isin direct violation of federal law. The U.S.Departments of Treasury and Commerce saidthat DHL violated laws that allow the exportof only certain types of items to those coun-tries, including informational materials andgoods valued at less than $100, according toa Wall Street Journal report. The report addedthat DHL violated those laws from 2002 to2007 by exporting packages containing itemslike computer software, oil-fi eld equipment,auto parts, and electronics equipment. TheTreasury and Commerce Departments alsosaid that DHL broke the law by failing toproperly monitor what was inside thousandsof other packages heading to those countries.

■ Air cargo remains in “intensive care.”Some relative improvement in the cargo sec-tor was reported by The International AirTransport Association (IATA) last month.“Demand may look better, but the bottomline has not improved,” said Giovanni Bisig-nani, IATA’s director general and CEO. “Wehave seen little change to the unprecedentedfall in yields and revenues…and the road torecovery will be both slow and volatile. Inthe meantime, the industry remains in inten-sive care.” The 11.3 percent decline in cargodemand for July was also a relative improve-ment over the -16.5 percent recorded in Juneand the -19.3 percent average for the fi rstseven months of the year.

■ Ship scrapping soars. According to mar-itime analysts, the number of container ves-sels sold for demolition so far this year hasreached record highs. Industry researchers atParis-based Alphaliner announced that thenumber of scrapped vessels has exceeded275,000 twenty-foot equivalent units (TEU),with increasing numbers of larger shipsamong them. A total of 148 ships have beenscrapped this year, of which 85 were con-trolled by carriers while 63 were disposed byNVOs (Non-Vessel Operators). Carriers haveled the move to scrap elderly tonnage, includ-ing a few ships larger than 4,000 TEU, makingthem the largest cellular ships ever demol-ished. MSC has been the most active carrierin the scrap market, with 20 owned ships soldthis year for demolition.

■ Intermodal volumes still singing theblues. While the economy has shown recentglimmers of improvement, it has not caughtup to the intermodal market, at least accord-ing to the Intermodal Association of NorthAmerica’s (IANA) quarterly Market Trendsreport. IANA reported that total intermodalcontainer and trailer loadings—at 2,829,971—were down 18.7 percent in the fi rst quarter.Nearly all intermodal metrics tracked byIANA were in the red for the quarter, with thelone exception being domestic containers,which were up 0.9 percent at 969,231. This cat-egory saw better growth in 2008 when it wasup 7 percent for the year—growth that waslargely attributed to high oil and gas prices.

■ LM’s 18th Annual Masters of Logistics study goes live on September 29th at 2 p.m!LM’s Group Editorial Director Michael Levans, Dr. Mary Holcomb of the University of Ten-nessee, and Dr. Karl Manrodt of Georgia Southern University are getting ready to put thefi ndings of this annual research project into perspective in a live webcast. The study, whichbenchmarks distribution costs and logistics practices, fi nds that the playing fi eld on whichthe true Masters of Logistics and their counterparts play has started to level due to theeconomic conditions. LM sponsored the study that was conducted by Georgia Southern Uni-versity, the University of Tennessee, SAP, and the consultancy Capgemini. An overview of theresults begins on page 24, but for more on what the fi ndings mean for shippers, tune in onSeptember 29th at 2 p.m. Register at logisticsmgmt.com/masters09.

A N E X E C U T I V E S U M M A R Y O F I N D U S T R Y N E W S

continued, page 2 >>

Get your daily fix of industry news on logisticsmgmt.com and supplychaindaily.com

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2 LOGISTICS MANAGEMENT WWW.LOGISTICSMGMT.COM | September 2009

continued

It also appears that the recession has made adent in domestic container loadings based onthe second quarter’s output and a 0.1 percentgain in the fi rst quarter.

■ USPS forecast: rain, sleet, gloom ofnight. Facing myriad economic headwinds,the United States Postal Service (USPS)reported a $2.4 billion net loss for the fi scalthird quarter. This loss exceeds the secondquarter’s $1.9 billion shortfall. For the thirdquarter, USPS revenue was down $1.6 billion.Along with the recession, the USPS saida large driver for the quarterly loss stemsfrom the shift from traditional mail deliveryto electronic communication alternatives,including e-mailing business documentsand online purchase ordering. The USPSprojects a net loss of more than $7 billionby the end of the fi scal year even though thefederal agency says it’s on track to reach its2009 goal of more than $6 billion in total costreductions.

■ Rude welcome for new PRC chief. ThePostal Regulatory Commission (PRC), anindependent federal agency that exercisesregulatory oversight over the United StatesPostal Service, announced that Ruth Gold-way has taken over as Chairman, replacingDan Blair. Goldway begins her new positionat a time when the USPS is in rough fi nancialcondition; however, industry analysts saythat she sees packages and shipping ser-vices as a very important part of the futurefor the USPS. According to reports, Goldwayis working hard at better understanding thecurrent issues and is keeping an open mindconcerning future USPS endeavors.

■ You can check out any time you like...Leading California economists and majoremployers released a new study analyzing thestate’s crippling fuel costs and its impact onlogistics management. According to the com-prehensive report done in behalf of “FuelingCalifornia,” a new nonprofi t consumer alliance,the issue has a direct bearing on “job fl ight.”The report notes that because California must

import its fuel, rather than produce it, ship-pers pay a higher premium to operate there.The state’s seaports, for example, are receiv-ing fewer inbound cargo vessel calls becausedrayage operators must pay more for truck fuel.According to alliance spokesmen, this analysiswill determine “what makes California differ-ent” than other states in terms of fuel stan-dards and policies. The complete study can bedownloaded at www.fuelingcalifornia.org.

■ Panama Canal update. A critical mile-stone for the Canal Expansion Program wasreached last month when the Panama CanalAuthority (ACP) received Grupo Unidos porel Canal’s (GUPC) performance and paymentbonds and signed the contract. ACP ExecutiveManager Jorge de la Guardia then issued theNotice to Commence work. The scope of workincluded in the contract encompasses thedesign and construction of the Canal’s newset of locks and water-saving basins on boththe Pacifi c and Atlantic ends of the Canal.“This event marks both an end and a begin-ning for the Canal Expansion Program,” saidJorge de la Guardia. “The fair, rigorous, andtransparent contracting process for the newset of locks has concluded…and a new part-nership with Grupo Unidos por el Canal hasbegun.”

■ Hey, remember RFID? According toABI Research, total RFID revenue (includ-ing transponders, readers, software, andservices) is expected to top $5.6 billion thisyear. That projection represents an increaseof $240 million, or 4.25 percent, over 2008revenue. What’s more, ABI Research expectsstrong RFID growth for supply chain man-agement item-level tracking in the next fi veyears. Overall, ABI anticipates annual growthto remain steady over the next fi ve years,with the total market experiencing an 11 per-cent compound annual growth rate (CAGR)through 2014. Analysts expect the marketto reach more than $9.2 billion in 2014, orapproximately $7.62 billion with consumerautomobile applications excluded.


continued, page 4 >>


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continued

■ M&A activity sinking. As was thecase in the fi rst quarter, transportation andlogistics merger and acquisition (M&A)activity was down signifi cantly in the sec-ond quarter, according to data from Price-waterhouse-Coopers (PwC). The fi rm saidthere were 11 announced M&A deals in thetransportation and logistics sectors worth$50 million or more. This is down from 18deals in the fi rst quarter and off signifi -cantly from the fourth and third quartersof 2008, which hit 43 and 46 deals respec-tively. Average deal value also declinedin the second quarter, with 11 deals at atotal value $1.4 billion announced duringthe second quarter, following 20 deals val-ued at $3.1 billion in the fi rst quarter. Thiscumulative output for the fi rst half of 2009,said PwC, puts 2009 M&A activity on paceto be 67 percent down from 2008, when 189deals valuing $96 billion were announced.

■ Mexico gets more multimodal. APLLogistics and Con-way Freight announcedthat their OceanGuaranteed service forless-than-containerload cargo from Asiawill now reach all major metropolitan mar-kets in Mexico. Spokesmen said that thisrepresents the biggest expansion yet ofthe three-year-old program that combinesocean and truck transportation to delivercargo to a shipper’s door. As reported inLM, OceanGuaranteed debuted in 2006as a China-to-U.S. service and expandedlast year into Canada. With the additionof Mexico, origin ports in Asia are nowconnected for the fi rst time to every majorNorth American market via day-defi nitedelivery.

■ Retail shippers salute Seattle. ThePort of Seattle’s “Clean Truck Plan,” whichis included in the Northwest Ports CleanAir Strategy, won a ringing endorsementfrom the National Retail Federation (NRF).“The Port of Seattle has taken the rightapproach working with its stakeholdersto develop a plan that will improve harbortruck-related emissions without imposingsignifi cant supply chain costs on the port’s

customers,” said Jonathan Gold, NRF’svice president of supply chain and customspolicy. Gold added that the NRF urged theCommission not to change direction orendorse policies designed to restructurethe harbor drayage market “in the nameof clean air.” The NRF, the world’s largestretail trade association, added that theClean Truck Plan should continue to focuson replacing the trucks and not the indi-viduals who drive the trucks.

■ NAFTA tension mounts. Therecently-concluded 2009 North AmericanLeaders’ Summit yielded few answersfor shippers concerned about the freemovement of goods on highways—andprovided even less information on the cur-rent ban on Mexican trucks. “We are in await-and-see mode,” said Clayton Boyce,spokesman for the American TruckingAssociations, in Washington, DC. “Butwe expect the DoT (U.S. Department ofTransportation) to issue a position nextmonth.” Meanwhile, shippers are hopingthat Mexico President Felipe Calderon’splea for fairness will prevail over the polit-ical interests of the U.S. Teamster’s Unionand other powerful lobbyist to extend theban indefi nitely.

■ End of an era. An iconic brand cameto an end when A.P. Moller-Maerskannounced that it would stop making shipsin its money-losing Odense Steel Shipyardin Denmark. The company, which ownsMaersk Line and extensive oil and gas pro-duction facilities in the North Sea, said itwill also put its Lithuanian Baltija Shipyardup for sale—an operation that will becomeobsolete after the closure of the Odenseyard. According to Moller-Maersk’s chiefexecutive Nils Andersen, the closing of theOdense Shipyard is the fi rst tangible signthat the Danish shipping giant is takingsteps to follow through with its strategyto only invest in profi table enterprises.The company plans to sell the industrial,design, and engineering facilities associ-ated with both shipyards. L



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transportation trends: ocean shipping

Cool, calm, correctionAs the global rate structure stabilizes for oceancarriers, what can shippers expect by way of spe-cialized service and available capacity? Our panelof industry experts gives readers a look forward.

global logistics

Sourcing successfully in the new ChinaEconomic changes have altered China’s sourc-ing landscape. There is no evidence, though, thatChina’s role as a major sourcing hub is diminish-ing. Our expert reveals what these sourcing shiftsmean to your operation.

supply chain technology

Inventory Optimization: Game of strategyIO technology provides significant ROI, and itisn’t as complex as it once was. However, it’s yetto gain significant traction. We set the recordstraight on this emerging technology.

warehouse & dc

Site Selection: 5 trends for the new economySite selection experts have identified a handfulof trends affecting how and where DCs are nowbeing located. By responding to these trends,companies can better position themselves for theeconomic recovery.

Ocean shipping 34

Inventory optimization 38

To subscribe online toLogistics Management go towww.getFREEmag.com/LM

Sept ember 2009 VOL. 48, NO.9


On Equal GroundOur annual study of logistics and transportation trends

suggests that the economy has been a great equalizer insupply chain performance. In fact, the significant

operational lead that the Masters had built up over the past two years has been largely eroded as

companies of all sizes focus soley on survivingthese difficult economic times.

24Cover illustration by Neil Brennan

30

34

38

42

ContentsContents

1 Management Update11 Viewpoint13 Price Trends

15 News & Analysis20 Bohman on Pricing22 Mulani on Excellence

56 Sage Advice49s Special Report:

Alternative Ports

LMX090901toc_ID.indd 7LMX090901toc_ID.indd 7 9/2/2009 3:43:06 PM9/2/2009 3:43:06 PM


webcasts/continuing education

Focus on the Fleet: Optimizing WorkforceManagementLIVE - September 9, 2009 at 2 p.m. ETlogisticsmgmt.com/pbowes

The 18th Annual Masters of Logistics:Results of our annual logistics trends studyLIVE – September 29, 2009 at 2 p.m. ETlogisticsmgmt.com/masters09

2009 Mid-Year Logistics Rate OutlookNow Available On-Demand,original broadcast July 29, 2009logisticsmgmt.com/midyear09

Logistics Management & Supply ChainManagement Review Virtual ConferenceThe Next Generation Supply Chain(Global Supply Chain Conference – GSCC)Available October 27 & 28, 200911 a.m.– 7 p.m. ETlogisticsmgmt.com/GSCC

Logistics Management & SupplyChain Management Review VirtualConference: Is Your Supply Chain Readyfor the Recovery?Now Available On-Demandlogisticsmgmt.com/recession09

on-demand webcasts

upcoming virtual conferences

on-demand virtual conferences

upcoming webcasts

bears repeating…“It seems like oil prices are going up for no reason.We should be scared to death, but at the sametime shippers cannot overreact to oil costs andeconomic conditions at a time like this.”-

— ART VAN BODEGRAVEN, PARTNER AT THE PROGRESS GROUP

� Truck tonnage was down 10.4 percentyear-over-year in July 2009

� Total dollars billed by 3PLs was up 7%from Q1 to Q2

� For the week ending August 22, rail car-load freight was down 16.1 percent over 2008

this month’s

fast facts

“Unfortunately, the [transportation] infrastructure problem isn’t going to go away anytime soonand will only continue to get worse until our leaders put forth legislation to address the issue.Fixing the problem will require some tough decisions, especially when it comes to figuring outhow to finance the Highway Bill. This crisis is the continuing decay of our nation’s transportationinfrastructure. ”

“Town Hall Meetings and the Highway Transportation Bill” —Mike Regan, August 26, 2009Logisticsmgmt.com/blog/regan

blog takeaway

If you weren’t online, you missed this...USPS takes further steps to reduce costs, but is still on pace to lose more than $6Bin 2009. Will Saturday mail be a thing of the past?

logisticsmgmt.com

LMX090901toc_ID 8LMX090901toc_ID 8 9/2/2009 3:33:41 PM9/2/2009 3:33:41 PM

It’s a fact – the tough economy has forced many trucking companies off the road. Including some you may have counted on for some

of your shipping needs. So here’s another fact for you – CRST is rolling strong, with the fi nancial stability and depth of services you

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If your company’s shipping fortunes have been placed on your head, from van expedited to

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®

Masters excel atcost containment

September kicks off with the resultsof our 18th Annual Masters of Logisticsstudy, our report of trends and issuesin logistics and transportation manage-ment—and the clearest snapshot theindustry has of how shippers and carriersare operating in these unprecedentedtimes. The story begins on page 24.

It’s also become our single mostanticipated report of the year, and forgood reason. On top of giving us a cur-rent operations “report card,” the studyidentifies emerging trends and offersshippers benchmarking data on logisticsbest practices gleaned from some of theworld’s leading organizations. In fact, oursurvey sample this year includes over 830domestic and international logistics andsupply chain managers representing anestimated $28.4 billion in total transpor-tation expenditures and nearly $14.5 bil-lion in international logistics spending.

To crunch this data, LM has onceagain collaborated with the esteemedresearch team of Mary Collins Holcomb,Ph.D., of the University of Tennessee,and Karl Manrodt, Ph.D., of GeorgiaSouthern University. Mary and Karl,along with support from our friends atJDA Software and Capgemini, havedone another terrific job of putting con-text around the data.

So, what are the overall findings?Well, if our research team were to gradethis sample of shippers for transportationcost containment they would give an “A.”For starters, the 2009 data show us thatthe poor economic climate has resultedin “transportation spend as a percent ofsales” figures that are pretty much in linewith 2008 findings.

The data also reveal an overall moveto lower transportation spending as indi-cated by the increasing number of com-panies that are spending 1 percent to 2percent and less than 1 percent of saleson transportation.

These findings certainly validate thattransportation has been a primary targetfor most companies en route to overallcost containment. But more importantly,the results are further proof that logisticmanagers have been equal to the taskand willing to help where they can. “Inlight of this uncertainty we are seeingmany shippers proactively managing theprimary aspect of volatility that they cancontrol—contracted freight rates,” saysCapgemini’s Belinda Griffin, one ourresearch team members.

One of the more interesting findingsthis year came in the analysis of howthe Masters current logistics operationscompare with the rest of our respondents.The bottom line: the economy has beena “great equalizer” in logistics and trans-portation performance. “We found thatthe significant performance and organi-zational structural differences betweenthe Masters and other firms that wasbuilt over the past two years has largelybeen eroded as everyone has becomesolely focused on surviving these difficulteconomic times,” writes our team.

However, the data on the Mastersdoes reveal that they’re taking steps toget ready for a rapid turnaround whenthe economy begins to grow, includingthe addition of new technology and morededicated transportation planning.

If you’re interested in learning moreon how the Masters are preparing you’llneed to tune into our Masters webcaston Tuesday, Sept. 29th (logisticsmgmt.com/maters09) for full details.

Michael A. Levans, Group Editorial Director

Comments? E-mail me [email protected]

EDITORIAL STAFF

Michael A. LevansGROUP EDITORIAL DIRECTOR

Francis J. QuinnEDITORIAL ADVISOR

Patrick BurnsonEXECUTIVE EDITOR

Sarah E. PetrieMANAGING EDITOR

Jeff BermanGROUP NEWS EDITOR

John KerrCONTRIBUTING EDITOR,Global Logistics

Bridget McCreaCONTRIBUTING EDITOR,Technology

Maida NapolitanoCONTRIBUTING EDITOR,Warehousing & DC

John D. SchulzCONTRIBUTING EDITOR,Transportation

Robert EckhardtSENIOR ART DIRECTOR

Norman GrafDIRECTOR/CREATIVE SERVICES

COLUMNISTSRay BohmanPRICING

Narendra MulaniEXCELLENCE

Elizabeth BaatzPRICE TRENDS

John A. GentleWayne BourneSAGE ADVICE

Brian CeraoloGROUP PUBLISHER

John PoulinCHIEF EXECUTIVE OFFICERREED BUSINESS INFORMATION

Jeff DeBalkoPRESIDENT, BUSINESS MEDIA

Jane VollandVICE PRESIDENT OF FINANCE

EDITORIAL OFFICE225 WYMAN STREETWALTHAM, MA 02451PHONE: 781-734-8509FAX: 781-734-8076E-MAIL:[email protected]

SUBSCRIPTION INQUIRIESAND ADDRESS CHANGES:

ONLINE:www.getFREEmag.com/LM

PHONE: 303-470-4445

E-MAIL:[email protected]

LMX090901viewpoint_ID 11LMX090901viewpoint_ID 11 9/2/2009 2:52:06 PM9/2/2009 2:52:06 PM

2005 2006 2007 2008 2009 2010

135

130

125

120

115

110

% change (left scale) Index 2001=100 (right scale)

(2001 = 100)Forecast

12

8

4

0

-4

-8

12

8

4

0

-4

-8

% CHANGE VS.: 1 month ago 6 mos. ago 1 yr. ago

General freight - local -0.4 1.8 -7.4Truckload 1.4 -0.6 -9.7Less-than-truckload 0.4 0.6 -3.7Tanker & other specialized freight -0.1 1.7 -4.5

TRUCKINGLatest Labor Department surveys of TL carriers reveal aver-age transaction prices for long-distance TL service climbed a sur-prising 1.4% from June to July. LTL carriers also increased prices0.4%. The American Trucking Associations’ truck tonnage indexbounced down in June and up in July, but with no one expectingfreight tonnage to rise significantly or consistently, what’s theimpetus for TL’s sudden price boost? An educated guess: thestubborn credit freeze has forced many into bankruptcy. As com-petition weakens, surviving truckers gain leverage for price hikes.We’ll have new industry cost insights available soon that will pro-vide an anchor for revised price forecasts ahead.

2005 2006 2007 2008 2009 2010



18

12

6

0

-6

-12

18

12

6

0

-6

-12

160

150

140

130

120

110


Rail freight 0.1 -0.5 -9.6 Intermodal 2.8 2.9 -16.3 Carload -0.2 -0.9 -9.0

RAILAs intercity TL companies boosted their prices in July, inter-modal rail prices followed suit, up 2.8%. Unlike struggling truckers,this was the third monthly price hike in a row for intermodal railservice. All told, thanks to a 0.2% price cut for carload service, railindustry average prices were up 0.1%. Nonetheless, intermodalrail inflation does raise the specter of much more aggressive pricehikes ahead when the economy does finally recover. Our currentforecast doesn’t presume that scenario. Instead, we’re calling forrelatively flat pricing through 2009 followed by a manageable 2%annual price increase for rail transport in 2010. A new demandmodel will help calibrate forecast revisions next month.

2005 2006 2007 2008 2009 2010

135

130

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110



36

24

12

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-12

-24

36

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-24


Scheduled air freight 5.1 -11.5 -17.5Chartered air freight & passenger 2.1 -1.3 -15.6Domestic air courier 1.5 1.5 -14.7International air courier 1.7 1.7 -14.1

AIRIn June, the airline industry cut its transaction prices for flyingcargo in the belly of planes on scheduled flights a record-breaking11.5%, so it’s no surprise that prices rebounded in July. But pricesfor cargo on scheduled flights increased only 5.1% and sit 17.5%below 2008 levels. Air charter companies flying cargo on domesticroutes also reported prices up 3.6% from June to July. But, U.S.-chartered planes flying international routes cut prices by 1.4%.Domestic and international air courier companies reported reces-sion-defying monthly price hikes of 1.5% and 1.7%, respectively.Still, they may lament that year-ago prices were 14% higher. Withnew cost data, forecast revisions can be expected here too.

2005 2006 2007 2008 2009 2010

180

170

160

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140

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24

16

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-8

-16

24

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-16


Deep-sea freight 4.6 -5.5 -20.3Coastal & intercoastal freight 6.8 6.3 -2.1Grt. Lks.-St. Lawrence Seaway 0.7 -4.0 -2.9Inland water freight -7.2 -17.7 -17.2

WATERWhile cargo volumes at U.S. ports declined to the lowest lev-els in seven years, somehow owners of U.S.-owned deep-sea ves-sels had enough clout to report a 4.6% price increase in July. Own-ers of barges and other vessels moving cargo on inland waterwaysdidn’t fare so well, cutting their average transaction prices by7.2%. That was the largest one-month price cut since an 8.3%price drop in November 2005. Overall, water transportation pricesincreased 2.5% from June to July, but remain 16% below peakprice levels set September 2008. Our forecast showed water trans-port prices hitting bottom in Q3 of 2009, before gently re-establish-ing an inflationary trend. The price deflation floor may have beenhit early. Next month’s forecast will provide some clarity.

Source: Elizabeth Baatz,Thinking Cap Solutions. E-mail: [email protected]


LMX090901econ_ID 13LMX090901econ_ID 13 8/31/2009 12:10:45 PM8/31/2009 12:10:45 PM


● Teamsters exec says New Pennmay be merged into YRC World-wide

● Appointment of Elliott to STBis good news for shippers

inside

WALTHAM, Mass.—What a dif-ference a year makes: With dieselcosts accounting for a signifi cantchunk of transportation budgets, it’ssafe to assume that shippers havebeen pleased to see oil prices signif-icantly down from last year’s recordhighs of $147.27 per barrel and $5per-gallon diesel.

While prices have been down formost of this year—oil is currentlyaround $73 per barrel and diesel hasbeen fl uctuating between $2.50 and$2.70 per gallon—it doesn’t meanthat shippers are out of the woods.In fact, some say there is greateruncertainty now than every beforebecause inventories are high and theeconomy is still in a recession.

A recent Logistics Management(LM) survey of roughly 130 logistics,supply chain, and transportationmanagers found disparities when itcomes to how much shippers’ aver-age fuel surcharges are above theirbase rates considering the recentprice levels.

According to the survey, 5 per-cent of respondents said their aver-age fuel surcharges are more than21 percent above their base rates,followed by 12 percent at 16 per-cent to 20 percent; 26 percent at 11percent to 15 percent; another 26

percent at 6 percent to 10 percent;17 percent at 0 percent to 5 per-cent; and 14 percent reporting thatthey didn’t know how much theiraverage fuel surcharges were above

their base rates.What’s more, 61 percent of

respondents indicated that if fuelprices rise, they intend to raise oradjust their freight budget to coverhigher than budgeted fuel prices.In turn, 85 percent expect to payhigher fuel surcharges to motor car-riers in the coming months.

The LM survey revealed that theaverage fuel surcharge percentagefor truckload shippers was 15.4 per-cent and 9.7 percent for less-than-truckload (LTL) shippers.

Even though oil prices appearmore digestible on the surface thanthey did a year ago, the price perbarrel of oil was as low as $33 perbarrel in December although die-sel has remained below $3 per gal-lon since early November, accord-ing to the Energy InformationAdministration (EIA).

“It seems like oil prices are goingup for no reason,” said Art VanBodegraven, a partner at The Prog-ress Group in Alpharetta, Ga. “Weshould be scared to death, but atthe same time shippers and theirsupply chains cannot overreact tooil costs and economic conditions ata time like this.”

Recent data from consultancyErnst & Young suggests that whileoil is currently between $60 and$70 per barrel, its recent run-up hasmade oil prices $20 to $25 higherthan market demand supported.And with relatively low demandand no marked change in produc-tion, Ernst & Young maintains thatthis run-up can be attributed to an

By Jeff Berman,Group News Editor

Despite price relief over much ofthe last year, shippers expect toincrease freight budgets to meetfuture price hikes.

How much is youraverage fuel surchargeabove your base rates?

Source: Logistics Management reader poll

Average surcharge(Percentage of respondents)

By how much do you planto raise your 2010 budgetto cover rising fuel costs?Planned increase(Percentage of respondents)

0-5%17%Don't know

14%

Morethan 21%

5%

6-10%26%

11-15%26%

16-20%12%

0-5%33%More than 21%

1%

6-10%45%

11-15%10%

16-20%11%

Survey indicates shippers arebracing for higher fuel prices

LMX090901news_ID.indd 15LMX090901news_ID.indd 15 9/2/2009 12:10:22 PM9/2/2009 12:10:22 PM

News Capsule


WASHINGTON—A letter from TysonJohnson, co-chairman of the TeamstersNational Freight Industry NegotiatingSubcommittee (TNFINC) to Team-sters members of New Penn, a regionalLTL subsidiary of YRC Worldwide(YRCW), suggested that YRCW plansto merge New Penn into YRCW.

In his letter to New Penn Team-sters, Johnson said that YRCW called

for an “emergency meeting” with theTNFINC. The meeting took place onAugust 11.

“Because the merger could costhundreds of Teamsters jobs, the major-ity of New Penn local unions have alsorequested a vote by New Penn mem-bers,” wrote Johnson. “During a confer-ence call with New Penn local unionleaders the next day, local leaders reit-erated their desire for a re-vote.”

While the most recent concessions

by YRCW and Holland Teamsterspassed by a 58-42 percent majorityon August 7, New Penn Teamstersrejected the concession package. Thosevotes were counted separately, becausethose workers are not part of the samebargaining unit. New Penn Teamstersat Chicago locals 705 and 710 andLocal 179 in Joliet, Ill., rejected theconcessions, too, and are covered bytheir own separate contracts.

In his letter, Johnson added thatthe TNFINC is asking its New Pennmembers to vote again. The ballots,that were mailed in mid-August will becounted on September 9.

YRCW said the New Penn bargain-ing units that did not yet ratify thislabor agreement represents less than10 percent of its Teamsters’ employ-ees. And they added that there are noimmediate plans to merge New Penninto YRCW.

“The company and the Teamsters areaddressing employee concerns for thesesmaller bargaining units to reconsiderthe modifi cations,” said YRCW. “Thecompany has not fi led any change ofoperations affecting the network statusof New Penn. New Penn continues toprovide superior regional, next-day trans-portation services to its customers.”

LTL TRUCKING

Teamsters exec says New Penn may be merged into YRC Worldwide

Source: Boeing Company’s World Air Cargo Forecast

Air cargo trafficwill expand at anaverage annualrate of

5.8%over the nexttwo decades

Global air cargopoised forbrighter skiesWhile rising jet fuel pricesand financial uncertaintyplagued air cargo growth in2007 and 2008, volumes areexpected to triple compared tocurrent levels over the next 20years, according to data fromBoeing.

anticipated economic recovery.“Shippers have the direction of fuel

costs right,” said James Haughey, ChiefEconomist of Reed Construction Data,a corporate sibling of LM.

“The recent pickup in crude priceswill add modestly to fuel surcharges inthe last half of the year. While the oilsupply is now generous at current pricesand crude and product inventories are

high, oil traders are adding to their sup-plies, anticipating that worldwide eco-nomic conditions will keep the pricesomewhat above the current level,”said Haughey, who stressed that this isnot 2008 all over again.

“Reserve oil production capacity isnow much higher, and this will limitthe price rise ahead compared to thehuge price spike last year,” he added.

Even with Haughey’s prognosisthat fuel prices will not spike like theydid a year ago, a shipper told LM thatmore alternative energy options—likeelectricity and natural gas—are stillneeded.

“The only option to truly managefuel prices in the mid- or long-term is tocreate other options that involve alter-native fuel vehicles or hedging prices,which only works to a certain extent,”said the shipper.

“With a surplus of inventories and adrop-off in economic activity through-out the world, it’s hard to determinewhy the price per barrel has basicallydoubled since the end of last year.That is why we need alternatives,” theshipped added. L

LM RESEARCH, CONTINUED

“Shippers have the direction of fuel costsright. The recent pickup in crude prices willadd modestly to fuel surcharges in the lasthalf of the year.”

—James Haughey, Chief Economist, Reed Construction Data


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This follows a recent vote by YRCWTeamsters and its Holland regionalsubsidiary to approve a 5 percent wageand pension concession package that isestimated to save the company approx-imately $45 million a month for theremainder of 2009 and up to $50 mil-lion a month in 2010. These conces-sions came after a previous 10 percentwage concession and pension freezethat took effect on January 1—a movethat’s estimated to save YRCW approx-imately $250 million annually.

“New Penn may be the most prof-itable company among all of YRCW’sunits,” said Satish Jindel, principal SJConsulting. “The Teamsters may belooking to get this message [of NewPenn merging into YRCW] out withthe hope of them getting help from theNew Penn members for a vote to get aconcession that enhances the ability ofNew Penn to get sold if the Teamsterconcessions are in place.”

Jindel added that Johnson has donea terrifi c job of “working rank and fi lelocal leadership” to get these conces-sions for YRCW, adding that Johnsonhas “brought the union this far to helpYRCW continue to have extra life.” Jin-

del said that he has not seen Teamstersdo this much for any union carrier dur-ing his 20 years of following the LTLmarket. L

—Jeff Berman, Group News Editor andJohn D. Schulz, Contributing Editor

LTL TRUCKING, CONTINUED


WASHINGTON—The appointmentand confi rmation of Daniel R. ElliottIII as new chairman of the SurfaceTransportation Board (STB) immedi-ately does three things to heighten railshippers’ optimism.

First, it swings the three memberSTB from a Democratic minority to a2-1 majority; second, captive-rate ship-pers could be winning more decisionsat the STB; and third, Elliott’s pro-laborbackground might mean STB decisionswill no longer be rubber-stamped infavor of the industry.

Elliott was formerly associate generalcounsel at the United TransportationUnion (UTU), the nation’s largest railunion. He is the fi rst rail labor execu-tive to chair the STB, formed in 1995as successor to the defunct InterstateCommerce Commission (ICC).

The STB is the only federal agencyfrom which railroads must seek approvalto merge, abandon track, and lease or selllines. In regulating such transactions,the STB sets levels of labor protection.

For nearly all its existence, the STBwas known as a favorable, pro-railagency. Many former STB offi cials,including ex-chairman Linda Morgan,have moved into lucrative posts in therail sector following their governmentcareers. That pro-rail bias could changeunder Elliott, according to former ICCand STB offi cials.

“The appointment will result in adecided shift from the pro-railroadposition that we’ve seen under everySTB chairman since Linda Morgan(in 1995) to one of a minimum of neu-trality,” said Fritz Kahn, a former ICCchairman.

The naming of Elliott was “obviously”good news for shippers who might bemulling future rate cases before theSTB, Kahn said. He warned, however,that Elliott’s ascension doesn’t meanthat shippers would prevail every timethey petition the STB.

With Elliott and Mulvey compris-ing a 2-1 Democratic majority at theSTB, rail shippers can expect to see“far greater balanced and decided deci-sions” out of the STB than any timesince the agency was created in 1996,Kahn added.

Elliott is the second UTU offi cialnominated by President Barack Obamainto a top transport post. He follows JoeSzabo, formerly UTU Illinois legislativedirector, who is the new Federal Rail-road Administrator. L

—John D. Schulz, Contributing Editor

RAILROAD REGULATION

Appointment of Elliott to STB is good news for rail shippers



Bohman on

On December 27, 2007, the trucking industry’slongstanding National Classifi cation Committee(NCC), which had the responsibility of keeping theNational Motor Freight Classifi cation (NMFC) cur-rent, ceased to exist. It was sunsetted after the fed-eral Surface Transportation Board (STB) revoked itsantitrust immunity, thereby prohibiting its mem-ber motor carriers from establishing classifi cationdescriptions, ratings (classes), rules, or protectivepackaging requirements collectively.

To keep the NMFC alive, a new organiza-tion was formed by the National Motor FreightTraffi c Association, owner of the NMFC. It iscalled the Commodity Classifi cation StandardsBoard (CCSB) and its members are classifi cationspecialists and are not carrier employees. Theyperform the same functions that the NCC didfor years.

Now, after nearly a year and a half, the CCSBhas decided to revise some of the procedures itand the NCC operated under for many, manyyears.

On June 2 in Alexandria, Va., the CCSBapproved the proposed amendments to itsNational Motor Freight Classifi cation Procedures,Policies, and Directives. The procedural amend-ments became effective on July 1, 2009. Here aresome of the key changes that were adopted:

1. Public dockets will now be issued no less than45 days prior to a CCSB public meeting versus notless than 60 days previously.

2. On its own motion, the CCSB may vote toreconsider a docketed proposal upon which disposi-tion has been made, but it must do so within 30days of its initial disposition.

3. For the fi rst time, the CCSB will make acharge for rendering a classifi cation interpretation.In the past, such interpretations were provided freeof charge. That provision took effect on April 1.

4. Besides holding its regular public meetings(currently three a year), the CCSB now has theauthority to hold special meetings to consider andvote on docketed proposals. Such meetings will beopen to the public.

5. Upon request, the CCSB shall assist anyonewishing to fi le a proposal.

6. The proponent(s) of a proposal may withdrawit at any time prior to its approval or disapproval.

7. Rules published in the NMFC are presentlyrequired to be consistent with “CCSB/NCC”precedent and current motor carrier practices, buthenceforth will be required to be consistent with“classifi cation” precedent and current motor carrierpractice.

8. The CCSB is now authorized to fi le proposalsto amend the NMFC.

9. Proposals for amending the NMFC must besubmitted in writing to the Chairman of the CCSB.

10. Notices of disposition of docketed proposalsshall be made by mail or email, but will no longerbe sent by fax.

It would be my suggestion that you accessCCSB’s website (www.nmfta.org) and print out therevised CCSB procedures contained in the dispo-sition of CCSB Docked 2009-2, Section III, andkeep them with your copy of the National MotorFreight Classifi cation. You’ll thereby have themhandy in the event you should need to refer tothem in the future.

The next meeting of the CCSB will take placeon October 20, 2009 in Alexandria, Va. L

CCSB revises procedures

Ray Bohman, a well-known author and consultant, is editor ofseveral highly successful newsletters on transportation and isa consultant to a number of national trade associations. He ispresident of The Bohman Group, consultants and publishers inthe freight-transportation field. His offices are located at 116 DeerMeadow Lane, Chatham, MA 02633. Phone: (508) 945-2272.

LMX090901pricing_ID.indd 20LMX090901pricing_ID.indd 20 8/31/2009 12:09:31 PM8/31/2009 12:09:31 PM

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Mulani on

Superstars in service managementPerhaps you’ve seen the statistics: At manyindustrial and service companies, after-saleservices account for 10 percent to 40 percentof revenue and up to 50 percent of inventoryinvestment.

However, you may not be aware that a largepercentage of companies—perhaps even yourown—continue to underestimate the importanceand value of superior service management.

Consider the results of a recent Accentureresearch effort focused solely on service manage-ment. Only 42 percent of the survey’s executiverespondents considerservice management akey contributor to theoverall customer experi-ence. And barely half saidtheir service managementorganization is extremelyimportant to the compa-ny’s overall business.

Companies’ perfor-mance of service manage-ment functions was alsofound lacking. Compara-tively few of the surveyedorganizations...

• Have end-to-end ser-vice solutions: advanced,integrated capabilities for developing and sellingparts; linking service and solutions; and coordi-nating asset management/maintenance, repairand operations (MRO) solutions.

• Leverage a fl exible service delivery modelthat enables them to tailor after-sale services bycustomer or customer segments.

• Take maximum advantage of service-relateddata that could help them manage and deployparts, people, facilities, and partners.

• Maximize customer transparency: deepinsights into customer needs, wants, and otherinformation that can be critical to pricing partsand services and creating the right messaging.

SERVICE MANAGEMENT MASTERSAND LAGGARDS

A lot of companies clearly need more-sophisti-cated service management capabilities. But whereshould those organizations begin? What practicesand capabilities should they deem most relevantto excelling in service management?

Readers may recall that we completed a relatedresearch project in the fulfi llment arena (profi ledin Logistics Management’s July and August issues).Similar to that effort, we now sought to profi lethe capabilities of service management masters

by distinguishing those that fi nished in the top 10percent of the survey sample based on approxi-mately 20 service management metrics.

We also identifi ed respondents that fi nishedin the bottom 10 percent—a group we refer toas service management “laggards.” Not surpris-ingly, masters signifi cantly outperformed lag-gards (as well as survey respondents as a whole)in the 10 bottom-line-relevant areas profi led inthe graphic.

CHARACTERISTICS OF SERVICEMANAGEMENT MASTERS

In studying the survey responses of servicemanagement masters and laggards, we foundthey also differ signifi cantly with respect tohow they manage their service operations. Theconclusion: Superior service management per-formance correlates strongly with seven specifi c


Service management performance across the entire surveypopulation and segmented by masters and laggards.

Narendra Mulani leads Accenture’s Supply Chain Managementservice line. He has worked across a diverse set of retail, technol-ogy, and products clients, and continues to have responsibility forAccenture’s global relationship with Procter & Gamble. He hasbeen with Accenture since 1997.

SurveyAverage Masters Laggards

Fixed right the first time 80% 95% 65%

Work orders over 90 days 10% 4.5% 20%

Work orders past original due date 15% 5 % 21.5%

SKU fill rate 80% 95% 20%

Broken calls due to parts, tooling or unavailable information 10% 5% 20%

SKU-level forecast accuracy for A & B parts 80% 90% 60%

Obsolescence of gross service-parts inventory 10% 5% 20%

Warranty costs as percent of sales 10% 3% 25%

Spares inventory turns 8 22.5 3.5

Days sales outstanding (DSO) 30 10 55

LMX090901excellence_ID.indd 22LMX090901excellence_ID.indd 22 9/1/2009 10:52:05 AM9/1/2009 10:52:05 AM

Mulani on


practices and capabilities:1. Service management phi-

losophy, organization structureand offerings. Masters are likely torun after-sale service operations as adistinct unit with full profi t-and-lossaccountability. Masters also tend tooffer a wider range of after-sale andasset management/MRO services.

2. Service delivery model. Mas-ters are particularly ambitious aboutthe post-sale services they provide tocustomers—serving customers wher-ever they are, on time, with high qual-ity, and at optimal cost to the company.

3. Service offering portfolio.More than twice as many masters aslaggards have a clearly defi ned portfo-lio of both after-sale and asset manage-ment/MRO service offerings that coverall their services and solutions.

4. Partner relationships. Servicemanagement masters excel at workingwith and coordinating supply chainpartners. Most masters have a well-defi ned and well-articulated partnerstrategy that is tightly aligned to theiroverall strategy.

5. Resource planning. Mastersgather, use, and leverage a far greaterrange of data than do laggards. Thishelps them better leverage theirservice people, parts, facilities, andpartners.

6. Service transparency. Mastershave high levels of visibility into theperformance of service resources. Lag-gards have a more diffi cult time under-standing the health and operationalgoings-on of their service operations.

7. Pricing and customer insight.The ability to price services optimallyis crucial. Masters consistently recog-nize and leverage the factors that drivereturns on their service business.

The above list is not exhaustive. Forexample, a profi table service businessalso requires C-level buy-in—top-tier

acknowledgement that a servicebusiness cannot be the core-busi-ness’ under-supported stepchild.

Our survey also points to theneed for a well-organized opera-tion with the skills and tools todefi ne product offerings and setprices; tightly control costs and

service levels; and team with asales organization to jointly marketa complete solution.

Next month, however, we willlook most closely at the above sevenareas and explain how masters out-perform laggards and—more impor-tantly—the competition. L

It takes an intelligent team of logistics professionals to help navigate your company through rapid changes in transportation. Turn to Universal Logistics Solutions to maximize your transportation spend and optimize your supply chain.

In order to provide measurable logistics solutions, every mode of transportation needs to be explored. Each customer receives a thorough supply chain analysis detailing their transportation spend.

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Truckload

Warehousing

Oil Field

Steel

Multi-Modal

Intermodal

Energy

Only 42 percent of thesurvey’s executiverespondents considerservice management a keycontributor to the overallcustomer experience.

LMX090901excellence_ID.indd 23LMX090901excellence_ID.indd 23 9/2/2009 9:07:50 AM9/2/2009 9:07:50 AM

ON EQUALGROUND

BY MARY COLLINS HOLCOMB, PH.D, ASSOCIATE PROFESSOR, UNIVERSITY OF TENNESSEE KARL MANDRODT, ASSOCIATE PROFESSOR, GEORGIA SOUTHERN UNIVERSITY

Our annual study of logistics and transportation trends suggests that the economy has been a great equalizer in supply chain performance. In fact, the significant operational lead that the

Masters had built up over the past two years has been largely eroded.

COVER STORY


LMX090901CSmasters_ID.indd 24LMX090901CSmasters_ID.indd 24 9/2/2009 9:25:20 AM9/2/2009 9:25:20 AM

By now we know the story:There’s unpredictable demand,increased customer scrutiny,

fuel and commodity price volatility,and excessive inventory in the supplychain.

We know that everyone involved inlogistics and supply chain managementhas been affected by this seismic shifton the continent. Yet, how much ofan impact has it made on logistics andtransportation operations, especially onour Masters of Logistics?

Our 18th annual study suggests thatthe economy has been a tremendousequalizer. The signifi cant performanceand organizational structural differencesbetween the Masters (fi rms with salesgreater than $3 billion) and other fi rmsthat was built over the past two yearshas been largely eroded as everyonehas become focused soley on survivingthese diffi cult economic times. Addingto this headache, companies of all sizeshave been expanding to new marketsand making substantial changes to theirorganizational structure.

Is there a bright spot? The study datasuggests that the Masters have com-pleted, or are in the process of complet-ing, initiatives that will position themto build sustainable competitive supplychain advantage in the future. In otherwords, while the Masters are weather-ing the storm along with their smallercounterparts, they are putting into placea foundation for a rapid turnaroundwhen the economy begins to grow.

MANAGING TRANSPORTATION INUNPARALLELED TIMES

For the past 18 years, the Mastersstudy has identifi ed emerging trendsin the fi eld of logistics and providedbenchmarking data on transportationand distribution. As in the past, thisyear’s study was conducted by GeorgiaSouthern University and the Universityof Tennessee in partnership with Cap-gemini, JDA Software, and LogisticsManagement magazine.

Over 830 domestic and global logis-tics, transportation, and supply chain

professionals participated in this year’sstudy. Those respondents accounted foran estimated $28.4 billion in transpor-tation expenditures, and nearly $14.5billion in international transportation.The companies represented in theanalysis range from small to very large.This year, 43.8 percent of respondentsreported that their companies have lessthan $250 million in annual sales while22.5 percent of the respondent poolreported that their companies’ annualsales were greater than $3 billion. Thelatter group has been defi ned as theMasters of Logistics.

More than 14 industry sectors fromenergy/chemical/mining to retailingparticipated in this year’s study, withthe core group of participants in themanufacturing sector (47.5 percent).Consumer products and general manu-facturing represented the largest sub-sectors of this group (18.2 and 17.2percent, respectively). The next largestsector participating in this year’s studyis retail, accounting for 12.8 percent ofthe total participants.

While the fi ndings presented hereare for North America, the global reachof the study has enabled the analysisof logistics and transportation trendsfor various regions of the world includ-ing Europe and Asia. The data suggestthat signifi cant differences exist in thehow companies in different regions ofthe world manage their supply chains.These differences range from strategicfocus to operational performance. Theregional results will be published at alater date.

The data for 2009 show that theimpact of the economy has resultedin transportation spend as a percent ofsales that is somewhat similar to 2008.While the data for 2009 show that thepercentage of fi rms spending more than5 percent of sales on domestic trans-portation has risen slightly from 17.6percent in 2008 to 21.0 percent in2009, this increase is not statisticallysignifi cant.

The data also point to a small shift inreduced spending on transportation as

indicated by the increasing number offi rms that are spending 1 percent to 2percent and less than 1 percent of saleson transportation (Page 26). Interest-ingly, in the aggregate, the number ofrespondents spending more than 3 per-cent of sales on transportation is verysimilar for both years (45.1 in 2009 ver-sus 43.2 in 2008). Transportation hasbeen a prime target for companies intheir relentless quest to reduce costs inevery area.

Variability in demand can make all


Masters of Logistics Webcastlogisticsmgmt.com/masters09 • Sept. 29th 2 p.m. EST

Percent of freight dollarsshifted by mode from 2008TL

31.9%36.0%

20092008

Surface package

6.1%

Small package express6.3%

9.3%

Private fleet11.5%

8.3%

National LTL13.3%14.2%

Regional LTL8.7%

13.7%

Air freight4.9%

2.4%

Rail1.6%

2.8%

Ocean

3.3%

Barge0.5%0.2%

Intermodal5.4%

3.2%

7.0%

8.0%

Source: Masters of Logistics 2009


facets of transportation, logis-tics, and supply chain plan-ning and execution very dif-fi cult. It is a major concernin the synchronization andcoordination of activities andhas been credited with creat-ing unnecessary costs at everylevel in the supply chain.

Adding to the challengeare two other signifi cant fac-tors: increased customer ser-vice demands and fuel pricevolatility. Together these fac-tors represent conditions thatcan only be tackled throughbetter internal and externalintegration.

“In light of this uncertaintywe are seeing many shippersproactively managing the pri-mary aspect of volatility thatthey can control—contractedfreight rates,” commentsCapgemini’s Belinda Griffi n. “Specifi -cally we are seeing a lot of transporta-tion managers teaming up with theirprocurement departments to aggres-sively re-negotiate rates in order to takeadvantage of the excess capacity thatexists right now in the freight market.”

“We’re fi nding that given these chal-lenges, companies are returning to ‘triedand true’ transportation man-agement strategies,” adds JDA’sDawn Salvucci-Favier. “Opti-mization is once again at thetop of the list for transportationexecutives in order to reducetransportation expenses.”

TRUCKLOAD LOSES SHAREOF BUDGET

In 2008, the truckload (TL)sector commanded an impres-sive share of the transporta-tion budget, with 36 percent ofevery dollar being spent on themode. Although TL still repre-sents the biggest portion of thetransportation budget for 2009,it has lost share along withregional LTL (Page 25).

Competition for freightamong the various surfacetransportation modes was fi erceas freight volumes declineddramatically in the second half

of 2008 and continued to slide in 2009.Despite attempts by the TL sector toaggressively remove capacity from themarket, demand declined even fasterresulting in excess capacity. This excesscapacity has resulted in bids that willproduce signifi cant savings for ship-pers. The outlook for next year basedon the study data is that the percentageof the transportation budget spent on

TL will continue to declinein the 1 percent to 5 percentrange.

One of the modes thatbenefi ted from the decline inTL and regional LTL budgetshare was intermodal. Sal-vucci-Favier notes that theincrease in intermodal trans-portation can be attributedto several factors, includingintermodal service levelsbecoming more predictableand stable at a lower costthan other surface trans-portation options. “Intermo-dal also represents a ‘green’option to over-the-road trans-portation that many shippersfi nd appealing.”

The study results suggestthat companies are position-ing themselves to achievesizeable gains in effi ciency

in the coming year. This is supported byseveral fi ndings including the increaseduse of core carriers by companies. Some36.2 percent of respondents reportedthat their use of core carriers hasincreased. Another 31 percent of partici-pants said that their use of core carriershas remained the same, while only 10.3percent of respondents stated that they

do not use core carriers.

STABLE AT THE COREWhat advantages do core

carriers provide? The studyresults show that core car-riers provide shippers withfour critical essentials: stableprices, improved service lev-els, committed capacity, andreduced transportation rates.

Savvy managers indicatethat they want to establishstrong carrier partnershipsthat will position them forboth good and bad economictimes. When the economyrebounds shippers can beassured that their core carri-ers will have capacity avail-able for them.

Shippers are also lookingto their core carriers to helpthem be more effi cient andeffective during these diffi cult

Masters of Logistics, continued


Transportation spend as a percent of sales

> 5% 21.0%17.6%

4%–5%12.1%

3%–4% 13.7%13.6%

2%–3%22.6%

1%–2%

2009 2008

17.0%

< 1%17.0%

10.4%

17.9%

18.3%

18.7%

Percent of 2009 budget spent ontransportation by modeMean of respondents

31.9%

13.3%

11.5%

8.7%

8.0%

7.0%

6.3%

5.4%

4.9%

1.6%

0.7%

0.5%

TL

National LTL

Private Fleet

Regional LTL

Ocean

Surface Parcel

Small Package

Intermodal

Air

Rail

Other

Barge


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economic times. Many have askedtheir core carriers to reduce rates inexchange for a priority on freight vol-ume. The data from the study sug-gest that improved service levels willbe an important contribution by thecore carriers as on-time deliverieshave declined and shipment com-plaints and damage have increasedduring the past year.

Another factor that will affecttransportation cost is that fi rmsare poised to renegotiate outboundtransportation contracts as condi-tions warrant. Approximately 31 per-cent of study participants have thiscapability. It’s interesting to note thatthe Masters, as well as medium tosmall size fi rms (with regard to salesrevenue), are building fl exibility intheir transportation contracts. Thebigger proportion (39.7 percent),however, still renegotiates contractson a traditional annual cycle.

INTERNATIONAL SPENDINGDECLINED

As economic conditions acrossthe globe worsened, spending ininternational transportation alsodeclined. From 2008 to 2009, thepercentage of fi rms that spent morethan 5 percent of sales revenue oninternational transportation declinedby approximately 15 percent.

“The global trends that have beennoted with respect to internationalshipping have certainly been observednot just in North America but also inEurope,” says Ramon Veldhuijzen,global logistics and fulfi llment leaderwith Capgemini. “For example, fl owsthrough the Port of Rotterdam, one ofthe major transport hubs for Europe,are down 13 percent in the fi rst half of2009 compared to the same period of2008.”

Further evidence that internationaltransportation spending declined is thereporting of companies that spend lessthan 1 percent of sales revenue in thisarea—40.9 percent in 2009 comparedto 38.8 percent in 2008. Interestingly,the percent of the transportation bud-get spent on ocean more than doubledfrom the previous year increasing from3.3 percent in 2008 to 8.0 percent in2009.

Where is international transporta-tion spending headed long term? A lot

depends on Cap and Trade legisla-tion and potential increased tariffson imports to account for their car-bon footprint. Companies that wereearly adopters of the offshore modelhave begun to rethink the economicand inventory impact of their sourc-ing strategies and have begun look-ing at near-shore alternatives.

TOP PERFORMER: TRUCKLOADService performance across all

modes continues its roller-coasterride. The low was experienced in2004 when a service meltdownoccurred in all of the modes andcontinued up to the 2007 studywhen service woes were the prevail-ing headline.

In 2007, however, there weresmall improvements in on-timedelivery posted by truckload (TL)and regional less-than-truckload(LTL) carriers, and even moreimpressive service gains postedby the railroads. The 2008 studyindicated that the on-time servicefor TL and regional LTL carriersremained essentially unchangedfrom the previous year.

Railroads continued to improvein 2009 with an average on-timedelivery performance of 88.8 per-cent. This level of service had not

been reported for railroads since 2005.But unfortunately they were not ableto sustain this performance in 2009,as on-time delivery dropped to 86 per-cent—the biggest decline posted for allthe modes.

Railroads were not the only ones tostruggle with on-time deliveries. Thismetric declined slightly for all of theselected modes except for TL, whichposted a small gain. This increase inservice vaulted TL to “best perfor-mance” for on-time delivery.

Both national LTL and regional LTLreported declines in on-time deliveryperformance. “Given the overcapacityof supply in the trucking sector, thisresult was somewhat surprising,” saysMichael Levans, editorial director ofLogistics Management. “Most motorcarriers would prefer to compete on thebasis of service rather than price. Theresults suggest that price may have beenthe primary consideration this year.”

Masters of Logistics, continued


Correct invoice mean responseNumber of correct invoices/total invoicesMode of transportation 2009 2008

TL 97.3% 96.8%

National LTL 93.1% 94.1%

Regional LTL 93.7% 93.9%

Rail 96.0% 98.2%

Express Package 96.4% 94.7%

Equipment availability mean responsePercent of your requests that can be satisfi ed withavailable equipment at the time of your requestMode of transportation 2009 2008

TL 96.5% 95.4%



Rail 96.8% 96.9%


On-time delivery ratio mean responseNumber of on-time shipments/total shipmentsMode of transportation 2009 2008

TL 97.2% 95.2%



Rail 86.0% 88.8%


The fact that there was no significantshift in domestic transportation spend asa percent of sales signals that transporta-tion managers have been fairly successfulin assisting the firm in cost containment.


INVOICE ACCURACY MIXED,EQUIPMENT AVAILABILITY DOWN

Invoice accuracy, which hadimproved for the selected modes in2008—with the exception of expresspackage—posted mixed results for2009. TL and express package reportedsome improvement in the percentage ofcorrect invoices from the previous yearwhile national LTL and rail showedmoderate declines. Regional LTLsremained unchanged year-to-year.

Billing errors for railroads increased,returning to the poor performance levelposted in 2006. “Fuel surcharges andaccessorial charges continue to createinvoicing problems for shippers and

carriers,” says JDA’s Salvucci-Favier.“While the integration of freight pay-ment technology and processes hasreduced this problem somewhat, thereis still a lot of work to be done in thisarea to improve performance.”

Equipment availability for nationaland regional LTLs declined from 2008to 2009. There was continued con-solidation within this industry sectorover the past year, and many carriersreduced capacity as demand continuedto decline. In addition, many LTL carri-ers expanded the scope of their servicesin an attempt to gain more business.

These factors may have contributedto the decline in equipment availabilityfor these modes. As noted earlier, even

though the TL sector reduced capac-ity it still had an oversupply for thedemand. This aided in improving equip-ment availability for the sector by 1.1percentage points from 2008 to 2009.

Economic conditions were alsorefl ected in the turndown ratio for 2009.All of the modes reported improvementin the turndown ratio; the TL and rail-road sectors posted record gains. In2008, the TL sector reported a turn-down ratio of 3.6 percent. There was aremarkable turnaround in performancefor this metric in 2009 as the turndownratio fell to 1.1 percent. The same dra-matic improvement was noted for rail-roads. In 2008 they had a 3.2 percent

turndown ratio; in 2009 this dropped to1.0 percent.

ARE THE MASTERS STILL THEMASTERS?

For the past two years the groupknown as the Master of Logistics hasbeen building transportation, logis-tics, and supply chain capabilities thatresulted in performance that was signifi -cantly different than other companies.The data from the 2009 study suggestthat the economic downturn has beena great equalizer in terms of transporta-tion, logistics, and supply chain man-agement practices.

There are fewer statistically signifi -cant differences among the three groups

analyzed—the Masters (above $3 bil-lion in revenue), the Contenders ($500million to $3 billion in revenue), andthe Challengers (less than $500 mil-lion in revenue)—than in the previoustwo years. This year’s study reveals thatthe three groups have more similar stra-tegic, tactical, and operating practicesthan in the past. This is especially truein transportation where all companies—including the Masters—are expending agreat deal of effort to improve effi ciencywithout sacrifi cing service. Actions suchas improved shipment consolidation,increased use of dedicated transporta-tion, and improved route planning havebeen initiated by fi rms of all sizes.

WHAT DOES THE FUTURE HOLD?It is too early to declare that the gap

between the Masters of Logistics andthe others has been closed. The eco-nomic downturn has had a deeply pro-found impact on every size business.

The initiatives that the Masters arecurrently implementing will help posi-tion them in a manner that will buildsustainable competitive advantage oversmaller sized fi rms.

The Masters are working on projectsthat will reduce time to market, reducecosts, and improve speed and execu-tion of supply chain activities. Thequestion is whether they will be ableto leverage the results of these effortsinto signifi cantly better performancenext year. Check in with us as we con-tinue to analyze the data and share thefi ndings. Over the next several monthsadditional reports and fi ndings canbe found at logisticsmgmt.com andtransportation-trends.com. L

Mary Holcomb and Karl Manrodtfrequently contribute to LogisticsManagement

Service shows promise and painMeasure TL National LTL Regional LTL Rail Express Package

2009 2008 2009 2008 2009 2008 2009 2008 2009 2008

On-time delivery 97.2 95.2 92.8 94.5 94.4 95.8 86.0 88.8 96.1 97.0

Correct invoice 97.3 96.8 93.1 94.1 93.7 93.9 96.0 98.2 96.4 94.7

Damage 1.1 2.1 3.2 2.4 3.2 2.7 1.1 1.1 2.9 2.7

Equipment availability 96.5 95.4 97.7 99.0 97.1 99.2 96.8 96.9 99.0 98.4

Turndown ratio 1.1 3.6 1.0 1.1 0.5 1.0 1.0 3.2 0.8 1.7


Masters of Logistics Webcast logisticsmgmt.com/masters09 • Sept. 29th 2 p.m.

“In light of this uncertainty, we are see-ing many shippers proactively managingthe primary aspect of volatility they cancontrol—contracted freight rates.”

— Belinda Griffin, Capgemini


OCEAN SHIPPING :

BY PATRICK BURNSON, EXECUTIVE EDITOR

As the global rate structure stabilizes for ocean carriers, what can shippers expect byway of specialized service and available capacity? Our panel of industry experts pro-vides an overview of current market trends and a working rate forecast to help shippersset future strategy.

Peak Season is an oxymoron this year, as vol-umes fell far below the demand cycle of yearspast. But carriers seized the opportunity

nonetheless, by rationalizing service and pulling incapacity in the most lanes with heightened traffi c.

Meanwhile, shippers are being charged more forvalue-added services irrespective of shipping andsourcing imperatives, and the rates seem to be stick-ing. As supply chains become leaner, ocean shippersare now looking for market intelligence that canoffer transactional advantages as well as strategicdirection as they’re gearing up for their 2010 plan-ning—and that’s just what we set out to offer.

Our panel of international ocean carriage special-ists consists of: Jon Monroe, president of Shanghai-

based Monroe Consulting.; Philip Damas, divisiondirector of Drewry Supply Chain Consultants inLondon; Michael Berzon, president of Mar-LogInc., a supply chain optimization consultancy spe-cializing in international trade and chairman of theWashington, D.C.-based National Industrial Trans-portation League’s ocean cargo committee; andPaul Bingham, managing director with IHS GlobalInsight Inc. in Washington, DC, who has 26 yearsof experience providing trade and transportationeconomic analysis.

The spirited give-and-take nature of the dis-course should give shippers an idea of how collec-tive and individual carrier behavior will affect theirown global operations.


TRANSPORTATION TRENDS

LMX090901TSocean_ID 30LMX090901TSocean_ID 30 9/1/2009 11:19:04 AM9/1/2009 11:19:04 AM

Logistics Management: With somany carriers scrapping tonnageand canceling new orders, willshippers have the capacity whenthe economy recovers?

Paul Bingham: The simpleanswer is yes. The pace of therecovery in trade will not see ship-per volumes overtake containershipfl eet capacity. The large overhangin worldwide container capacity, evenaccounting for increased scrappingand order cancellations, will continueto exceed underlying container tradedemand for several years.

Jon Monroe: But no one expectsthe economy to rebound anytimesoon. While the economy will recover,we may not see the same level of vol-umes that we saw in 2007 for manyyears—and let us not forget that theEU market has dropped as well. Itmay be well into the middle of thecoming decade before there is a shiftin the supply and demand equation inthe Pacifi c. What we are seeing is nota correction but a restructuring of thebuying habits of America; and if thisturns out to be the case, we may haveships sitting idle for some time.

Philip Damas: The problem isnot whether there will be enoughcapacity, but whether enough oceancarriers will survive and whetherthe capacity will be operated whererequired, rather than laid up andmothballed.

LM: Can shippers expect any newcapacity coming online?

Michael Berzon: Many carriers aretrying to minimize overhead, given thereduced revenues during this recession,by trying to defer or cancel new capac-ity. Others are going ahead with theirearlier orders on the assumption thatthe new tonnage will be needed whenconditions start to return to earliervolume levels.

What capacity is being mothballedcan eventually be returned to serviceto meet demand. During these peri-ods, as demand pushes the supplyof space, we would expect rates toincrease. In those trade lanes that areparticularly squeezed, one can expect

lines with capacity to enter them inorder to achieve market share in anow profi table trade lane.

Damas: I’ll be blunt: With the hugeorderbook for new containerships, weforecast that there will be at least 20percent global over-capacity in 2010,2011, and probably also in 2012.

LM: In the meantime, what’shappening to the existing pricestructure?

Damas: The Drewry Hong Kong-Los Angeles container rate bench-mark for week 28 was $871 per 40-foot container, a 57 percent fall fromthis time last year. Pricing structuresfor freight rates have collapsed as vol-umes fell and overcapacity increased.The relationship between freight ratesand carrier costs in this sector has van-ished. In fact, ocean carriers are cur-rently trading with negative cash fl owsand often not even covering their vari-able costs.

Bingham: Supply and demanddynamics have worked with fallingprices encouraging more scrappingand lay-up of vessel capacity. Withthe bottom of the recession and tradedemand declines having been reached,the market is now just starting torecover, especially with the rational-ized service offerings and vessel lay-ups, though at levels well below thosenecessary for carrier fi nancial health.

LM: Would you say rates have hitbottom?

Monroe: I would say that rateshave hit bottom. In fact, the carri-ers, after having negotiated in goodfaith, are now renegotiating by tryingto implement a second GRI (GeneralRate Increase). While everyone sym-pathizes with the carrier’s plight, noone is happy to go back to the draw-ing board after they already calculatedtheir costs for the year. So, it’s a tugof war between carrier and customerto stabilize the pricing structure.

Berzon: Obviously, given thereduced volume cargo and a highdegree of capacity, prices are at his-toric lows. However, there are signsof increases in a number of trades.

The Transpacifi c Stabilization Agree-ment (TSA), which serves the Asia/U.S. trade, has set a signifi cant tar-get price increase. They still do notunderstand that shippers are awarethat different carriers have differentcost structures. In addition, within afl eet, different ships have differenteconomics.

LM: Bunker fuel rates are alwaysa concern. Will surcharges keeppace with demand in the future?

Berzon: The problem with sur-charges is that the basis of determin-ing them has been historically non-transparent. Some carriers, to theircredit, have attempted to disclose theformula for calculating them. Whenprices rise, as they did last year, thehigh surcharge level tends to stayin place long after fuel prices havefallen. Bunker surcharge formulascan be jointly developed by a shipperand a carrier and included in a ser-vice contract.

Monroe: I share Michael’s view. Itwill always be a supply and demandstructure, meaning commercial con-sideration may force the carriers tocompromise on the bunker. But ifthe carriers do not get their proposedGRI, don’t count on it.

Bingham: Agreed. If the carriersshow discipline, surcharges couldkeep pace with demand in the future.This would mean surcharges wouldbe used to represent the neutral passthrough of variable costs that they’reintended to be. However, it may alsobe that carriers fall to the temptationto use the application and setting ofrates of bunker surcharges to becomea mechanism for hidden rate compe-tition, in which case they won’t keeppace with demand.

LM: U.S. West Coast ports havebeen losing share in recent months,with more direct calls being madeto Canada and Mexico. Is this atrend?

Monroe: Yes and no. Many com-panies started shifting their distribu-tion to the East Coast from the WestCoast. Especially after inland rates



took the big hike over the past threeyears. So while carriers and import-ers started to move from SouthernCalifornia, the port of LA/Long Beachwas already losing business to the EastCoast.

I think there are few trends, onlyreactions…and those reactions will bebased upon the real cost of distribu-tion. As to how the Canada and Mexicoports will affect the West Coast: It willprobably shift business away. However,if West Coast inland rail costs were togo down, ocean carriers will call thereagain. So I don’t see a trend, only reac-tions based upon fi nding the lowestcost to market.

Bingham: Unwanted growth inglobal containership fl eet capacitymakes the addition of more direct callspossible, and an alternative to layingthe ships up. With the exception of thetwo weekly calls at Prince Rupert, newcalls in Canada are serving the Cana-dian market. Likewise, the Mexico callsare not driven by U.S. trade diversionthrough Mexican ports but the underly-ing Mexican trade.

The long-term trend will be a contin-ued rationalization of selection of portgateways by shippers, driven by inlanddistribution networks that are partlyinfl uenced by patterns of consump-tion, locations of distribution centers,and intermodal rail and trucking rates.Some U.S. Atlantic Coast ports havegained share (despite declining vol-ume) in the recession in advance of theexpansion of the Panama Canal, withlow all-water service rates combinedwith improved inland connections fromthese ports.

LM: How have market conditionsaffected intermodal?

Berzon: As far as intermodalfreight is concerned, recent increasesin costs for operating in and out ofthe U.S. West Coast is forcing trans-portation decision makers to look foralternatives. This includes Canada’sPrince Rupert that now has excellentrail service to the Midwest and is aday shorter in sailing time from manyAsian ports.

Mexico is also making improve-ments in their port and rail infrastruc-ture which should become viable in a

few years. There is also the fact thatwhen the Panama Canal expansion isfi nished early in the next decade, thatwill present still another alternative.Of course there will always be sig-nifi cant traffi c through these ports toserve large local markets.

LM: Carriers are also telling usthat they’ll be “slow steaming”on more routes around the capesrather than through the Canals.Any truth to this?

Berzon: That question is bestanswered by the carriers based onthe agreement they have with theircustomer for time, place, and pricefor service. It’s not unusual for someshippers to look for “slower” services,usually carriers that call at many portson extended routes. The carrier ben-efi ts from carrying the cargo and theshipper benefi ts from having inven-tory in transit which frees up space inlandside warehouses—it’s a win-winsituation.

Bingham: We can confi rm thatslow steaming is now quite commonwhile the number of services divertedaround the Cape routes instead of tran-siting the Canals is very limited. Thefact that any east-west services pre-viously operated through the Canalswould divert that far is a measure ofthe overcapacity in the industry, therelatively low bunker costs, and thelack of discounting of Canal tolls.

LM: Barriers to entry are high, butdo you see any new players enter-ing the business? An integratorperhaps?

Monroe: I can’t say it would be asmart thing to do. But you’re correct,barriers to entry are high and the oper-ational costs are high as well. I justdon’t see it. Where is the money?

Bingham: Though ships can beacquired very cheaply right now, it’shard to imagine any company beingattracted to enter the sector as a newoperator with such an overhang ofcapacity and consequential poor out-look for signifi cant rate recovery. It’spossible that a new player could buyinto an existing carrier in poor fi nan-cial shape to set the stage for a pos-sible larger role several years down

the road, but even that seems unlikelygiven that the integrators and otherpotential players are not in strongfi nancial shape in their original mar-kets either during the recession.

Berzon: Well, before we see newplayers entering the ocean liner busi-ness we will likely fi rst see some merg-ers among existing ocean carriers anda few current players departing. Any-thing beyond that is pure speculation.

LM: Considering everything wediscussed, what advice can youoffer to ocean shippers headinginto 2010?

Damas: Shippers must pay moreattention than ever before to risks intransportation procurement. The riskof carrier bankruptcies, intermediarybankruptcies, unexpected terminationof ocean services, cargo theft, and cargoliens are just some of the high-risk areasthis and next year.

Actually, I’m sure many shipperswould prefer to go back to the timewhen the key risk was infrastructurecongestion and delays. As Drewry saidin its recent report on risk managementin international transport and logistics,savvy shippers are implementing for-mal risk management plans to mitigatenew risks and respond to unavoidablerisks.

Bingham: Shippers should closelywatch recovery of the economy andtrade volume growth to understand thedemand conditions in which they willbe purchasing services. They shouldalso closely watch the collective man-agement of container capacity by theindustry to see if some carriers addservice capacity back so quickly inattempts to grab market share that uti-lization actually falls. Then the shipperswill know whether the supply demandbalance of deployed capacity remainsin their favor even as recovery in theeconomy and increases in volumes takehold.

Monroe: Put your head down andlook for stability. But do not look forlower costs. They are as low as they willget now. Work on stabilizing and secur-ing your inbound supply chain. L

Patrick Burnson is Executive Editorof Logistics Management

Ocean strategies, continued



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Sourcing successfully

I N T H E N E W

Market and economic changes have altered China’s sourcing landscape. However, there is no strongevidence that China’s role as a major sourcing and manufacturing hub is diminishing. Our expertreveals what these sourcing shifts mean to your supply chain operation.

Back in April, Logistics Management andAccenture collaborated on an articleentitled “Right Shoring: A fl exible supply

chain strategy for tough times.” The story’s premisewas that operational excellence stems most directlyfrom a company’s ability to react quickly—but notimpulsively—to global market changes and macro-economic shifts. Using sourcing to make our point,we explained that blending on-shore, near-shore,and far-shore operations often serves companiesbetter than acquiring materials solely from distant,low-cost countries.

One case example was China, whose sourcingprofi le is somewhat different from several years ago.Contributing to the country’s ongoing advantageare immense manufacturing capacities and laboravailability as well as low (albeit rising) labor costs.However, China’s productivity levels are also lower,

which neutralizes the labor advantage somewhat.In addition, North American and European

companies are discovering that sourcing solelyfrom distant venues (such as China) can over-expose them to the brutal effects of fl uctuating oilprices and unpredictable currency swings. Mono-lithic far-shore sourcing strategies also make it dif-fi cult to respond quickly to rapid shifts in customerdemand. Together, these realizations have begunto change how China is positioned in the globalsourcing saga.

However, the April article did not touch on themany changes engendered by the above shifts. Aremore U.S. and European companies fi nding alter-natives to China-based sourcing? And what are thesupply chain management implications for compa-nies with China-focused sourcing investments oraspirations? Following are some insights and ideas.

BY JONATHAN WRIGHT, GLOBAL DIRECTOR OF SUPPLY CHAIN FULFILLMENT, ACCENTURE

GLOBAL LOGISTICS


LMX090901GLchina_ID.indd 34LMX090901GLchina_ID.indd 34 9/2/2009 10:07:10 AM9/2/2009 10:07:10 AM

CHINA REMAINS A TIER ONESUPPLIER

No company or country maintainsan indefi nite, unassailable competitiveedge; and China is no different. For awhile, China seemed to come about asclose as any country ever has to being aone-stop shop. But things have changedand to its credit, China is adapting.

As shown in Figure 1, labor-intensiveitems such as clothing and textiles usedto represent the bulk of products sourcedfrom China. Today, products with highertechnology content are among its topexports. However, even with these shifts,it’s imperative to remember that China’srole as a critical worldwide source ofgoods and materials is not in jeopardy.

Companies, customers, and commod-ities come and go, but China continuesto be one of the best and most robustsourcing opportunities there is—withplenty of opportunities and solid play-ers. Consider fi ve reasons why Chinarepresents as large (or larger) a sourcingopportunity as ever before:

1. Dips in the global economyhave left China with a lot of excessmanufacturing capacity (50 per-cent or more in some industries).This could make now an excellent timefor global companies to step up sourc-ing activities. Compare the situation toa down stock market, which is often theideal time to buy strong but undervaluedcompanies.

2. Dramatic overcapacity alsoexists in ocean freight. Hundreds ofvessels are currently fl oating fallow inHong Kong’s harbors. No one expectsthis situation to turn around quickly,which means the time could be right tolock in ocean shipment contracts.

3. China’s market (domestic)growth is about as promising as anyeconomy in the world. Most compa-nies’ sourcing decisions need to considerthese growth prospects, along with thepotential to serve those markets witheasily available components and mate-rials (i.e., those sourced in China orthereabouts).

4. Although China’s labor costsare rising, they are still signifi cantlycheaper than Western countries.Moreover, increasing labor costs may

be suppressed by China’s constantpush toward the establishment of newresources and facilities in outlying areasof the country—where labor costs arenaturally lower. The challenge, of course,is that obtaining goods from more ruralcommunities in China adds more timeand distance to the sourcing equation.

5. Most of China’s leading sup-pliers have dramatically improvedtheir product/service quality byimplementing control mechanismsand systems, renewing manufactur-ing lines, and increasing the talentpool. Chinese companies are moreopen to continuous improvement meth-odologies as well as collaboration withinand across industries, with overseaspartners, and with third parties. Thisreceptivity to teamwork and improve-ment clearly makes China more desir-able from a sourcing perspective.

TRENDS IN SUCCESSFUL SOURCINGChina’s role as a premier source of

components and materials may not bein jeopardy. However, the evolution ofglobal business and the tenuous state ofthe world economy demand that west-ern companies reexamine their sourcingstrategies and operations in China.

One reason is that a fair number ofChinese suppliers have been hurt bycustomer bankruptcies or (somewhatless lethally) customers’ inability to payon time. As a result, some Chinese sup-pliers are demanding more stringentpayment terms, particularly from newcustomers.

Other suppliers, however, are seek-ing to attract customers by taking a morefl exible approach to payment terms. Nomatter which way a supplier is inclined,it strongly behooves buyers to under-stand the fi nancial health and evolvingpolicies of suppliers.

Price negotiations with Chinese sup-pliers also require high degrees of sophis-tication and preparation. Irrespective oftheir China-sourcing experience, com-panies should ensure that contracts andproposed changes are well-researched(fact-based) and sustainable. Obtain-ing short-term price reductions from aChinese supplier without any commit-ment to a long-term partnership will

increase the risk of the supplier walk-ing away from an agreement when theeconomy turns around.

Tools such as price indexing (allow-ing limited periodic changes in line withraw material prices) can be very effec-tive in this context. However, there arestill many Chinese suppliers that are notwell-versed in price-indexing on con-tracts. Prospective customers should beready to provide detailed explanationsand illustrations of price-indexing todemonstrate its win-win potential.

This may also be a good time to con-sider working with highly reputable,large logistics providers. Entities likeDHL, FedEx, and UPS are structuredto help businesses of all sizes sourcequickly and reliably. And the added costsassociated with not doing it yourself arelargely neutralized by reduced assetsand overhead as well as the likelihood ofachieving greater convenience, reliabil-ity, security, consistency, and scalability.

Moreover, transport costs withinand out of China are relatively low andrepresent only a small portion of totallanded costs when shipping globally. Alltold, the incremental cost-bump associ-ated with a top-quality third party is rela-tively small.

Companies seeking a major sourc-ing presence in China may also wishto develop international procurementorganizations (IPOs) rather than acceptthe limitations generally associated withless-effective trading agents, joint ven-tures, and wholly owned foreign enter-prises. Think of IPOs as extensions of acompany’s global procurement organi-zation—shared services entities staffedwith specialized sourcing teams thatalso perform dedicated order- and logis-tics-management functions.

IPOs often represent a company’sbest chance to reduce sourcing costs andlimit sourcing cycle times. They also putlocal capabilities “on the ground,” ensur-ing greater proximity to supply marketsand better responsiveness to local oppor-tunities. Plus, the presence of an inter-national procurement organization helpsguarantee that all forms of procurementinformation are communicated to cor-porate business units worldwide.

Permanently eliminating costs from


Want more information on sourcing in China and around the world?Check out LM’s April feature: Right shoring: A flexible strategy for tough times

logisticsmgmt.com/rightshoring


supply chain operations, as well asfrom the cost of acquired goods, is alsovital. Good deals on commodities andlogistics contracts are fi ne (increasinglyessential, in fact), but they generallyaren’t ways to reduce costs for good.Where will your sustained cost reduc-tions come from?

Other keys to sourcing successinclude maximizing fl exibility and cre-ating a mind set of continuous improve-ment—two business behaviors thathelp ensure a company’s ability to takeadvantage of opportunities as they arise.Consider that shifts in fuel prices, mar-kets, and economies are global ubiqui-

ties, but that within China, changes intariffs, rebate rates, and costs are justas constant.

There is also the challenge of myriadlanguages and subcultures (estimatesare that up to 200 different languagesare spoken across China). All thismeans that companies must constantlyassess and revise their global sourcingapproaches by:

Enhancing planning and forecastingmechanisms to maximize responsiveness.Insiders believe that forecast accuracyapproaching 70 percent is typicallyassociated with high performance.

Segmenting the supplier base. Con-sider letting a third party source themore predictable items and focus in-house experts on more complex catego-ries such as capital equipment or directproduction materials.

Lastly, few companies would dis-agree that high performance in globalsourcing requires comprehensive per-formance metrics—identifying andmeasuring the business behaviors thatcontribute most directly to total costof ownership. Acquisition and logistics

costs may be the most obvious mea-sures, but numerous other things alsoaffect performance, including costsassociated with customs, tariffs, andduties; obsolescence; lost sales due topoor product quality or unacceptableservice; warranty and service; and theramifi cations of longer times to market.

THE BAR HAS NEVER BEENHIGHER

Market and economic changes havealtered China’s sourcing landscape.However, there is no strong evidencethat China’s role as a major sourcingand manufacturing hub is diminishing.Clearly, the country’s role is changing.But as a top tier venue for sourcingand selling, China may have more tooffer than ever before. Global sourc-ers and marketers may need to “refi netheir searches,” but no forward thinkingorganization will conclude that the Tigerhas been caged. L

Jonathan Wright is Global Director ofAccenture’s Supply Chain Fulfi llmentpractice.

China, continued


Optical, Photographic,Precision, Time andMedical Instruments

Mineral Products

Raw Hides and Skin, Leather, Travel Goods, Hand Bags, etc.

Machinery, ElectricalEquipment and Parts

Base Metalsand Products

Pearls, Jewelry and OtherPrecious Products

Other Manufactured GoodsVegetable Products

Live Animals and Animal Products

Plastic and Rubber

Products of the Chemicalor Allied Industries

Footwear,Headgear,Umbrellas,etc.

Textiles andTextile Articles

15

7

0%0%

40%

60%

5% 10% 15% 20% 25%

Growth Rate (VARG over Y04 and Y05)

75

96

Vechicles, Aircraft,Vessels, Rail Equipment

2

Special Servicesand Others

Stone, Plaster,Ceramic Products,

Glass andGlassware, etc.

Pulp, Paperand Others

Food and Beverage

Wood and WoodProducts, Baskets, etc.

6

4

2

5240

8

11 25

20

10

8

5

4

2

1

Fig. 1. China is exporting more high-quality and technology products thanever. The size of the bubbles refl ectsthe value of China’s 2005 exports in$ billions; blue bubbles representproducts and categories with high-quality and technology requirements.The X-axis is the percent of totalexports for each category, and the Y-axis is the year-over-year growth rateof that category.

Want more information on sourcing in China and around the world?Check out LM’s April feature: Right shoring: A flexible strategy for tough times

logisticsmgmt.com/rightshoring


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IO technology provides significant ROI, and it isn’t as complex as it once was. However, it’s yetto gain significant traction among logistics professionals. Our tech correspondent sets the record

straight on IO and explains how Dell made a strategic move to put it to good use.

In good times, it’s simple enough for shippers to stock upon products that may or may not “fl y off the shelves” ina timely fashion. When things get tight, however, inven-

tory management becomes crucial as companies can’t affordto tie up precious dollars in stagnant stock. In other words:today, the leaner the better.

Inventory management can be challenging for organiza-tions of all sizes, especially for those with multi-echelondistribution networks where inventory resides in multiple

locations. Enter inventory optimization (IO), a supply chainsoftware option that’s come into its own by helping fi rmsachieve optimal product deployment and improve opera-tional performance by calculating more accurate inventorytargets.

Marketed by vendors like Oracle, IBM, JDA, Optiant,SmartOps, SmartTurn, and ToolsGroup, just to name a few,IO software has become an important tool to aid manufac-turers and retailers in managing their overall supply chain

BY BRIDGET MCCREA, CONTRIBUTING EDITOR

SUPPLY CHAIN TECHNOLOGY


INVENTORY OPTIMIZATION :

Game of strategy

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inventories more effi ciently or by help-ing companies better understand theimpact that specifi c business decisionshave on overall inventory investment.

“Inventory optimization technologyhas moved beyond its previous ‘blackbox’ perceptions and has increasinglybeen adopted and deployed by leading-edge companies,” says Simon Ellis, prac-tice director for supply chain strategiesat the analyst fi rm IDC ManufacturingInsights. “Decision processes such asoverall sales, inventory, and operationsplanning (SI&OP); profi table proximitysourcing; and new product innovationcan all be aided by this technology aswell,” he adds.

Sure, this sounds great on paper; buthow do logistics and supply chain profes-sionals go about assessing whether nowis the right time to make the investmentin a tech-based inventory managementsystem? Over the next few pages we’llexamine the benefi ts and challengesthat shippers can expect when investingin inventory optimization software. We’llalso assess the technology’s current sta-tus in the marketplace and then lookbehind the walls of a cutting edge sup-ply chain operator that’s currently reap-ing the rewards of its IO investment.

GAINING TRACTION?Inventory optimization software is

starting to gain some traction in themarketplace, especially now when morecompanies are racing to fi nd ways towork smarter, better, and faster—but it’syet to catch fi re.

In a recent survey of manufacturersusing inventory optimization solutions,Ellis says Manufacturing Insights foundthat, depending on the specifi c inven-tory problem, return on investment forIO can be “signifi cant and mean-ingful.” Deployment typicallytakes four to six months, with keyinventory and related benefi ts evi-dent in less than 12 months.

Typical business questionsthat an inventory optimizationapplication can address, accord-ing to Ellis, include:

• How much inventory shouldI hold of each product?

• Where is the most cost-effi -cient point to store that inventory?

• My products are often

seasonal or cycli-cal in terms ofdemand, so howdo I most effi -ciently plan anddeploy overallinventory?

• What busi-ness policies aredriving inventoryinvestment acrossthe entire supplychain?

• If I must improve service, howmuch incremental inventory investmentwill I need?

• Conversely, if I decrease service lev-els, how much inventory can I free up?

With the answers to these questionsin hand, Noha Tohamy, vice presidentof research for AMR Research, saysthat companies will be better equippedto meet the challenges they’re facingin today’s business environment. “Theeconomy has increased the focus oninventory optimization, as every shipperwants to minimize or optimize workingcapital,” says Tohamy. And despite therising interest in IO, Tohamy says “wehave just scratched the surface from anadoption standpoint.”

Ellis concurs, adding that while heexpects investment in such applicationsto grow over the next three years, inven-tory optimization is “still a relativelysmall category.”

Steve Banker, Boston-based ARCAdvisory Group’s director of supplychain management, says inventory opti-mization applications’ lack of traction atthis stage can be blamed on the fact thatthe category itself isn’t very well under-stood. Plus, he states, existing demandmanagement systems are constantly

being upgraded and enhanced, whichmeans it’s only a matter of time beforeshippers gain inventory optimizationcapabilities from their existing vendors.

“Companies know that they can justwait around and eventually—the nexttime they upgrade their supply chainsoftware—they’ll get the optimizationfunctionality with it,” says Banker.

“Users are going to their vendors ofconventional inventory optimizationtools to see if there’s a way to buy soft-ware services from them,” says Tohamy,who adds that standalone inventoryoptimization systems from vendors likeSmartOps or Optiant can require multi-million dollar investments to cover boththe license and the consulting services.

To circumvent such a large invest-ment, Tohamy says some companiesare focusing on the tactical side of theinventory management issue by sourcinggoods from low-cost countries, assessingsupplier bases on a quarterly or biannualbasis, and/or ensuring that organizationalgoals are properly aligned with inventorymanagement goals across all networks,suppliers, DCs and customers.

“If you have regional DCs that areincentivized to keep inventory low,regardless of whether it’s in the overallcompany’s best interest…then you won’t

be able to optimize inventory lev-els across your entire multi-ech-elon network,” says Tohamy.

DELL PUTS IO TO USEWell known for its innovative

manufacturing and distributionstrategies, Dell is one shipperbenefi ting from a global inventoryoptimization implementation thattook place in mid-2008. Based inRound Rock, Texas, and serv-ing a worldwide customer base,the company designs, develops,

Axxom Software AG (www.axxom.com)IBM/ILOG/LogicTools (www.ibm.com)i2 Technologies (www.i2.com)Optiant (www.optiant.com)Oracle (www.oracle.com)SmartOps (www.smartops.com)ToolsGroup (www.toolsgroup.com)

Source: IDC Manufacturing Insights

Inventory Optimization Vendors

Looking at Inventory Process or Policy Changes

Looking at Inventory Technology Enhancements

Source: Aberdeen Group, May 2009

Companies are actively re-evaluatingInventory Management

91%

61%


ILL

US

TR

AT

ION

BY D

AN

IEL G

UID

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manufactures, markets,and supports desktop PCsand workstations, notebookcomputers, servers, net-working products, and stor-age solutions.

Always looking for waysto work smarter, better,and faster, Dell kicked offits inventory managementimprovement efforts in 2007with two inventory optimi-zation pilots, including onethat spanned the fi rm’s NorthAmerican operations. “At thetime, we were concerned lessabout the accuracy of thedata and more about inven-tory management and settingpolicies across our variouslocations,” says Ramesh Raja-gopalan, enterprise architectfor Dell’s global supply chain.

A regionally-specifi c pilotfollowed that revealed variousmisaligned areas within Dell’sinventory management sys-tem. “In some areas we had too muchinventory, and in other parts we had toolittle,” recalls Rajagopalan, adding thatthe exercise also revealed that replen-ishment cycles weren’t always coordi-nated with consumption.

Armed with those conclusions—andthe prediction that inventory could bereduced from $6 million to $3.5 mil-lion, and without affecting service lev-els—Rajagopalan approached seniormanagement about investing in i2’sinventory optimization, a software thatwas selected based on its “vigorousanalytic capabilities,” he says. Aftergetting the go ahead, he and his teamselected two of Dell’s largest parts sup-pliers and rolled it out to those vendorsin February 2008.

Implementation—which Dell refersto as a “process pilot”—took about 90days, and was focused primarily onmanaging suppliers and replenishmentprocesses via a constant inventory pol-icy. Over time, that policy would allowDell to set inventory policies by individ-ual part numbers—and at specifi c loca-tions across the globe—while managingsupplier replenishment based on thosetarget numbers.

By the end of 2008, Rajagopalan

was able to show senior management aone-time reduction of inventory of 55percent of parts from the two initialvendors. The solution was slowly rolledout to the remainder of Dell’s supplierbase, allowing the manufacturer tomore closely integrate with its vendorsvia a collaborative platform that didn’tpreviously exist.

More importantly, the manufacturernow has a tool that can analyze its supplychain activities and utilize the fi ndings toferret out root causes and identify poten-tial problems. Having that informationin hand helps Dell make good decisionsregarding its inventory management,even if it simply means updating mate-rials requirement planning (MRP) andnotifying suppliers of those updates.

“There are many simple actionsthat you can take and that go a longway in effectively managing businessprocesses,” says Rajagopalan. “Whilethe inventory optimization tool itselfis the enabler, the real benefi ts for ushave come from the simple, correctiveactions that produce signifi cant resultsacross the supply chain.”

SIGNIFICANT AND GROWINGIn its recent inventory management

survey, Aberdeen Group of Boston found

that 91 percent of companiesare currently reviewing oppor-tunities for improving inven-tory performance throughprocess changes. Sixty-onepercent say they’ve made—or,have been asked to make—inventory-related technologyrecommendations within theprevious six months.

Whether the need forimproved inventory manage-ment techniques is beingdriven by the economy or bycompanies’ growing aware-ness of the impact that inven-tory has on the bottom line,the need for solutions thataddress the issue continues.

Nari Viswanathan, vicepresident/principal analyst ofsupply chain with Aberdeen,says the technology vendorsthat focus less on the tech-nology itself and more onthe people and processesinvolved with inventory opti-

mization are the ones that will gain trac-tion in the marketplace over the nextfew years. “You can get some incremen-tal benefi t by maintaining customer ser-vice levels while reducing inventory,” hesays, “but the biggest advantages comefrom making structural changes withinyour supply chain.”

While the inventory optimizationmarket is relatively small comparedto overall supply chain management(SCM) spending, IDC’s Ellis says it’sstill a “signifi cant and growing” segment.Based on Manufacturing Insights’ ITspending taxonomy and vendor track-ing, Ellis estimates the current globalmarket for inventory optimization to beabout $60 million.

“We believe that over the next fi veyears the segment will experiencehealthy growth in the 10 percent peryear range,” says Ellis. “Inventory opti-mization technology provides signifi -cant value, and the technology itselfisn’t as complex as it once was. Anycompany that’s not at least looking atthese options right now is doing itself adisservice.” L

Bridget McCrea is a Contributing Editorto Logistics Management

Inventory optimization, continued

Source: Aberdeen Group, May 2009

Key pressures to improveInventory Management

29%38%

20%25%

15%30%

7%36%

Corporate Need to Improve Return on Invested Capital

Shortage of Working Capital to Support Operations/Expansions

Pressure to Improve Service Levels

Market Pressure to Reduce Order-to-Delivery Lead Times

Increasing Lead Times, Variability, and Carrying Costs

Very Influential Critical

10%26%

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Site selection experts from both real estate and supply chain think tanks have identified ahandful of trends that are affecting how and where DCs are now being located. By proac-tively responding to these trends, companies can better position themselves for the nextwave of economic recovery.

These days, hardly anybody in charge of ware-house/DC site selection is spending moneyor looking to expand a distribution network.

In fact, almost everyone’s playing defense—lookingfor ways to reduce costs.

A more likely site-selection scenario today is onewhere managers are closely studying supply chainsthat may have become bloated from years of contin-ued growth. They’re checking for redundant facilities

and considering whether consolidation makes moresense. They’re not necessarily expanding their distri-bution network footprint, instead they’re closing DCsand opening new ones at sites that make the mostbusiness and economic sense—perhaps near ports orcloser to customers.

In the next few pages, site selection experts fromboth real estate and supply chain think tanks identifyfi ve trends that are affecting how and where DCs are

BY MAIDA NAPOLITANO, CONTRIBUTING EDITOR

SITE SELECTION:

WAREHOUSE & DC Site selection

5 trends trends for the new economy

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being located in the new economy.By proactively responding to thesetrends, companies can better posi-tion themselves for the next wave ofeconomic recovery. So, if you’re oneof those managers choosing to stayahead of the curve, you should starttaking notes.

HANDFUL OF TRENDS1. Growing demand in emerg-

ing global markets. Despite a slowglobal economy, Steve Ellet, a prin-cipal with Chainalytics, an Atlanta-based supply chain consulting fi rm,sees emerging markets around theworld still growing at a faster pacethan traditional established markets.Many experts point to emerging mar-kets in Asia andEastern Europe asleading the way, withChina and India asthe most dominantgrowth marketsbecause of theirlarge populationsand growing upperand middle class.

According to Ellet, global com-panies will need to build networksand open sites to fulfi ll the demandin these markets—the catch is thatthey’re doing it in unfamiliar geog-raphies. Working closely with localpolitical representatives can helpovercome this hurdle.

2. Emerging logistics hubsand the expansion of the Pan-ama Canal. It stands to reason thatbecause certain markets are emerg-ing, so too are the logistics hubs sup-porting them. Adam Bruns, managingeditor for Site Selection magazine,points out how port expansion activi-ties are in full swing in areas such asNovorossiysk (Russia), Laem Cha-bang (Thailand), and Manzanillo(Panama). He cites the “Russianenergy market, Asian imports, andthe increasingly interdependent eco-nomic heft of emerging economies”as examples of key drivers for theseexpansions.

But perhaps the biggest trend thatBruns says will be affecting site selec-

tion decisions for years to come will bethe completion of the Panama Canalexpansion in 2014. “Because of thatproject, big shifts are expected to occurin the distribution and transportationof cargo,” he says.

The expansion is expected toallow super-cargo container vesselscarrying 14,000 containers (whichis triple the capacity of the largestships crossing the canal today) totraverse the 50-mile waterway. Thenumber of DCs in close proximity tothe Gulf Coast and East Coast ports,and away from overcrowded WestCoast ports, are expected to growdramatically. How much will dependon whether these ports can make thenecessary changes in time to accom-

modate the larger ships.3. Navigating more stringent

fi nancing hurdles. Three years ago,fi nancing a new DC or plant wasalmost a given. Today, Tony Kepano,senior vice president of corporate ser-vices for CB Richard Ellis, observesthat just because you have a needdoesn’t necessarily mean that it’sgoing to be easily fi nanced.

Commercial sites are typicallyassessed as Tier 1, Tier 2, or Tier 3based on how fi nancial markets areviewing these sites. The deeper themarket—as in New Jersey which isconsidered Tier 1—the less risk forbanks to fi nance it. Adding a Tier 3 sitemay seem attractive in terms of reduc-ing transportation costs, but these sav-ings may be erased by the much highercost of capital that banks are associat-ing with that Tier 3 location. Becauseof this, Kepano emphasizes how it’snow more critical than ever to inte-grate the fi nancing piece into the siteselection decision-making process.

4. Opting for more fl exibilitywith 3PLs. Companies that are wary

about the economy are shying awayfrom building their own facilities andrunning their own DCs. Chainalyt-ics’ Ellet describes how some that arelucky enough to be expanding preferto contract with third-party logisticsproviders (3PLs) when opening a newdistribution point. According to Ellet,3PLs give companies the fl exibility topenetrate a specifi c geographic regionwithout spending much-needed capi-tal; yet they allow the company to takeadvantage of the reduced freight ratesthat come by entering the region.

5. Downward pressure on rentsand a “fl ight-to-quality.” Jules Nis-sim, senior director for Cushman &Wakefi eld of New Jersey Inc., noteshow certain submarkets are overbuilt

with so many spec-ulative buildingsthat the situation isputting downwardpressure on rents.Where rents havedropped off dra-matically from twoto three years ago,

companies that are doing well arecertainly taking advantage.

“They want to become more effi -cient,” says Nissim, “It’s a fl ight-to-quality and they’re leaving their olderfacilities and relocating to state-of-the-art facilities.” Nissim points outthat most are looking for 32-foot to36-foot clear buildings to maximizecube for storage, plenty of trailerparking, along with eco-friendly T5 orT8 lighting to save utility costs.

CONVATEC RETHINKS THENETWORK

Keeping these fi ve trends in mind,let’s now examine a recent networksite selection project undertakenby ConvaTec, the Princeton, N.J.-based medical device manufacturerthat’s now in the midst of rebuildingits European distribution networkcloser to customers, with the help ofChainalytics.

Specializing in ostomy and woundcare products, ConvaTec used to bea division of Bristol Myers Squibb(BMS). But in August 2008, this

Site selection WAREHOUSE & DC

The biggest trend that will be affectingsite selection decisions for years to comewill be the completion of the PanamaCanal expansion in 2014.



well-performing business unit, withsales of more than $1.5 billion dollars,was sold to a private equity fi rm andbecame a stand-alone company.

It had previously shared distributionservices with two other BMS divisions.But for ConvaTec to now succeed onits own, Todd Smith, the fi rm’s vicepresident of global supply chain, knewhe needed to move quickly to put thecompany’s own distribution network inplace. This was particularly apparentin Europe where products were storedand distributed from 14 DCs across 14countries using 14 different 3PLs.

Another twist kept matters interest-ing: A month after being sold, Con-vaTec was merged with a smaller Euro-pean-based medical device companycalled Unomedical that specialized incatheters and medical tubing devices.The merger added seven more DCsto the network for a total of 21. “Notonly did we have to fi gure out what todo with our own network, but we hadto combine theirs as well,” explainsSmith. “And right off the bat we knew,based on our level of sales and volumes,that we could not possibly sustain thatamount of infrastructure.”

So, in July 2008, even before any dealhad closed, wheels were already set inmotion to strategize a plan for the com-pany’s rebirth. ConvaTec hired Chaina-lytics to create an optimized Europeandistribution network and answer twocritical questions: How many distribu-tion centers did the company need?Where should it put them?

Chainalytics gathered inbound andoutbound freight rates and routes andcontracted pricing from existing 3PLproviders to build a model of ConvaTec’sexisting distribution network that theteam validated against actual costs—andthen used it to test different scenarios.Tim Brown, a Chainalytics’ principalwho helped develop the model, adds thatall the scenarios were compared usingthe same criteria, with cost and serviceperformance being the most critical (SeeFigure 2).

Fewer DCs meant that they werefarther away from customers creatinghigher outbound costs. However, moreDCs meant higher warehousing andinventory costs but lower outbound


Figure 1. 2008 Top Metros by number of projectsTier 1: Metros with population over 1 millionRank Metro State(s) Count

1 Houston-Baytown-Sugarland Texas 179

2 Dallas-Forth Worth-Arlington Texas 156

3 Chicago-Naperville-Joliet Ill./Ind./Wisc. 138

4 Cincinnati-Middletown Ohio/Ky./Ind. 124

5 Detroit-Warren-Livonia Mich. 108

6 New York-Newark-Edison N.Y./N.J/Pa. 99

7 Pittsburgh Pa. 79

8 Columbus Ohio 77

9 Cleveland-Elyria-Mentoor Ohio 67

10 Charlotte-Gastonia-Concord N.C./S.C. 60

10 Washington-Arlington-Alexandria D.C./Va. 60

Tier 2: Metros with population 200,000 to 1 millionRank Metro State(s) Count

1 Dayton Ohio 41

2 Akron Ohio 39

3 Toledo Ohio 38

4 Allentown-Bethlehem-Easton Pa./N.J 29

5 Des Moines Iowa 28

6 Grand Rapids-Wyoming Mich. 27

7 Greensboro-High Point N.C. 24

7 Tulsa Okla. 24

7 Youngstown-Warren-Boardman Ohio/Pa. 24

10 Omaha-Council Bluffs Neb./Iowa 23

Tier 3: Metros with population less than 200,000Rank Metro State(s) Count

1 Sioux City Iowa/Neb./S.D. 20

2 Springfield Ohio 10

3 Danville Va. 9

3 Decatur Ala. 9

5 Florence S.C. 8

6 Jackson Mich. 7

6 Wheeling W.Va./Ohio 7

8 Blacksburg-Christianburg-Radford Va. 6

8 Bowling Green Ky. 6

8 Dubuque Iowa 6

8 Elkhart-Goshen Ind. 6

8 Muskegon-Norton Shores Mich. 6

8 Owensboro Ky. 6

8 Tuscaloosa Ala. 6

Figure 1 lists Site Selection magazine’s 2008 top 10 metropolitan area rankings based on cor-porate facility projects for Tier 1, Tier 2, and Tier 3 population groupings (March 2009).


costs. After numerous iterations, theteam agreed that an eight-DC solutionwould meet their needs.

From the very beginning, it wasclear that they would continue to use

3PLs. “We had no desire to make thecapital investments necessary to openour own DCs,” explains Smith. Thus,with this ideal network in place, theteam put together an RFP and sent it to3PL players that had a major presenceacross Europe.

Chainalytics then re-ran the modelwith the actual pricing provided byeach bidder. After much deliberation,ConvaTec selected Movianto, a 3PLprovider based in Stuttgart, Germany,to operate all but two of the eight DCs.ConvaTec decided to stay with its exist-ing providers in Italy and Russia, whileMovianto already operated their Ger-many DC. The team then selected fi venew sites in France, Spain, the U.K.,Denmark, and Eastern Europe.

In France, DC operations weremoved from a southwest region to onelocated in Paris in the midst of majorcustomers. In Spain, they relocated fromBarcelona to Madrid, allowing the com-pany to also serve customers in nearbyPortugal with reasonable transit times.

SHORTER,FASTER.

The Port of Montreal > the closest East Coast port to Chicago > the shortest transit time betweenEurope, the Midwest and Central Canada >open 365 days per year > direct-to-rail transfer for high intermodal efficiency. www.port-montreal.com

Figure 2

Number of Distribution Centers

As the number of DCs decreases, itbecomes more difficult to meet targettransit times to customers

We want to find the number andlocation of DCs that minimizes total cost

Outbound freight costs decreasewith the number of DCs as thedistance to customers shortens

Warehousing, inbound trans-portation, and inventory holdingcosts increase with the numberof DCs

Ope

ratin

g C

ost

Theoretical network costs modelshowing relationship of costs andservice level to the number of dis-tribution centers. (Chart courtesy ofConvaTec.)


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ConvaTec plans to complete migrationto the remaining three sites by the fi rstquarter of 2010.

By using multiple facilities with one3PL, the company achieved some lever-

age from a contracting standpoint. Oncein place, the new network is estimatedto save 10 percent in total logisticscosts. But perhaps the biggest side ben-efi t from this reconfi guration, according

to Smith, is that eight DCs are clearlymore manageable than 21. L

Maida Napolitano is a ContributingEditor to Logistics Management

Steve Ellet, principal, Chainalytics

On pushing for the continuous analysisof network models: “The effort to dothese large scale network models canget quite significant. Once you do one,put a team around it and keep it freshto justify the effort. Every month look athow you’re doing and compare it to whatyou actually said you were going to doin the plan.”

Tony Kepano, senior vice presidentof Corporate Services, CB RichardEllis

On communities, states, and their taxincentives: “When you’re in a flourish-ing economy, incentives are much easier

to come by. When things are tight andthere’s not a lot of tax dollars to floataround, there’s going to be an impacton local communities’ ability to offerthe incentives that they had promisedin the past. Practice due diligence toensure that they can deliver on thesepromises.”

Todd Smith, vice president of globalsupply chains, ConvaTec

On building site selection models:“Don’t try to be too precise becauseultimately there are a number of intan-gibles you still have to consider. Someof these projects can get really boggeddown with data. Avoid trying to tic and

tie everything to the last penny when it’sreally not worth it.”

Jules Nissim, senior director, Cush-man & Wakefield of New Jersey Inc.

On the site selection process: “Lookat every aspect that impacts the busi-ness. Consider the taxes and tax baseof the town. Understand the businessclimate in the town, the community, andthe state. Determine current and futuretax components. Study transportationcosts, the road networks, and proximityto ports. Check the availability and qual-ity of labor along with growth trends of aparticular region. Investigate availablereal estate opportunities.”

Sage advice from our site selection experts

LMX090901WDCsite_ID.indd 47LMX090901WDCsite_ID.indd 47 9/2/2009 9:12:23 AM9/2/2009 9:12:23 AM

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Logistics Management • September 2009 49S

With signs that thedeep global recessionmay fi nally be com-ing to an end, ship-ping analysts suggestthat there’s been a sea

change in how ocean-borne cargo will bedistributed in future years.

The impact this will have on NorthAmerican seaports will be signifi cant, sayanalysts, favoring those with the bestmultimodal infrastructure and fi nancing.Many of these ports have been considered

“alternatives” in the past, but are now re-garded as legitimate threats to establishedfi rst-call “Mega Ports.”

The subtle shift among the top tencargo gateways in the American Associa-tion of Port Authorities (AAPA) rankingsmay tell only part of the story. “If youlook carefully at the leaders, it becomes

clear that container throughput has beendown across the board,” says Aaron Ellis, aspokesman for the AAPA. “It’s a zero-sumgame,” he adds, noting that “one port’s lossis another port’s gain.”

At the same time, observes Ellis, whensome carriers reconfi gure a deploymentloop they’ll try to maximize the call byusing the biggest vessels in their fl eets. “Sothe ports with widest channels and deep-est drafts are at an advantage,” he says.

But that doesn’t mean a handful ofresourceful “alternative” ports won’t bechasing market share. Indeed, some of themost aggressive players are positioningthemselves for the economic rebound.

Panama Canal impactThe most obvious and pressing concernfor shippers today is how a major newhemispheric development will change the

The Port of New Orleans’ proximity to the Midwest via a 14,500-mile inland waterway

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50S September 2009 • Logistics Management



way ports will do business. This was madeclear when the Panama Canal Authority(ACP) and the Maryland Port Administra-tion (MPA) announced a Memorandumof Understanding (MOU) agreement toincrease economic growth and commercialactivity between the two entities.

Signed by ACP Administrator/CEO Al-berto Alemán Zubieta and MPA ExecutiveDirector James White, the MOU will helpspur trade, facilitate information shar-ing and promote the use of the all-waterroute—the shipping route to Asia fromthe U.S. East Coast via the Canal. The MPAoversees the six public marine terminals ofthe Port of Baltimore. “We’re expecting anew infl ux of vessels to East Coast ports in2014,” says Richard Scher, spokesman forthe Maryland Port Administration. “Wehope to capture some of that business, too.”

As part of the MOU, the ACP and MPAwill conduct joint activities and sharebest practices. Specifi c areas of focus willinclude research and data interchange,technical advancements, and person-nel training programs. The agreementexhibits each organization’s dedication tomeeting the anticipated increased levelsof international trade.

The Canal expansion program is alsoexpected to bring larger ships to the U.S.East Coast, and the MPA is undertaking

its own efforts to increase capacity. Forexample, The MPA is exploring the possi-ble use of a public-private partnership tooperate its Seagirt Marine Terminal andalso fund a 50-foot berth. The MPA’s goalis to have that berth in operation whenthe Panama Canal expansion project iscompleted in 2014. The Port of Baltimoreis currently one of only two U.S. EastCoast ports with a 50-foot draft.

The Canal expansion fi gures promi-nently in the plans of the South CarolinaState Ports Authority (SCSPA), and thePort of Charleston more specifi cally. Justthis spring, Mediterranean Shipping Com-pany (MSC), the world’s second-largestcontainer carrier, signed a new agreementfor business in Charleston through 2017.

“This signals MSC’s confi dence inCharleston’s ability to handle their needsnow and well into the future,” said FredStribling, the SCSPA’s vice president ofmarketing and sales. “We enjoy a strong,productive relationship with MSC, andwe anticipate a growing MSC presence inthe Port of Charleston.”

Charleston, with the deepest wateron the South Atlantic coast, routinelyhandles MSC vessels with design draftsof up to 47 feet and capacity for 6,70020-foot equivalent units (TEUs). The fi rstphase of a new, 280-acre container ter-

minal is slated to open in 2014. Striblinghighlighted the port’s navigational andoperational advantages in light of theextended agreement and expansion of thePanama Canal that is underway, notingthat the port has an excellent inland ac-cess to a growing cargo base.

Over the past decade, MSC hasexploded onto the Charleston shippingscene. The company’s existing presencein the port includes services to the westMediterranean, South America, Carib-bean, Africa, and Europe.

Gulf playersAnother indication that small ports canvie with bigger global gateways surfacedlast spring with news that Florida is ag-gressively wooing new business.

Just 11 days after signing a history-making pact with the Panama CanalAuthority, Port Manatee’s good fortunewas stroked again—this time by FloridaGov. Charlie Crist’s signature on a billexempting Developments of RegionalImpact (DRI) within three miles of theport’s boundary.

“The governor’s support creates hugemomentum to advance Port Manatee’sfuture in containerized shipping,” saysDavid McDonald, the port’s executivedirector. Prior to the governor’s action,each of Florida’s 14 deepwater seaportsonly benefi ted from state DRI exemptionsfor developments within their physicalboundaries. The new law extends port DRIexemption privileges to within a three-mile radius of each port, sparing qualifi eddevelopments the long process of permit-ting and speeding new projects forward.

In Florida, development projects reach-ing certain thresholds regarding acreage,square footage, land use, and parkingspaces can trigger a DRI review. Theprocess is lengthy and includes reviews bylocal, regional, and state planning agen-cies. Gov. Crist’s authorization of the newDRI exemption law further enhances the

The Port of Charleston, with the deepest

water on the South Atlantic coast, has

navigational and operational advantages

in light of the extended agreement and

expansion of the Panama Canal that is

currently underway.


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port’s ability to attract new industries anddistribution centers to the new Port Mana-tee Encouragement Zone—a 3,700-acreregion of land locally “incentivized” forcommercial development.

The governor’s action follows the passagelast May of a Manatee County ordinanceexempting 50 percent of local transporta-tion impact fees on developments withinthe county and the encouragement zone.Other Manatee County economic incen-tives provide qualifi ed developments furtherimpact fee relief of up to 100 percent.

Port Manatee had earlier signed aMemorandum of Understanding with thePanama Canal Authority to share infor-mation and participate in joint marketingefforts to mutually increase business op-portunities for each organization. “We’rethe closest deepwater port to the Panama

Canal,” says Steve Tyndal, senior directorof trade development and special projects.

If and when trade relations are restoredwith Cuba, adds Tyndal, the port will haveanother regional advantage due to itsproximity to that nation. The two-year ac-cord elevates Port Manatee’s profi le withinshipping circles to attract containerizedcargo to the port and in new develop-ments to the encouragement zone.

The Port of New Orleans, which isat the center of the world’s busiest portcomplex—Louisiana’s Lower MississippiRiver—is also worth watching, say indus-try analysts. Its proximity to the Ameri-can Midwest via a 14,500-mile inlandwaterway system, six Class One railroads,and the interstate highway system makesNew Orleans the gateway of choice for themovement of cargoes such as steel, rubber,

coffee, containers and manufactured goods.This became especially evident when

the MCS Stella recently called at theport’s Napoleon Avenue Container Termi-nal, and moved a record number of con-tainers. “We’re excited about the trends ofincreasing volumes,” says Jeff Hakala, vicepresident of New Orleans Terminals.

In fact, the Stella’s arrival coincided witha particularly busy stretch for the Port ofNew Orleans last spring when a total of 31cargo vessels, including 15 container ships,called the port. The 15 container calls in-cluded vessels from Hapag-Lloyd, SeaboardMarine, Maersk, and Osprey Lines.

Northwest optionLast year’s Republican vice presidentialnominee, Sarah Palin, may have misspokewhen she said Alaskans could “see Russia”

NORTH AMERICAN CONTAINER PORT 2007 RANKING BY TEU VOLUME

Rank Port (State/Province) Country 2007 TEUs 2006 TEUs Absolute Change Percent Change 2006 Rank

1 Los Angeles (CA) United States 8,355,039 8,469,980 -114,941 -1.4% 1

2 Long Beach (CA) United States 7,316,465 7,289,365 27,100 0.4% 2

3 New York/New Jersey United States 5,299,105 5,092,806 206,299 4.1% 3

4 Savannah (GA) United States 2,604,312 2,160,168 444,144 20.6% 6

5 Oakland (CA) United States 2,388,182 2,391,598 -3,416 -0.1% 4

6 Vancouver (BC) Canada 2,307,289 2,207,748 99,541 4.5% 5

7 Hampton Roads (VA) United States 2,128,366 2,046,285 82,081 4.0% 8

8 Seattle (WA) United States 1,973,504 1,987,360 -13,856 -0.7% 9

9 Tacoma (WA) United States 1,924,934 2,067,186 -142,252 -6.9% 7

10 Houston (TX) United States 1,768,627 1,606,786 161,841 10.1% 12

11 San Juan (PR) (fy) United States 1,684,883 1,695,134 -10,251 -0.6% 12

12 Charleston (SC) United States 1,635,534 1,754,376 -118,843 -6.8% 11

13 Montreal (QU) Canada 1,473,914 1,363,021 110,893 8.1% 14

14 Manzanillo (COL) Mexico 1,409,782 1,409,614 168 0.0% 13

15 Honolulu (HI) (fy) United States 1,124,388 1,125,382 -994 -0.1% 15

16 Port Everglades (FL) (fy) United States 985,095 948,687 36,408 3.8% 16

17 Miami (FL) (fy) United States 828,349 884,945 -56,596 -6.4% 17

18 Veracruz (VER) Mexico 716,046 729,717 -13,671 -1.9% 18

19 Jacksonville (FL) (fy) United States 697,494 710,073 -12,579 -1.8% 19

20 Baltimore (MD) United States 612,877 610,466 2,411 0.4% 20

Abbreviations: TEU= Twenty-foot Equivalent unit. fy = Fiscal year. Reported fi gures represent total loaded and empty containers and include those moving in domestic and foreign trade.

Sources: AAPA survey; Secretaría de Comunicaciones y Transporte, Coordinación General de Puertos y Marina Mercante ; various Websites


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from its shores. But shipping industryanalysts say the governor was right aboutone thing: the state’s main port is seizingmore international business from Russiaand other hemispheric neighbors.

In addition to containerized freight,the port handles most of Alaska’s refi nedpetroleum products, including 100percent of the jet fuel for ElmendorfAir Force Base and over 80 percent forTed Stevens Anchorage InternationalAirport. Ships from Asia call frequently,transporting construction materials andbulk cement, and the port serves as theprimary export facility for the state’s larg-est petroleum refi nery as well.

Anchorage is served twice weekly bytwo major carriers that originate in Ta-coma, Wash. Totem Ocean Trailer Express(TOTE) is a roll on-roll off carrier, andHorizon Lines is a lift on-lift off carrier.One additional container vessel per weekoccurs seasonally. Bulk shipments areboth domestic and foreign and involve

imports of basic commodities such ascement, refi ned petroleum products, andconstruction materials.

Another memorable moment in thepublic forum last year occurred whensome analysts suggested a “northwestpassage” due to global warming would betransforming container vessel deploy-ments. While they were wrong about thisalarming forecast, it’s certainly true thatmore ships are headed north.

Led by a surge in container traffi cthrough the Fairview Terminal, the Portof Prince Rupert handled 10,587,848tons in 2008, a slight increase over 2007,despite the economic downturn that hasresulted in declining traffi c through mostother North American West Coast ports.

Fairview Terminal handled 181,890TEUs from 78 vessels in its fi rst full yearof operations, following the facility’sopening in late October, 2007. Theterminal’s throughput for the fi rst sixmonths was 42,555 TEUs before jump-

ing more than 300 percent in the secondhalf of 2008 with 139,335 TEUs as a resultof the addition of the second COSCO/CKYH Alliance service put in last July. Inthe fourth quarter, the terminal operatedat greater than 60 percent of its 500,000TEU capacity with a throughput of79,106 TEUs.

“The opening of the Fairview ContainerTerminal in 2007 was an important steptoward connecting the Canadian econo-my to the developing economies of Asia,”says Dale MacLean, the port’s Board ofDirectors chair. “The new express gatewayis providing shippers with unparalleledspeed and reliability, a competitive advan-tage in their supply chain management,while the Fairview Terminal has created asolid foundation for economic activity inWestern Canada and a stimulus for newinvestment across the region.” L

Patrick Burnson is Executive Editorof Logistics Management

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Reed Business Information, A Division of Reed Elsevier Inc. Specialized Business Magazinesfor ▫ Building & Construction ▫ Research ▫ Technology ▫ Electronics ▫ Computing ▫ Printing ▫ Publishing ▫ Health Care ▫ Foodservice ▫ Packaging ▫ Environmental Engineering ▫ Manufacturing▫ Entertainment

This index is published as an additional service. The publisher does not assume any liability for errors or omissions.

* indicates that the ad appears in the Ports supplement.**indicates a regional ad

Advertiser Page No. Advertiser Page No.

AIT Worldwide Logistics . . . . . . . . . . . . . . . . . . . .6800-669-4248 . . . . . . . . . . . www.aitworldwide.com

ATC Logistics & Electronics . . . . . . . . . . . . . . . .37800-466-4202 . . . . . . . . . . . . . . . . . . .www.atcle.com

C.H. Robinson Worldwide, Inc. . . . . . . . . . . . . . .27800-323-7587 . . . . . . . . . . . . . www.chrobinson.com

Con-way Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5650-378-5200 . . . . . . . . . . . . . . . .www.con-way.com

CRST International/Malone . . . . . . . . . . . . . . . .10800-736-2778 . . . . . . . . . . . . . www.crstmalone.com

Department of Foreign Affairs . . . . . . . . . . . . C-2613-944-4000. www.pacificgateway.gc.ca/international

**HCI Steel Building Systems . . . . . . . . . . . . . .41800-255-6768 . . . . . . . . . . . . . . . . www.hcisteel.com

Kenco Logistics Services . . . . . . . . . . . . . . . . . . .3800-758-3289 . . . . . . . . . . . . .www.kencogroup.com

Lynden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14888-596-3361 . . . . . . . . . . . . . . . . . www.lynden.com

National Industrial Transport League . . . . . . . .45703-524-5011 . . . . . . . . . . . . . . . . . . . . . www.nitl.org

NYK Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12201-330-3000 . . . . . . . . . . . . . . . . . . . . www.nyk.com

*OHL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51800-401-6400 . . . . . . . . . . . . . . . . . . . . www.ohl.com

Old Dominion Freight Line. . . . . . . . . . . . . . . . . . .9800-432-6335 . . . . . . . . . . . . . . . . . . . .www.odfl.com

Port Of Montreal. . . . . . . . . . . . . . . . . . . . . . . . 46,47 . . . . . . . . . . . . . . . . . . . . . .www.port-montreal.com

ProLogis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,19303-567-5000 . . . . . . . . . . . . . . . .www.prologis.com

Saddle Creek Corporation . . . . . . . . . . . . . . . . . .33888-878-1177 . . . . . . . . . . . . . . www.saddlecrk.com

*SMC 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48, 54800-845-8090 . . . . . . . . . . www.smc3.com/go/relax

United States Postal Service . . . . . . . . . . . . . C-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.usps.com

Universal Truckloads Services . . . . . . . . . . . . . .23800-233-9445 . . . . . . www.universal-logistics.com

Verizon Communications . . . . . . . . . . . . . . . . . .17800-VZW-4BIZ . . . . . . www.verizonwireles..com

Wared Logistics. . . . . . . . . . . . . . . . . . . . . . . . . C-4312-560-1200 . . . . . . . . . .www.waredlogistics.com

Werner Enterprises Inc. . . . . . . . . . . . . . . . . . . . .21402-895-6640 . . . . . . . . . . . . . . . . . www.werner.com


BUSINESS STAFFPUBLISHING DIRECTOR,SUPPLY CHAIN GROUPBrian Ceraolo732-970-1070

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Imagine you’re a firefighter called to a homeengulfed in fl ames. You race to the house, hook upthe hoses, and turn on the water only to fi nd thatthis is one of several low pressure hydrants in thisarea.

Finally your team manages to fi nd and hookup to a high pressure water hydrant main on anadjacent street. The search takes too long and thehouse is lost. Your team is dejected and is nowfi ghting off jeers from the family and neighbors.Such was the case recently in a municipality nearours. The public outrage was deafening: Who is toblame? The fi re department? The mayor? The pub-lic works deparment?

The review panel reported that the fi re depart-ment received theorder and respondedin good time, deployedits resources properly,and operated within“defi ned processes”—nottheir fault. The Mayor,who previously orderedcolor coded hydrants(signifying high or low pressure), actually had allthe hydrants painted green to beautify the city. Hesaid, “not my fault.”

And the public works department said its pri-mary job is to perform maintenance on all cityhydrants and to keep good records, but mostly inhandwritten books kept by their crews.

At best, I would classify this fractured effort theresult of unconscious incompetence.

Unfortunately, there are too many similaritiesbetween municipalities and companies as theyattempt to serve their customer base. In this case,there were specifi c fl aws in process effective-ness and ownership; database structure and itscompleteness, timeliness, and intradepartmentalaccess; false/theoretical capacity, risk manage-ment, and testing; and poor intradepartmentalcommunications.

While any one of these shortfalls could be thefocus of a Sage Advice column, let’s take a quickswipe at each. We’ll treat the transportation team

as the fi re department because, in most cases, thetransportation team has always been expected topull the company’s fat out of the fi re. The planningdepartment resembles the public works departmentbecause it knows where all the sources of supplyare located. And the Mayor is like the marketing/sales team thinking of ideas to make the productand service attractive to clients—but generallyindifferent about the unintended consequences.

It’s inconceivable that any organization wouldknowingly react to emergencies relying on anincomplete database and be vindicated by areview panel which suggested it operated withina purported “defi ned process.” Process needs tobe tested for shortcomings.

So, your logistics teamcannot be like the citywith its disjointed opera-tions that claims it has aprocess; but acts blindlyand like a hero overcom-ing the incompetenceof others. So what sepa-rates your team from the

disjointed efforts of the city in my example above?Here are seven things to test for:

1. When is the last time that you looked to seehow many shipments were re-consigned becausethe customer database showed the wrong “ship to”address?

2. When was the last time you took your operat-ing system down and demonstrated that you couldmanually—and cost effectively—assign and faxtender shipments to carriers and deliver on time?

3. Have you tested your ability to operate yourprocess remotely with 80 percent of your staff oper-ating from home? Did the last pandemic worry you?

4. When was the last time you reviewed thecustomer service and logistics processes andresponsibilities/accountabilities at ground level?Were you in agreement?

5. When is the last time you asked for andreceived a review of the performance audit of yourTMS and other operating systems?

6. Does the logistics team consistently celebrate“heroism”? It may be nice to recognize people thatgo over and above, but often it masks process fl aws.

7. The next time something signifi cant goesawry, will people wonder if you should have knownbetter and whether you worked for a dysfunctionalmunicipality in your former life? L

By John A. Gentle, DLP

Can you put out the fire?

John A. Gentle is president of John A. Gentle & Associates, LLC, alogistics consulting firm specializing in contract/relationship man-agement and regulatory compliance for shippers, carriers, brokers,and distribution centers. A recipient of several industry awards, hehas more than 35 years of experience in transportation and logis-tics management. He can be reached at [email protected].

The next time something signifi cantgoes awry, will people wonder if youworked for a dysfunctional munici-pality in your former life?

LMX090901advice_ID.indd 56LMX090901advice_ID.indd 56 8/31/2009 12:01:55 PM8/31/2009 12:01:55 PM

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