Commentary: Driving profitability in an express world
The pressure is on to move to faster and faster delivery to the end consumer. Here are a few strategies shippers can adopt to drive profitability in their transportation networks while still providing what their customers really want.
Travis Peter is a strategic solutions engineer at Green Mountain Technology (GMT), a parcel spend management service provider for shippers with over 10 million parcels per year.
As e-commerce continues to explode, the arms race for faster fulfillment is becoming increasingly intense. Two of the largest players, Amazon.com and Wal-Mart Stores Inc., are jockeying for position as the e-commerce kings. Their latest battleground: the online grocery market.
While these giants forge ahead, many other e-commerce shippers find themselves struggling to keep up. One problem that many of them inevitably face is maintaining profitability while still providing end customers the fast fulfillment that they desire. To accomplish this, retailers that hope to stay in the race must continually adapt and optimize their networks to keep their shipping costs and transit times low.
This focus on efficient, cost-effective fulfillment is having a significant impact on the carriers that serve the e-commerce market. According to "The Impact of Brand Strategy on Parcel Transportation: GMT 2017 Benchmark Report," a research report prepared by Green Mountain Technology in partnership with Cleveland Research Company, most parcel and less-than-truckload (LTL) carriers identify two-day-or-less order fulfillment as their primary strategic focus. They also cite it as one of their most difficult competitive challenges.
Opportunities to mitigate rising costs
The need to meet end customers' growing expectations is raising costs for e-commerce shippers, but there are ways they can mitigate those costs while still maintaining efficient operations. For example, with the widespread advent of omnichannel commerce, customers have more ways than ever to place orders, and single customers often place multiple orders throughout the day. Shipping a multitude of smaller packages can quickly accumulate unnecessary shipping costs, since flat surcharges, such as residential and delivery-area surcharges, are applied on a per-package basis. As a result, it is increasingly important for retailers to identify opportunities to combine split orders into single packages. In that regard, implementing improved "cartonization" logic to determine the ideal box size and the optimal arrangement of items within that box often provides a significant return on investment. Additionally, consolidation of orders from the same customer that occur within a specified time frame can further reduce the likelihood of split orders. By effectively scheduling these order holding periods with their fulfillment cycle and carrier cutoff times, shippers can reduce their shipping cost without any negative impact on transit times.
Another example of a way to keep costs down is to pay attention to the impact of package size on freight costs. Consider the example of dimensional weight, which is is based on the total volume of the package relative to the total weight. In recent years, the introduction by FedEx and UPS of dimensional weight as a basis for all air and ground freight charges has added yet another complexity to U.S. parcel distribution costs. In the most recent example, in September, FedEx announced that it will begin applying dimensional weight adjustments to its SmartPost service in 2018. Once that policy goes into effect, FedEx will calculate the billable weight of a SmartPost package by taking the greater of the actual weight and the dimensional weight. The adjustments, if they occur, will always be increases in billable weight. (Similar practices are gaining ground internationally as well; for example, DHL and Canada Post also apply dimensional weight adjustments to shipments.)
Dimensional weight adjustments, coupled with large- and oversize-package surcharges (based on the length and girth dimensions of a package), further underline the importance of box engineering in minimizing transportation costs. In many cases, parcel shippers can easily avoid a lot of unnecessary cost by selecting or engineering a slightly smaller box that falls within these dimensional constraints.
Amazon and Wal-Mart invest large sums of money in their networks in order to achieve faster fulfillment times, opening distribution centers across the globe and acquiring e-commerce and brick-and-mortar companies alike to maximize their consumer reach. Not every shipper has access to the amount of investment capital required to follow in Amazon's path, but larger retailers have taken to shipping from their store locations to mimic a larger distribution network. Target, for example, recently announced its Target Restock program, which allows customers with a Target credit card to order a variety of household items in-store and have them delivered directly to their homes by the next day for a flat US$5 fee. In a similar vein, shippers can eliminate the costly residential leg of a delivery by providing a "buy online, pickup in store" offering, which naturally shortens transit time. Both of these methods seek to shrink the distance between ship point and customer in order to shorten transit times and reduce costs; however, it is important to note that stores will most likely require special resources and inventory management considerations to be able to directly fulfill orders.
Achieving faster transit time does not always require a broad distribution network. Shippers can "zone skip" by consolidating orders with similar destinations into trailers and sending them directly to carrier hubs near those destinations. Additionally, shippers can explore the use of regional carriers. These carriers service various sections of the country and operate more efficiently within these service areas than larger international carriers can, which often leads to faster transit times at an equal or lower cost. Retailers looking to ship locally and quickly can also leverage crowdsourced carriers through the use of services such as Instacart or Deliv. These options allow retailers to more easily adapt to fluctuating demand, particularly during peak periods when other carriers' networks are bottlenecked.
The last, and possibly the most important, insight lies in a retailer's ability to identify what its customers truly value in an online shopping experience. Fast order fulfillment is not the answer for every retailer, with some customers preferring "no-risk" return policies or increased shipment visibility to receiving their items one or two days faster. Aligning e-commerce strategy with customer expectations for the individual retailer will always be the best way to get the greatest value for their transportation spend.
Shipping in an increasingly express world is not getting any easier. Shippers must continue to innovate and adapt their networks to be able to keep pace with burgeoning customer expectations. Those retailers that are best able to navigate the new complexities of their networks will be the ones with the best opportunity to succeed.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.