Today's relatively soft market won't last forever. Now is a good time for shippers to take a fresh look at their airfreight networks with an eye toward the future.
As we enter the second half of 2014, change appears to be on the horizon for the airfreight market. The combined pressures of increased capacity and shippers' "air freight as a last resort" mindset drove prices down through the beginning of the year. Despite those pressures, improved economic activity is apparent in many sectors of the market, including domestic transport. This is important not only because of air freight's position as a closely aligned member of the transport industry, but also because it is widely monitored as a leading indicator of economic activity.
It's hard to imagine that over the next few years demand growth will result in higher rates. Wide-body capacity has been growing because of high demand on the passenger side of the industry for that type of aircraft. In most markets, capacity will continue to outpace even the highest expectations of demand growth. For that reason, 2014 and 2015 are expected to finish out like the past few years, with relative softness in rates. (See Figure 1.)
Article Figures
[Figure 1] Projections for demand, capacity, and ratesEnlarge this image
Strategies for shippers
Most of our transportation sourcing clients recognize that they can get solid cost reductions in a weak market, and they have done a good job at that in the air market over the past four years. However, this year is likely to offer one of the last opportunities for shippers to strategically redesign their air networks. Economic activity is on the rise in most regions, and it's very likely that transportation rates in most markets and modes (other than air freight) will increase accordingly.
Lacking in most negotiations is strategic preparation for the next phase of the business cycle. Leading transportation buyers, however, are using this time in the cycle to realign their air networks to insulate themselves from the impact of inflationary markets in the future. Analyzing and truly understanding the nature of a company's airfreight demand can open the way for pre-buying of capacity (through block space agreements, for example) and move a supply chain away from reliance on what eventually will be volatile spot rates. We are seeing a growing number of conversations between shippers and freight forwarders about joint planning, which will enable more pre-buying up the value chain.
We have also seen several instances where a "total cost of ownership" (TCO) analysis showed that air freight is more cost-effective than ocean, especially for high-value goods. Going beyond transportation and factoring in costs like increased inventory, insurance, the risk of product damage, and other capital costs weakens the economic case for ocean shipping in industries like pharmaceuticals and luxury goods.
Changes in product design can affect shipping and handling requirements, yet few companies have in place a systematic process for reevaluating product specifications and their impact on transportation costs. However, it is worth taking the time to verify that service requirements are properly aligned with the products being shipped. Collaboratively challenging long-standing requirements in this way can uncover cases of overspecification; this provides an opportunity to reduce dependence on special transportation services and significantly reduce costs.
Many shippers are taking a fresh look at their mix of global, regional, and local service providers. By balancing the benefits of global scale and local expertise, they aim to better meet increasingly stringent cost and service requirements. This balance is continuously shifting as even domestic transportation industries become more globalized. Increased global leverage can ensure that smaller shippers receive the attention they need from their freight forwarders. Having a strategic, meaningful relationship will often mean the difference between receiving a rate increase or not.
A good time to make big changes
Now is the right time for supply chain managers to reevaluate their airfreight networks. Softness in the market has taken away some of the pressure to push every possible negotiation lever, freeing time in the discussions to focus on other ideas. Probably the best reason to undertake this reevaluation now is that the marketplace affords greater flexibility, allowing shippers to make bold changes to their networks without incurring big costs in the process. A decision to rationalize from 10 freight forwarders to two in Europe, for instance, won't cost much today. That won't be the case, however, when the market turns tight in the future.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.