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More Significant Evidence of the Implications of Shifting Global Transportation Needs and Modes

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Supply Chain Matters has brought previous attention to a significant trend occurring in global transportation.  Large numbers of manufacturers and service providers have placed a greater focus on transportation cost efficiencies and/or flexibilities.  That is good news for bottom line budgets but rather troubling news for global carriers or global logistics services providers who have invested in expensive capacity and infrastructure.  Recent earnings report from FedEx, UPS, Ceva Logistics and other global transportation providers, to name just a few, reflect this building shift within the industry.  More sophisticated planning has allowed global supply chains to not rely on priority shipping modes but rather rely on non-premium or multi-modal surface transportation options.  Erosion in global transportation rates has in-turn provided global shippers’ added flexibilities in the modes they elect to move goods to consuming markets.

One of the most time-sensitive industries is that of fresh-cut flowers.  The Wall Street Journal recently reported that even this $14 billion industry has responded to increased premium air freight costs.  In essence, the floral industry is responding to cost conscious retailers who want to reduce the input costs for flowers. A spokesperson for Netherlands based FloraHolland, the world’s largest floral  wholesaler predicts that upwards of 30 to 40 percent of floral shipments from Latin America, along with 20 percent of shipments from Africa to Europe could be routed by ocean container in the next five years.  That is a rather significant shift emanating from a stalwart industry that had total reliance on global air freight.

According to the WSJ, improvements in chilling and container monitoring technologies have prompted this building shift toward ocean shipping modes, particularly for imports to Europe which is a rather large market. Industry sources were cited as indicating that certain roses, carnations and other floral varieties do not suffer ill effects from sea voyages provided temperature environment is consistently maintained.

Transportation professionals are fully aware that ocean container carriers are making big and rather expensive bets in bringing a new generation of larger, more efficient mega-ships into service during the next five years.  Today, there is far too much ocean container capacity chasing lowered volumes. Industry leader Maersk has again downgraded its outlook for global trade while the industry itself endures its 15th consecutive week of declining market shipping rates.  Maersk now forecasts global container demand to grow just 2-4 percent in 2013 vs. a prior forecast of 4-5 percent in February.  While newer ships will address needs for more efficiency and flexibility, the industry itself is in a Darwinian struggle as to which players can financially survive the transition. The Financial Times recently reported that a fifth of global container capacity has now been idled worldwide.

Global multi-modal transportation and logistics providers are obviously noting the building momentums in this modal shift and will invariable adjust their business strategies in the coming months.  However, the biggest question mark is how many existing ocean container carriers, suffering building economic loses from the current gross condition of excess capacity, will survive to serve a different global transportation landscape several years from today.

There are other industry shifts to cite as examples.

Today’s Wall Street Journal notes that the proposed $2 billion Freedom pipeline project that is proposed to ship refined oil products from the lucrative oil field of Texas to California based refiners has failed to gain the interest levels of the major oil refiners in that region.  Instead, they are relying on existing tank car shipments via rail lines to feed fuel hungry west coast markets.  According to the Association of American Railroads, rail carloads of oil nearly tripled from 2011 to 2012. A recent boom has also come from new sources of crude in the U. S. Northern Plains and Appalachian regions that now increasingly rely on rail tank car movements to core refining distribution points. According to WSJ’s reporting, refiners are relying on rail shipments because of the flexibilities it provides in allowing firms to access crude supplies from different geographic regions at different prices, a flexibility not offered in a fixed pipeline.

This week, global 3PL CEVA Logistics, which provides logistics services to service sensitive consumer, healthcare, pharmaceutical and major high tech markets, reported a 6 percent decrease in earnings citing an overall soft global logistics markets, under performing contracts and impacts of business switching to ocean transport.  CEVA , an asset light 3PL, has already taken steps to re-capitalize its balance sheet and raise new capital and has taken actions to offload some remaining fixed costs.  At this week’s Smarter Commerce Summit, IBM announced a four year contract with CEVA to utilize the cloud-based IBM Sterling Commerce B2B platform and integration services for its customers. At the time of its re-capitalization efforts in April, L.M. Schlanger, CEVA CEO interviewed with Logistics Management and was quoted: “… customers are demanding more transparency and more visibility and more traceability and control of their supply chains at any given point in time.”  He alsopointed to increased internal IT investments and applications to meet the increased needs of customers.

Thus, multiple shifting forces are impacting global transportation.  The current economic crisis that has severely impacted Eurozone markets, and the building momentum toward nearshoring occurring in some industries are impacting current shipping volumes and rates.  Longer term, more sophisticated shippers with better planning capabilities and leveraged use of advanced technology have discovered means to rely on more economical or more flexible modes of transport. That is the long-term trend.

Insightful industry officials are now or should be connecting the dots.  Investing in appropriate technologies and services our beginning to yield savings in a cost area that has begged attention for many years. At the same time, carriers and logistics providers that have to invest in rather expensive assets and global transportation capacity are making their bets on where the long-term industry trends end up.

The takeaway for procurement, supply chain and product management teams are to not at all assume business-as-usual in short and longer-term transportation strategy and contracting.  Do your homework, stay informed of continuing industry shifts and implications. Select your partners wisely, those that can fulfill both today’s and tomorrow’s business needs. Teams should also be evaluating investments in more synchronized fulfillment execution across the end-to-end supply chain including the journey toward supply chain control tower.

We are here to help you sort out these trends and implications.

Bob Ferrari

 

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