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Validation that Transportation Costs a Top Concern for Supply Chain Leaders


For the past three years, our Supply Chain Matters editorial commentaries related to the annual Council of Supply Chain Management Professionals (CSCMP) sponsored State of Logistics survey reports have consistently expressed concern towards a persistent trend for increased logistics, transportation and inventory costs within the U.S… The latest report depicting 2014 activity and our related commentary was no exception.

Thus it was rather timely this week for the Grocery Manufacturers Association (GMA) to release findings of a benchmark research report conducted with the help of the Boston Consulting Group. The report, A Hard Road: Why CPG Companies Need a Strategic Approach to Transportation, provides profound observations for Consumer Product Goods focused supply chains related to transportation cost increases trending way beyond a cyclical trend.  The most sober takeaway from the report is the declaration that: “transporting goods to retailers is now the greatest worry of supply chain leaders.

The GMA-BSC report indicates that more than 80 percent of supply leaders interviewed cited transportation as their top-of-mind concern, while across the board, service levels are declining. According to the report: “Trucks are chronically late, capacity is insufficient, and delivery windows are exasperating retailers” Once more, transportation costs are noted as eroding other supply chain cost savings. The report authors indicate that since the study was conducted in 2012, freight costs have risen as much as 14 percent over the four year period, and only a third of CPG producers were able to trim transportation costs these past two years. CPG firms are further increasing safety stock inventories to compensate for unpredictable service levels.

While there is no simple solution for tackling the current challenges related to transportation, the report outlines five different lever strategies for reader consideration. A key message is that the procurement of transportation can no longer be viewed from a pure commodity perspective, but rather a strategic internal or external sourcing strategy related to line-of-business needs. One important lever outlined  was that active supply chain network design analysis should be considered a priority.  A sober statistic noted that 72 percent of CPG firms surveyed are now actively engaged in network design efforts as compared to the 6 percent level reported in 2012.  That is compelling. Such efforts are directed at dynamic means to optimize routes, locations of distribution centers for supporting customer fulfillment needs as well as assessment of trade-offs in owning transportation assets. Obviously, technology and services firms catering to supply need network design are rallying to support these needs.

This report concludes with a message that CPG supply chains need to view transportation from a strategic lens, focusing product distribution strategies on transportation-centric cost and service requirement needs.  Supply Chain Matters obviously adds that such recommendations apply to other industry supply chains as well, along with active consideration for developing in-house supply chain network design capabilities.

U.S. transportation cost and service performance are indeed an ongoing key concern, one that will remain to be analyzed at the highest levels of supply chain leadership for many more months to come.  Carriers and 3PL’s had better be attentive and proactive in addressing these concerns.

Bob Ferrari

Ocean Container Truck Chassis Scheduling Remains a Challenge for U.S. Ports


Supply Chain Matters calls reader attention to an added backdrop to the State of U.S. Logistics during 2014, specifically continuing ocean container shipping challenges. Robert Bowman, Editor at SupplyChainBrain penned an article, Searching for a Solution to Chassis Management. 


The article observes that in a bid to cut costs and focus on the construction and launch of ever-larger container vessels, shipping lines began selling off intermodal assets such as owned truck chassis. The result is noted as some of the largest U.S. port complexes having a tough time managing the ocean container truck chassis flowing between terminals, attempting to figure out which entity has jurisdiction over inspection, maintenance and repair practices, and where chassis need to be scheduled to handle arriving vessels. Supply Chain Matters also called attention to this problem in our coverage of the U.S. West Coast port disruption in the fall of 2014.

While equipment leasing companies have stepped into the vacuum with various concepts of equipment pools or “pool of pools” the latest ratified labor agreement involving U.S. West Coast ports calls for dockworkers insisting that inspect chassis upon exit from a facility,  That has led to additional challenges and frustrations, and according to this report, federal cout action is a strong possibility as lessors balk at this added inspection step.

Bob Ferrari

The State of U.S. Logistics Remains Concerning and Requires Attentiveness


The following Supply Chain Matters commentary is our annual reflection on the Annual State of U.S. Logistics Report. Normally, our postings typically average 350-400 words of blog content for reader benefit. Rather, this is a longer length advisory report to educate our readers that will be also be made available for separate complimentary downloading in our Research Center within the next few days.


The 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report, the latest which reflects on 2014, has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and Container_Termprocurement professionals. Since our inception, Supply Chain Matters has provided specific commentary and our view of the key takeaways from the report.  With the latest report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.

Our editorial commentaries for both the 2012 and 2013 State of Logistics reports expressed concern towards a continued trend for increased logistics, transportation and inventory costs. The latest report depicting 2014 activity is no exception.

The report summary begins: “Total logistics costs increased only 3.15 percent in 2014.” The underline and emphasis of the word “only’ is ours since we were astounded by such use depicting normalcy. Considering the low rate of inflation, interest rates and the dramatic reduction in the costs of crude oil in 2014, from our lens, an overall 3.1 percent in the cost of logistics in the United States should remain a concern for industry supply chains. These total costs have now climbed beyond the peak level reached in 2007, prior to the global recession.  In theory, U.S. logistics efficiency and productivity should be trending positive.

We first call attention to the report’s references to U.S. GDP values as a point of reference comparison.  The report authors have utilized nominal GDP as a consistent baseline as compared to real GDP. Nominal GDP includes all the changes in market prices that have incurred during any year including inflation or deflation, while real GDP is reported as a percentage increase from a specific base year. To provide our readers a sense of the difference for 2014, nominal GDP growth for the U.S. was reported as 3.9 percent while real GDP averaged between 2.6-2.9, percent, depending of which cited source, over the past six quarters. For the 2010-2014 recovery period from the severe economic recession, The World Bank reported annual real GDP growth as averaging 2.2 percent annually. This difference is significant when reporting and charting logistics costs as a percentage of GDP.

Lesson in economics aside, we advise readers to pay close attention to specific logistics and transportation cost increases. As an example, total U.S. logistics costs rose by nearly $43 billion in 2014, compared to a $31 billion increase reported for 2013. For the period 2010-2014, U.S. logistics costs have risen 18.2 percent or $223 billion, almost 7 percentage points higher that real GDP growth in that same period. Factor whatever GDP growth number you want but the takeaway message should be one of concern and diligence to the trends of why such increases are occurring.

Other highlights and some observations of the latest 2014 report are noted below.

  • Inventory carrying costs in 2014 rose another 2.1 percent, compared to the 2.8 percent increase reported in 2013 and the 4.0 percent increase reported for 2012. Overall business inventories were reported as rising by $52 billion or 2.1 percent in 2014. The second and third quarters were noted as high water marks for 2014 and that obviously reflects the impact of the U.S. west coast port disruption, as industry supply chain teams increased safety stock levels in anticipation of contract labor talks. Manufacturing inventories were reported as down slightly. Interest costs remained well below 1 percent and thus increased costs for taxes, insurance, warehousing, depreciation and obsolescence occurred. The cost of warehousing rose 4.4 percent, reflecting near capacity utilization rates.


  • Overall transportation costs were reported as rising 3.6 percent, with the largest component, trucking, up nearly 3.0 percent. The current fragile state of the U.S. trucking industry was again highlighted. The report cites anecdotal evidence indicating that loads are heavier and more trucks are moving near full capacity. Cited are estimates from the American Trucking Association (ATA) estimating the current truck driver shortage as being between 35,000 and 40,000 drivers, which should remain of concern.


  • U.S. rail costs were reported as increasing 6.5 percent on top of a similar percentage increase reported for 2013. Total carloads were up 3.9 percent, the highest since 2006 and overall rail traffic was reported as increasing 4.5 percent. The U.S. railroad industry operating remains operating at near capacity, despite the addition of 1300 new or rebuilt locomotives and nearly 4500 new rail cars put into service.


  • Costs for water based transportation rose 8.9 percent in 2014, the second highest reported growth sector. U.S. East Coast ports were noted as experiencing the biggest percentage gains in traffic pick-up because of the West Coast port disruption. Another challenge that manifested itself in 2014 was the impact of the larger, mega container ships calling on U.S. ports, and resultant disruptions related to the availability of container truck chassis, along with the time required for unloading and re-loading. One rather important trend noted was that the monthly average number of containers imported from China was more than 10 percent higher than average monthly shipments for the last four years. From our lens, that seems to be a reflection of even more freight being routed by ocean container vs. air. Air freight revenues were reported as declining 1.2 percent with international air freight down 3.6 percent.


  • The revenue growth trajectory of U.S. non-asset based services and Third Party Logistics (3PL) providers continued in 2014. Revenues pegged for the third-party logistics (3PL) sector were reported as $157.2 billion, an increase of $10.8 billion or 7.4 percent over 2013. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 20.5 percent in 2014, on top of the 7.2 percent growth reported for 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones. We continue to believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.


The Looking Ahead portion of the 2014 report provides another important takeaway for our readers, one that we have already reinforced in our predictions for this year. The report specifically states:

The capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.

The report later summarizes:

To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”

Thus, our 2015 Supply Chain Matters Prediction for a turbulent year in global transportation more likely will take on a multi-year context.

Supply Chain Matters submits that the overall takeaways from the 2014 State of Logistics are once again dependent on the reader frame-of-reference.

If you reside anywhere in the transportation and 3PL logistics sector, your reaction is likely positive. Business is very good indeed. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding added investments in capacity and delivery of services. Distribution center operators and real estate interests are included, especially in light of the pending shift of more ocean container traffic in favor of U.S. East Coast ports, as well as the dramatic changes in distribution flow-through and drop-ship footprints required by more online customer fulfillment needs.

If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.


Once again we offer the following insights:

  • Procurement, supply chain planning, B2B business network and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of 2014 data is to insure that the cost, service and inventory benefits derived by contracting services with respective 3PL’s outweighs the continuing pattern of increasing 3PL services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s will have to invest more in technology and services, adding more motivation to increase fees.


  • Approaching transportation spend as the singular dimension of cost reduction remains an unwise move, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes. The data for 2014 indicates that more and more supply chain teams are exercising strategies to assure consistent and reliable transportation capacity and logistics services.


  • Similarly, we again encourage S&OP teams to re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point and fulfillment center trade-offs and costs of carrying inventory. Today’s global logistics environment remains dynamic and complex. Decision-making data must reflect this state, along with the assumption that overall logistics costs are trending higher.


  • In order to reduce overall cost and asset investments, senior supply chain leaders in certain industries have contracted more and more services to 3PL’s and other service providers. Insure that your teams are continually analyzing cost and benefit tradeoffs. Maintain periodic reviews of costs and benefits on a more frequent basis.


  • Both FedEx and UPS initiated dimensional-based pricing on ground shipments effective in 2015, and initial financial results from both of these carriers indicates positive impacts in revenues. This area continue to have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy for certain classifications of products. Be watchful of this area.


  • Last year’s Supply Chain Matters commentary reflecting on the State of U.S. Logistics observed that the U.S. economy showed more promising signs of manufacturing growth. The latest report of 2014 activity paints a more cautionary picture regarding manufacturing and logistics growth. The logistics industry must tackle troubling capacity and productivity constraint trends along with their impact on customer costs. There has also been too much of a tendency to maintain fuel surcharges and fees to boost revenue and profitability levels even higher.

We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication on supply chain objectives and needs.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Quantified Impact of the Expanded Panama Canal for U.S. Bound Container Shipping


The Boston Consulting Group (BSC) and C.H. Robinson have just released a new joint study, How the Panama Canal Expansion is Redrawing the Logistics Map, (sign-up required for complimentary report) which we feel should be essential reading for multi-industry sourcing, procurement, logistics and transportation teams. This study should motivate such teams to undertake more frequent and ongoing analysis of existing MSC_Ship_2supply chain networks involving ocean container movements, in light of the opening of the scheduled 2016 expanded Panama Canal. According to this new study, the difference will be significant shifts in port volumes and resultant transportation costs.

The joint BSC-Robinson study predicts that by 2020, up to ten percent of container traffic bound for the United States from East Asia could shift their destination to U.S. east coast ports. According to the authors, that shifting volume is equivalent to building a port double the size of the existing ports of Savannah and Charleston. The study concludes that this container routing shift will permanently alter the competitive balance among U.S. east and west coast ports as well as the battleground region for determining the most cost efficient or service-sensitive assumptions in logistics and transportation routing.

Supply Chain Matters has previously viewed similar studies that analyzed the impact of the expanded Panama Canal on U.S. east coast ports.  We therefore reviewed in-detail, this latest joint study from BSC.  The research is grounded in a data point indicating that last year, 35 percent of East Asia container traffic was routed to U.S. East Coast ports. The baseline 2020 assumption of the report is that without the Panama Canal expansion, east coast share would rise to 40 percent if current economic. energy and shipping trends remain constant. However, factoring the upcoming Panama Canal expansion, the study authors predict that the east coast share could reach up to half of port volume.

Like any sound analysis, the BSC research tested three broad scenarios that included:

  • A weaker growth rate for the U.S. recovery.
  • A shift in manufacturing sourcing that favors different Southeast Asia and U.S. nearshoring.
  • The potential of over-expansion of port infrastructure.

When all the analysis is included, the BSC model suggests the emergence of three classifications of ports:

  • Advantaged- concluding that New York-New Jersey and the southeastern ports of Norfolk, Savannah, and Charleston stand to gain added share volume.
  • Neutral or Unclear- notes unclear impacts to the U.S. east coast ports of Baltimore, Miami and Norfolk.
  • Disadvantaged- concludes that while Los Angeles- Long Beach ports will continue to be the fastest routing option for reaching major population centers in the U.S., these ports will face new competition and/or lost business from competition in the region east of Chicago. The southeastern portion of the U.S. is the area designated as having the most economic benefit from the expanded Panama Canal routing.

BSC provides certain caveats. They include the very key assumption as to how efficient U.S. east coast ports become in their ability to efficiently unload and load the larger Panamax plus class of ocean container ships along with which of the four possible economic scenarios actually occurs. Supply Chain Matters has also raised such concerns, observing that the underlying logistical challenges caused by much larger container ships that affected U.S. west coast ports remain challenges for all U.S. ports that plan to service such ships.

We believe that the joint report outlined actions for readers bears consideration for multi-industry supply chain teams, logistics and transportation services providers as well as U.S. port operators and legislators.

This report’s takeaway for shippers is that the opening of an expanded Panama Canal next year will provide increased options but greater complexity. Shippers will likely need to take a much more segmented and detailed approach to possible supply routings that weigh cost vs. service time considerations.  We would not hesitate to add that this message implies more dynamic and frequent use of supply chain network modeling analysis techniques to provide product sourcing and sales and operations planning teams with continual analysis of the various cost and service scenarios for container routings.

For carriers, including U.S. railroads, the message is about interrelated decisions in investments, pricing, routing and customer development decisions. Investments in key U.S. east coast ports and supporting infrastructure is an obvious consideration along with a caution that future changes in key tariff rates could well change the overall economics for shippers. Reports indicate that investments in new warehousing and logistics facilities adjacent to the advantaged east coast ports has been steadily increasing and land costs are exploding due to this increased demand.

The BSC study concludes that time-sensitive cargo will continue to route through U.S. west coast while cost sensitive or high density cargos may have economic advantages in east coast port routings. Carriers need to consider these options.

For logistics services providers, the BSC message is to help shippers and carriers sort out these changing scenarios. For non-asset based LSP’s, there are key investment decisions remaining to be considered for customers and their routing needs.  BSC rightfully points out that LSP’s have the opportunity to be an important partner for customers in helping them to navigate these transportation changes.

Supply Chain Matters would add that carriers and LSP’s as a community, need to step-up and provide their customers with the added intelligence and service options they need to take maximum advantage of the Panama Canal expansion opportunity. We hasten to add that any entity looking to alter these decisions through self-advantage should be called out by shippers.

Finally, we re-iterate that individual supply chain teams themselves insure that they undertake their own analysis of their respective supply chain networks.  Such analysis can no longer be an occasional project but rather a more frequent activity matched to ongoing developments or events.

In this continuing environment of supply chain complexity and change, strategic and tactical network decisions should not be solely delegated to third parties, and remain the responsibility of individual supply chain teams.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters ® blog. All rights reserved.


Implications from This Week’s FedEx Earnings Report


FedEx reported Q4 and FY15 financial results this week that included strong indicators of some change in strategic direction along with implications from previous actions.

Financial highlights for the final fiscal quarter included an increase in adjusted   FedExGroundoperating income of 5 percent but a reported loss of $895 million primarily as a result of special charges related changes in the carrier’s pension accounting methods. Other factors impacting income in the quarter were noted as increased variable incentive compensation and unfavorable net impacts from fuel and weather.

For the full fiscal year, total revenues increased by $1.9 billion while operating income slid nearly $2 billion from the year earlier period.

Beyond the numbers were indications that FedEx management acknowledged that the carrier will significantly step-up investments in its ground based business segment. Because of the continued growth of online commerce, FedEx senior management indicated that both commercial and residential ground delivery services continue in volume growth. Daily volumes in Q4 grew by 5 percent and ground based operating margins have averaged 17-20 percent.  In the most recent quarter, margins for the ground based segment were negatively impacted by the recent GENCO acquisition. Senior executives further acknowledged that GENCO will remain a drag on full year FY16 profits for the ground-based segment which is perhaps an indicator of inherent profitability challenges related to this acquisition.

Regarding the announced $4.8 billion acquisition of Europe based TNT Express, company executives indicated confidence that regulators will likely not raise significant objections.

The carrier indicated that its capital spending in the coming fiscal year will be $4.3 billion, the majority of which will be channeled into ground segment infrastructure. Further announced was that the FedEx SmartPost segment, an online commerce focused service that hands-off last mile delivery to the United States Postal Service will be merged into the ground business segment on September 1st of this year. By merging the two segments, FedEx has plans to enable increased flexibility for its ground network. New software is being implemented that will combine ground-based packages destined to a common delivery address. Thus if the system determines a SmartPost package is destined to an address scheduled for delivery of a regular ground-based shipment, the software will route both packages to the delivery vehicle. If the SmartPost package is independent and does not meet network criteria, it will be routed to a local post office for delivery. The net effect is an impact to current USPS revenue streams.

Similar to UPS, the latest financial results from FedEx further reinforce the positive revenue effects of newly implemented dimensional based pricing, as well as the continuance of fuel related surcharges. In the most recent quarter, FedEx reported that ground based yields increased 2 percent because of the new dimensional weight rates. The Wall Street Journal reported this week that UPS is communicating to dozens of retailers that it intends to end big discounts related to dimensional pricing for this coming holiday buying surge, and in the case of some, enforce dimensional pricing for the entire year.

Given this latest information, Supply Chain Matters is of the viewpoint that FedEx is making a competitive thrust against its ground-based competitors, in particular UPS, for the support of online customer fulfillment.

For the international air express segment, FedEx continued with implementing its multi-year profitability plans which included cutbacks in overall capacity along with increased investments in more fuel efficient, less maintenance prone air freight aircraft. The effects of reduced international air express capacity were felt in the latter part of last year when U.S. west coast ports were severely impacted by bottlenecks, and shippers attempted to turn to alternative air routings.

Our prediction of a turbulent year in global transportation continues to manifest and includes continued efforts by major surface and air-based global carriers to significantly increase margins along with actions of heightened competitiveness among major industry players.

Bob Ferrari

Are Ocean Container Megaships Benefitting Industry Supply Chains? – Perhaps Not



Our readers who closely follow our global transportation and logistics related commentaries are well aware that Supply Chain Matters has penned our share of rants related to the ocean container shipping industry. For reference, you can review examples of a rant in March of 2013 and a follow-on rant in May of 2013.

Because we are an independent blog, not beholden to industry ties or influence, we felt compelled to offer our point of view to educate industry supply chain teams on the implications and consequences of such strategies. That also compelled us to predict at the beginning of this year, that 2015 would be a turbulent year for global transportation, and indeed, that prediction continues to unfold.  MSC_Ship_2


The ongoing strategy of contracting for and introducing ever larger super-sized container ships defies the realities of an industry that has gross overcapacity.  Instead, the shipping line dominants, particularly Maersk, are exercising a strategy that in essence, forces other shipping lines to either match such investments or consolidate capacity with other carriers.

Now for those supply chain professionals who do not necessarily subscribe to blog commentary and viewpoints, The Wall Street Journal’s Logistics Report (primary sponsor being UPS, Inc.) has penned its own recent commentary: OECD Says Economic Gains From Big Ships Are Sinking.

The report cites a recent study from the Paris based Organization for Economic Cooperation and Development’s (OECD) International Transport Forum which suggests that the operating cost benefits of megaships to ocean container lines are more than offset by the economic costs on port infrastructure and logistics impacts related to having to load and unload these vessels. A quote from this report indicates:

The development of the world container fleet over the last decade is completely disconnected from developments in global trade and actual demand.”

The OECD researchers indicated that the new mega container ships allow carriers to benefit from $25 in operating cost savings per container, amounting to $200 million in operating benefits starting in 2017. Meanwhile, the costs for improving ports, re-dredging harbors, expanding transport and logistics networks to accommodate these megaships is estimated to be more than shipping line savings.

The WSJ Logistics report further cites research from McKinsey estimating that a 20 percent gap between shipping capacity and demand will persist until at least 2019.

““The effect of this overcapacity is low freight rates, which will undermine the profitability of the container shipping sector.”

We would add our prior observation that indeed, that is the strategy at-play, eliminate marginal carriers by financial stress and force consolidation among consolidated, multi-carrier capacity networks.  The recent U.S. west coast port disruption, although primarily brought about by the effects of labor contract renewal negotiations, was also compounded by the building effects of mega container ships having to be unloaded and re-loaded in just a few days. To gain additional insights on the economics, check out the last paragraph of the recent WSJ Logistics article which cites OECD statements as capacity break-even estimates.

Supply chain teams should therefore not assume that the U.S. west coast port disruption was just a one-time aberration. As more and more megaships enter service over the coming months and years, disruptions are a real possibility if particular ports are not prepared to support the newer mega container ships. Inventory and component sourcing strategies will have to be carefully managed. Nor should transportation teams rest on the current effects of overcapacity leading to cheaper spot container shipping costs.  As the marginal shipping carriers succumb or consolidate, the survivors will want to recoup profitability.

Expect a turbulent year in global transportation not only in 2015, but the next three years as well. Perhaps that continues to motivate smaller and mid-market companies to continue to outsource logistics and transportation needs to global-based 3PL’s who have the savvy and expertise to be able to navigate through such troubled waters.

Bob Ferrari

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