The biggest news of 2006 was what didn't happen, not what did.
A year of relative calm, however, isn't giving way to complacency. Instead, businesses are proactively, if privately, tinkering with and tightening supply chains to streamline processes and build additional scalability into their networks, observed Rosalyn Wilson at the Council of Supply Chain Management Professionals' 18th Annual State of Logistics Report in June.
"The story this year is the underlying drivers of business logistics costs, and the changes in how companies manage their supply chains. No single defining event, such as Hurricane Katrina or soaring fuel prices, occurred in 2006 to explain the trends," reported Wilson.
What's Driving Priorities?
These drivers, namely transportation and carrying costs, are setting the pace for the way businesses approach supply chain priorities.
Resigned to the fact that tactical approaches will do little to spark economies on the transportation front, businesses are stoking strategic initiatives deeper within their global networks.
Such vision inevitably comes at a cost though - businesses are carrying more inventory throughout their supply chain to mitigate longer transit times and rising transportation spend.
The good news? Carrying more inventory isn't necessarily a cause for concern, but rather a reaction to changing supply chain needs, Wilson explained.
"Managing logistics in today's complex global environment costs more," she added.
The past few years have brought the challenges of moving both domestic and global freight under a microscope - specifically magnifying the capacity, congestion, and cost issues shippers and consignees have faced while managing shipments over the Pacific and over the road.
Leaning on Deeper Inventory
This difficulty has inevitably forced global businesses to reconsider other areas of their supply chain operations.
"The strategy in the era of just-in-time manufacturing was to remove excess inventory from the system, slimming inventories to bare minimum levels. We demanded reliable transportation services that could deliver when promised, making it possible for firms to reduce inventories and implement streamlined supply chain management strategies," explained Wilson.
But the events of the past few years - notably the terrorist attacks of Sept. 11, the West Coast port strike, and Hurricane Katrina - have compelled companies to accommodate safety stock within their supply lines, pushing inventories back to their suppliers, to meet spikes in demand and manage exceptions accordingly.
Retailers have traditionally been competent managing lean inventories to account for shifting consumer demands - but their strategies are necessarily evolving with the times, observed Wilson.
Supply chain visionaries recognize the value of addressing strategic distribution decision-making closer to supply to respond better to demand. How businesses manage inventory deeper in the supply chain also reverberates out to how they distribute product to consumers on the domestic front.
"Large, regional distribution centers do not facilitate the flexibility and time-sensitive deliveries these companies make. Retailers are starting to use local warehouse sites, serving fewer locations, but with more technology to manage inventory," noted Wilson.
2006 In Review
How did these trends impact last year's numbers? The U.S. business logistics industry continued to grow at an unprecedented rate, eclipsing 2005's record year by 3.5 percent, Wilson reported.
Total logistics-related costs topped out at $1.3 billion and rose from 9.4 to 9.9 percent of the nominal Gross Domestic Product - an increase of $130 billion from 2005. Over the past decade, business logistics spend has increased 63 percent.
Despite soaring fuel prices, softening truck capacity conditions, and increased competition, many motor freight carriers reported modest revenue growth, largely a result of passing along surcharges to customers.
As a result, transportation costs were up 9.4 percent over 2005.
The motor freight market set the tone for the cargo industry at large: U.S. ports handled an 8-percent increase in TEUs last year; railroads managed a record 9.4 million containers; and air cargo saw freight ton-miles rise 4.6 percent, according to Wilson's report.
But the real emerging story in 2006 was the continuing growth and importance of the warehouse and distribution sector.
With inventory carrying costs increasing at a double-digit clip - 17 percent in 2005 and 13.5 percent in 2006 - it has become clear that businesses are no longer as confident as they have been executing lean inventory strategies. Many shippers prefer to keep more product in the supply chain to accommodate shifting demand.
Wilson also discussed overall 2006 trends by mode. Among the findings:
- Airfreight revenue grew by $3 billion during 2006, an increase of 7.6 percent - considerably lower than the 17-percent leap one year earlier.
- Escalating fuel costs, which account for as much as 30 percent of the industry's operating expenses, dampened revenue growth for the year. Still, preliminary figures indicate overall ton-miles are up 4.4 percent over 2006 and have grown 22 percent since 2000.
- Trucking costs increased by $52 billion in 2006, an increase of 8.8 percent over 2005.
- Soft demand and new equipment purchases - largely a result of the EPA's new emissions and engine standards - increased truck capacity but marginally weakened demand for trucking services. Larger carriers were able to grow their revenue by passing along fuel surcharges to their customers; smaller operators, however, had less leverage to do so as they faced increasing competition in a surplus market.
- The driver shortage continues to raise concerns among industry experts, despite increased capacity in 2006. Last year, driver turnover in the long-haul segment increased 121 percent and the short-haul sector was not far behind at 114 percent, according to the American Trucking Associations. Drivers are migrating to companies that offer higher wages and substantial benefits.
- Rail freight costs increased 12 percent, with revenue for Class I railroads jumping 13 percent.
- Since 2004, the rail freight industry has increased revenue nearly 30 percent, reflecting the industry's commitment and capacity to meet intermodal demand. For the ninth consecutive year, the railroads have set records for total carloads carried, an indication that growing rail freight demand in the NAFTA corridor continues to take the industry to new heights.
- Maritime and domestic water traffic increased by 7.9 percent in 2006, to nearly $3 billion for the year, augmented by continued ocean freight growth.
- Aging infrastructure and deferred maintenance are beginning to take a toll on ocean transportation. Diversified sourcing strategies through multiple ports have helped rationalize volume and accommodate growing inbound cargo traffic.
If you've recently purchased a Warehouse Management System (WMS), you are in good company, as WMS purchases are on the rise. The worldwide market for WMS solutions is expected to grow at a compounded annual rate of 4.8 percent over the next five years, according to a new study, Warehouse Management Systems Worldwide Outlook, from Dedham, Mass.-based ARC Advisory Group.
The WMS market reached $1.07 billion in 2006 and is expected to top $1.4 billion in 2011, predicts the report.
Though the WMS market is mature, it will experience faster growth in the next few years than it has in the recent past, says Steve Banker, service director for supply chain management at ARC.
"The average WMS solution has a lifespan of 11 years. As the years between 1995 (11 years prior to the base year of this study) and 2000 were high-growth years for the WMS market, the market going forward will mirror, on a smaller scale, the previous era's growth," he explains.
In addition, WMS solutions are morphing to incorporate new technologies, shows ARC's research. The increasing use of voice recognition and radio frequency solutions in warehouses, for example, has impacted the development of WMS solutions.
WMS providers have devoted a considerable effort to understanding the warehouse workflows and processes that result from these new multi-modal terminals, says Banker. WMS solutions must now be configured to support these data collection methods, as well as multimodal applications.
In the future, WMS architecture may need to treat automatic identification (AutoID) as one layer of the solution so that multi-modal AutoID tasks are supported, he adds.
Cutting costs has historically been the top priority for supply chain professionals. Most companies today, however, are looking to improve supply chain processes by meeting customer mandates for faster and more accurate fulfillment, according to a new study by Boston-based research firm Aberdeen Group.
Supply chain executives are addressing this need for new approaches and priorities by increasing their spending on supply chain technology in 2007.
Five times as many companies plan to increase, rather than decrease, IT spending, shows the report, The Supply Chain Innovator's Technology Footprint 2007, which surveyed more than 200 companies at the start of the year. The survey's aim was to explore companies' technology investment plans en route to supply chain improvement.
What technology do most companies plan to invest in? Inventory management stands out as a top priority, with 57 percent of respondents listing it as their number-one technology pick.
"Companies that have not yet refreshed or expanded their use of inventory management technology should put it on their to-do list this year," suggests the study.
Supply chain visibility ranks a close second to inventory management, with 55 percent of participants listing it as the biggest priority for technology investment.
Other interesting findings from the Aberdeen report include:
- Companies looking to create new supply chain innovations are 1.5 times more likely to view globalization as the top driver for supply chain improvements.
- Services-oriented architecture and radio frequency identification technologies are not high priorities for warehouses in 2007.
- Companies are increasingly looking to on-demand software and Web-based applications to address supply chain visibility.
- Forty-one percent of overall respondents - and 77 percent of large enterprises - plan to spend $500,000 or more on logistics technology in 2007.