Airfreight Logistics: Plane and Simple Strategies
Although high fuel costs cloud the view, airfreight forwarders still play a vital role in transportation and supply chain strategies.
It costs more for your cargo to fly the friendly skies these days. Jet fuel prices have risen 90 percent in the past 12 months, and global airlines will spend an additional $67 billion on fuel this year, according to the International Air Transport Association.
"Shippers are concerned about the cost of fuel," says Gary Schulties, senior vice president, air freight, North America, DHL Global Forwarding. "Fuel cost is the single largest issue facing the airfreight industry today."
To cope with higher airfreight prices, many shippers are re-thinking their supply chains and shifting freight to slower modes when possible. Such shifts mean carrying more inventory in the pipeline, however, a strategy that clashes with lean ideals.
As a result, businesses continue to depend on airfreight forwarders to help strike a balance between efficiency and cost-effectiveness.
Three multi-billion-dollar companies—Electrolux AB, Rohm and Haas, and Tyco International—share their thoughts and strategies on leveraging air cargo in tough times.
Electrolux AB: The Challenge of Geography
The global supply chain at $17.5-billion Swedish appliance manufacturer Electrolux AB has changed radically in the past five years.
No one knows this better than Bjorn Vang Jensen, vice president of global freight and logistics services. From his offices in Singapore, he manages the company's cross-border/cross-continent movements of finished goods and components.
"Like other consumer-durables and electronics companies, Electrolux has experienced a tremendous shift from local manufacturing in high-cost countries to low-cost country sourcing," Vang Jensen says. "We now source and deliver all over the world."
Vang Jensen's not exaggerating. He controls freight flows from manufacturing plants in the remote interior of China, sources components and delivers finished goods to Eastern Europe and Russia, and manages supply lines to Mexico and the United States.
This trend toward global sourcing, coupled with a number of factory closures in high-cost areas of North America, Europe, and Australia, has intensified the complexity of Electrolux's supply chain.
"From a sourcing and corporate finance perspective, there's no doubt we're taking the right approach," says Vang Jensen. "But from a supply chain perspective, this strategy runs counter to what's taught in any supply chain management course."
Supply chain management best practices tout moving suppliers closer to production, becoming lean and agile, reducing inventories, and shortening lead times.
"But we are lengthening lead times, and by default, increasing supply chain inventory," Vang Jensen says. "We're introducing additional risk, adding suppliers far from home, and sourcing finished product from distant locations. The company sees major net benefits from managing tradeoffs and risk, so our supply chain managers have to make the best of it."
To make the best of it, Electrolux sometimes relies on air freight to move products and components.
"We strategically plan to use air freight for high-value components such as circuit boards," Vang Jensen continues. "We also use air freight where the value-density of the component is so high that using ocean would result in excessive inventory.
"Filling an ocean container with circuit boards, for example, would create about three years' worth of inventory. And, with rapid technology changes, we'd end up with a huge number of obsolete boards. This is a prime example of where air freight clearly makes sense."
Electrolux moves about 3,000 tons of air cargo globally each year and ships a similar volume, predominantly components, by air courier.
In spite of wildly skyrocketing airfreight costs resulting from fuel price increases, the company is not likely to change its methods. "Unless someone invents a vessel that can cover the Pacific in two days, we'll always need air freight," Vang Jensen says.
Electrolux just completed a global airfreight tender and locked in two-year contracts with its air forwarders. These contracts include "fair and equitable caps" on fuel surcharges.
As a result of the airfreight tender process, Vang Jensen selected two global service providers and three niche players that specialize in serving specific, difficult-to-reach parts of the world.
"Rates are our main selection criteria," Vang Jensen says. "We also consider global coverage and scale. We want the air carrier to assign us a key account manager. And we want senior-level access to resolve any disputes or problems.
"We never had to pull that trigger in the last four years. That speaks to the quality of the providers and our process."
Electrolux is at a disadvantage when negotiating airfreight rates because it cannot commit to specific volumes. That's why it selects only large service providers—forwarders that can randomly guarantee uplift.
Vang Jensen also considers the degree of visibility the air forwarder can provide.
"Providing basic track-and-trace functionality is the price of entry in air freight today," he says.
But Electrolux requires capabilities beyond that—specifically, that the provider can interface with its Oracle Transportation Management Solution, which currently is being installed worldwide. The Oracle solution will manage the company's global air, ocean, and land transportation, and is about one year away from full deployment.
"We need real-time total supply chain visibility from every supplier we use," Vang Jensen says. "Because one provider cannot serve all the modes we use, we decided to implement an in-house solution." Vang Jensen admits that Electrolux's solution has its weak points.
"Our supply chain is not very pretty," he says. "We don't ship from port to port. It would make life simple if we could locate all our facilities right at the ports in Shenzhen, China, and Long Beach, Calif.
"Unfortunately, that's not likely to happen because our suppliers and factories are located all over the world.
"It's not good enough for an air carrier to move freight from Pudong to Memphis," he adds. "We need origin and destination services, including the ability to pick up and deliver to remote locations.
"If a carrier can't deliver cargo to Springfield, Tenn., then it can't move our air freight—because that's where we need it."
Rohm and Haas: Delivering Critical Products
Rohm and Haas, a Philadelphia-based specialty chemicals company, serves a variety of industries, including construction, electronics, household goods, packaging, transportation, pharmaceuticals, food, and industrial process.
Each industry carries different supply chain requirements and characteristics, but the electronics sector, with its extreme time sensitivity and high-value products, drives the company's use of air freight.
"We make everything from monomers to materials used in the semiconductor industry," says David Pope, the $8.9-billion company's North American region logistics director. Pope manages North American-based logistics for both domestic and international transportation, and has counterparts in Asia and Europe.
The company's electronics materials include advanced photolithography chemicals and chemical mechanical polishing pads and slurries used to manufacture semiconductor wafers.
These products are consumed in "fabs"—semiconductor wafer manufacturing plants around the world, especially concentrated in North Asia.
The criticality of Rohm and Haas' products in this market is high because of the extraordinary value of the semiconductor wafers it produces. Delivery timing and supply chain service and integrity are critical.
"We can't rely solely on ocean to serve these customers," Pope says. "We do use ocean if we are sending photolithography products to a warehouse for safety stock.
But air freight plays a large role in our transportation strategy, even with slurries." Slurry products are heavy—comprising 95 percent water—so although they would normally be transported by ocean, they are packaged in totes and drums and shipped by air to meet customer demand.
When selecting transportation modes, Rohm and Haas always considers a combination of service and price. "Cost is important, but we look at the entire value proposition—from pick-up, air transport, and customs clearance to final delivery," says Pope.
As part of this service, Rohm and Haas expects forwarders to provide exception-basis visibility to cargo at any time, anywhere in the world.
"All carriers offer tracking on their Web sites, but that's not what we're looking for," Pope says. "We want to manage air freight by exception, so we need real-time visibility and alerts."
Rohm and Haas prefers to concentrate its airfreight spend with regionally based forwarders, as opposed to one or two global forwarders.
"A forwarder may claim to be global, but all of its locations may not be able to communicate with each other," Pope says. "Regional carriers have a hands-on, personal touch.
"The big players sometimes have to scramble to offer personalized services. They may maintain a cost advantage over regional carriers, but for us, it comes down to service."
Tyco International: A Situational Need
With corporate offices in Princeton, N.J., Tyco International serves a broad array of industries around the world, including electronic security and fire protection, valves and controls, and other industrial products.
Air freight makes up eight percent of the company's total freight profile; air freight small package comprises 12 percent.
Chris Corrado, director of global logistics for the $18-billion company, views selecting air service as a matter of balancing the service-price-value equation. For Tyco, air freight is often the go-to transportation mode for time sensitive shipments.
"In our flow control business, for example, a customer may need a replacement valve in an oil refinery right away, so we send it by air," explains Corrado. "Or a technician installing a new security system for a customer may need certain components that he doesn't carry in his truck. We airfreight those."
Although air freight is not the mode used most often in Tyco's supply chain, the company still chooses its partners wisely.
"Most of our air freight moves with three core-endorsed global airfreight forwarders," Corrado says. "We have negotiated service and price packages, as well as the terms and conditions regarding carrying our freight."
Tyco chose to concentrate its air freight with three forwarders for two primary reasons: to take advantage of their global footprint and to gain visibility.
Additionally, consolidating freight with fewer providers gives Tyco greater price and service leverage. "If a shipment goes south, the forwarders know who we are and they respond," Corrado says.
This year, fuel prices have driven Tyco to shift freight to slower, less-expensive ground alternatives whenever possible. When its shipping needs do require air freight, however, Tyco can be assured that it is well covered.