CLM 2004: Following The Leaders

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What are the hot logistics topics for 2005? IL sat down with a number of different logistics solutions providers and practitioners at this year's CLM conference to track the latest buzz in global supply chain trends.

Last month's annual Council of Logistics Management (CLM) meeting in Philadelphia highlighted the growing importance of globalization as well as the broader cradle—technology, methodology, and people—necessary to support and nurture supply chain management best practices worldwide.

Companies today are keenly aware of the changing rules of engagement for operating globally. Many have taken critical steps within their businesses and supply chains to be able to better adapt and react to market volatility and growth.

Much of this change is at the behest of customers. Early adopters, however, are also making necessary investments in burgeoning technologies to gain competitive advantage and offer end users better value for their services.

During the CLM conference, Inbound Logistics met with a number of companies, including carriers, third-party logistics providers, and IT providers, to discuss changing business dynamics and supply chain trends.

The objective of our discourse was twofold: to filter customer and supplier concerns through the eyes of service providers, and to drill down four broader trends: globalization; the development and integration of new technologies, foremost RFID; capacity constraints; and business continuity and contingency planning.

The prevailing consensus among CLM constituents is that globalization remains the top supply chain priority, especially as it relates to capacity, security, and technology concerns. Companies today are looking at expansion into new markets, business acquisitions, and investments in new processes and technologies through this global prism.

The continuing evolution of visibility technologies and web-enabled communication systems, further compounded by the emergence of Asia and Eastern Europe as manufacturing hot spots, has made the world a much smaller place. The challenge for intermediaries is expanding their services and/or leveraging existing penetration in these markets to grow business and further streamline the global supply chain.

Following the Customers

For some, it's as simple as piggybacking on customer growth in new markets. "Customers can take you places you've never been," says Mark Ellis, vice president contract logistics, Kuehne + Nagel, a global 3PL headquartered in Schindellegi, Switzerland.

For others, it requires a strategic initiative of locating and staffing global distribution facilities—where demand dictates—to facilitate inbound shipments into the United States.

The process of expanding into budding markets such as Asia has entailed meeting two primary objectives: knowledge and integration, says Jeff Hurley, managing director and chief operating officer, TNT Logistics North America, Jacksonville, Fla. "First, exporting North American employees to Asia to accelerate information exchange; and second, connecting all business units across larger accounts to better manage the supply chain."

Likewise, part of Kuehne + Nagel's growth initiative in China is to evolve the knowledge base of middle management expertise by importing talent as well as training local nationals. "Universities in Shanghai and Beijing are now offering logistics courses, which they did not do five years ago," notes Ellis.

Expanding into new markets, however, does not come without risks. For one, intermediaries that do not have the experience and expertise in certain regions of the world chance being co-opted by customers into situations they may not be prepared for.

Second, it is difficult to successfully manage and scale growth without the necessary infrastructure for support.

An obvious alternative is to outsource the appropriate expertise to regional 3PLs. But the underlying problem is that the term "global logistics provider" has become ubiquitous, notes Dave Mabon, senior vice president sales and marketing, Kuehne + Nagel. As a result, businesses outsourcing services and facilities to 3PLs have to be much more diligent in their search for global partners.

That said, 3PLs that do have traction in global markets are also looking at how they can better leverage their experience and expertise to build their value proposition. For example, many 3PLs are finding opportunities to control more warehousing facilities in- country to facilitate and expedite cargo flow both inbound and outbound.

P&O Nedlloyd Logistics has seen a "reverse globalization" trend in Asia, says Mike Vaccaro, vice president business development, for the East Rutherford, N.J.-based 3PL. "Many Asian manufacturers prefer to tackle the American market themselves even though they don't have the necessary infrastructure in the United States. Therefore there is a need for warehousing and distribution for products coming into the United States."

Another option that both Kuehne + Nagel and P&O Nedlloyd have targeted is growth by acquisition.

In some circumstances, expansion necessitates strategic acquisitions in terms of both geographical scope as well as the scale of industry intermediaries are looking to penetrate.

In 2001, for example, Kuehne + Nagel did both, acquiring USCO Logistics to strengthen its pulse on the 3PL market in the United States.

P&O Nedlloyd's spinoff of its own logistics company in 2002, and subsequent acquisition of The Gilbert Companies, better positioned the ocean liner to global customers that required integrated supply chain management facilities for goods sourced both internationally and domestically in the United States.

More recently, Gilbert has done some RFID pilot programs with customers that ultimately will provide a reference point for both the ocean liner and the logistics company when it comes time for more extensive testing.

Demand-Driven Logistics

One of the obvious challenges in operating a global supply chain is being able to control the flow of inbound cargo to minimize inventory carrying costs, while at the same time enhance responsiveness to potential disruptions or bottlenecks.

Managing logistics at the point of origin helps streamline this process and also enables businesses to better account for transportation and distribution costs throughout the supply chain.

"A major trend, in addition to the expansion of sourcing points in various industries, is that retailers are taking control of the product at the point of origin," says Anthony Chiarello, president, Maersk Logistics, a 3PL based in Madison, N.J. "The percentage of shipments being controlled by retailers at the point of origin today is multiples of what it used to be. We expect it to be multiples of that three to five years down the road."

Congestion at West Coast ports, labor shortages, and thinning capacity have forced many stateside consignees to slacken lead times to account for supply chain disruptions. For retailers in particular, managing the supply chain at the sourcing point enables them to anticipate and react quicker to spikes in demand.

"If you're a domestic supplier of widgets to Wal-Mart, for example, you can buy those widgets any time of the year and warehouse them in your domestic locations, selling them as necessary," says Chiarello. "If you're a Wal-Mart and you only sell those widgets two months out of the year, you will manage your supply chain to make certain that product comes at a specific time."

This approach requires much greater collaboration and information sharing because spikes will be even more dramatic and impact capacity to a much greater degree, adds Chiarello. "We've seen more of this than last year, especially as the trend of direct sourcing continues to peak," he concludes.

The Great Enabler

If inbound logistics is the methodology by which businesses can more efficiently source products globally, then technology is clearly the enabler.

"Good supply chain visibility will mitigate issues surrounding globalization," says Mike Klaus, president, ArcStream, a Watertown, Mass.-based business and technology consulting firm. "Line of sight to true demand will lessen concerns about variability. Look at the primary concerns of companies today—security, velocity, business continuity. All are tied to variability that cannot be planned for."

What this requires then, suggests Klaus, is a concerted effort on the part of both customers and software intermediaries to first analyze where tactical problems exist, then apply the appropriate technology to fill in gaps.

"It's a matter of using technology to prove your business philosophy, and not simply develop technology for technology's sake," he adds.

This customer-focused approach is part of a much broader trend in logistics IT, with providers looking to extend their value proposition to potential clients by taking a more holistic approach to developing cross-silo supply chain solutions.

"Demand-driven logistics is a big process change for customers, and in many instances the infrastructure is not there," says John Murphy, director of product development for G-Log, a Shelton, Conn.-based logistics software developer.

Technology, accordingly, is an agent that will drive this change in supply chain philosophy.

The Potential Impact of RFID

The ultimate goal for ocean shippers is to know where every container is at any given time, says Duncan Wright, director of business development for Horizon Services Group, headquartered in Charlotte, N.C.

The ability to capture live data using RFID tags would fulfill this objective as well as greatly enhance security, safety, and velocity of ocean shipping. Which leaves Wright to wonder why there hasn't been a greater push among ocean shippers to more readily embrace RFID technologies.

"Asset tracking is done in other industries—namely trucking. I would like to see more crossover industry expertise," he says.

The ocean shipping industry is perhaps the last place one might expect to hear RFID hype; yet Wright sees the potential impact of this technology too awesome to ignore.

Horizon Lines also has a vested interest in RFID because it is one of the largest conveyors of pharmaceutical shipments into the United States.

"As a result of counterfeiting, pharmaceutical companies are very interested in the integrity of shipments, perhaps more so than security," Wright says.

Many supply chain practitioners are equally as excited as Wright, but just as many are waiting for the RFID tide to come closer to shore.

"RFID is still some time away," says Tom Escott, president of Schneider Logistics, Green Bay, Wisc. "From our perspective, we see that RFID is currently important inside the four walls of a warehouse. We're responsible for providing visibility through telemetry in other ways. But RFID will continue to grow in importance in terms of tracking pallet- and product-level information.

"RFID offers a huge opportunity for companies to determine exactly what inventory they've got and match that precisely with what is in demand."

The contention by many pundits is that the rules of engagement for RFID are still being defined and therefore heavy investment, aside from some tentative pilot programs, is premature. Early adopters such as Wal-Mart, the Department of Defense, and pharmaceutical shippers have made great strides in applying RFID's use to supply chain activities.

Still, it's hard for intermediaries to sell customers on investing in a new technology when they are just beginning to reap the rewards of using bar codes and scanners.

"RFID is getting a lot of buzz lately, but our customers tell us that industry standardization is the biggest hurdle to implementation," says Mark Spisak, director North American services, Transgroup Worldwide Logistics. "We need the same standards in the European Union as in the United States; we need the same standards for Wal-Mart as for the DoD. Unless we have that, RFID will never realize its full potential."

Still, the potential impact of RFID technology in supply chain applications has most logisticians talking. "It will have great impact, especially in being better able to tie the flow back to demand signals, and in managing freight flows internationally and domestically," Chiarello says. "RFID will change the way we do business."

He points to the amount of fluff retailers are building into their product flow, given capacity challenges. "But if you can manage the flow and be more effective in your project and replenishment planning, and more efficient in matching demand signals to supply, you can take that fluff out and cope more easily with capacity demands."

"There will be a lot of benefit to RFID being linked to other visibility tools and processes," adds Chiarello, because it offers a more efficient and passive means of collecting real-time information, which has tremendous implications in terms of productivity improvements. Customer interest and receptiveness, however, will ultimately dictate how soon and to what degree intermediaries engage in more progressive RFID testing and rollouts.

A Perfect Capacity Storm

Tremendous GDP growth, productivity decreases as a result of the hours-of service legislation, driver shortages, increasing fuel and insurance costs, and greater demand for truckload capacity are mushrooming into a perfect capacity storm, says Jeff Tucker, CEO of Tucker Company, a 3PL based in Cherry Hill, N.J.

Throughput concerns are equally problematic at the ports and increasing import volume has only exacerbated the fundamental problem: the United States is a consumer society.

"The capacity tide will not change because the import volume is not going to slow down, especially out of China," says Vaccaro, adding that the import volume will continue to grow at double-digit rates.

"The ships are getting bigger, which will cause even more problems at West Coast ports. All this affects the customer supply chain all the way back to the origin," he says.

Part of this dilemma is purely a corollary of globalization, says Escott, especially as more and more manufacturing is pushed abroad.

"It's ironic that globalization is what is forcing some of the real capacity issues. The shipping flows of products into the ports are definitely changing what the North American transport network looks like," he says.

The challenge Escott alludes to is ensuring that U.S. infrastructure and transportation networks are flexible enough to accommodate cargo variability moving through ports.

"Globalization is having a tremendous impact on the ability to manage product flows in the United States—the ability to have a truly seamless global supply chain more than ever hinges on good North American availability of capacity," he says.

"That's where logistics managers are forced to make up for earlier delays because of choke points in the supply chain," adds Escott. "For some, that means nailing down inland network capacity is more important than securing ocean contracts: if you haven't done your inland planning and diversification of ports correctly you won't get your product to market successfully."

Perhaps a greater irony of globalization and capacity concerns is that domestic transportation in the United States has become increasingly difficult. The general trend among over-the-road shippers is to reduce the number of core carriers to the lowest possible aggregate, notes Tucker.

"Shippers who don't have a lot of a carriers are struggling," Tucker adds, noting an increased reliance on 3PLs that broker business for freight transport buyers.

"The marketplace has changed so rapidly that this is an unanticipated development for many businesses," says Mario Lopez, assistant vice president business development, P&O Nedlloyd Logistics. "Everyone knew the import market was going to grow but few thought it was going to grow so fast. The port capacity crunch is not just here in North America. A lot of ports around the world are experiencing the same issue, especially in Europe."

"The ports are getting squeezed," adds Vaccaro. "We see it in China. Shanghai is almost at capacity now, the East Coast ports are getting jammed as well, and truck drivers are complaining about four- and five-hour delays. It's in the air, in the terminals, on the ships, in the railroads, and the inland network."

Relying on good partners and developing close relationships with your suppliers and customers is one way to manage capacity challenges. "You can't eliminate these bottlenecks but you can try to anticipate them and find alternatives," he says.

Duncan Wright agrees, but he would like to see better utilization of intermodal routings. Short sea shipping, which has been a mainstay in Europe over the past decade, entails using existing vessels to move freight between coastal ports and also between coastal ports and inland ports. It offers a viable alternative to congested road and rail networks.

Continued investment in maritime infrastructure and technology would help alleviate diminishing capacity, and at a reasonable cost to shippers.

"There are solutions, but they all come with a price," adds Vaccaro. "All these concerns are solvable with money and time.

Unfortunately, with the speed of today's supply chain, there's rarely enough time and no one wants to spend the extra money."

Business Continuity

Not surprisingly, capacity constraints at U.S. ports have many retailers and their 3PLs understandably concerned about alternative ways of sourcing product if supply chain disruptions occur.

But the real key to business continuity and contingency planning is visibility. "If you know where your product is, then it is much easier to reroute it if a problem occurs," says ArcStream's Klaus.

"Visibility systems give companies tools to manage lead times and variability, therefore enabling them to better handle inventory levels," notes Gary Frantz, director corporate communications, GT Nexus, an Alameda, Calif., logistics IT developer.

By reducing inventory levels and diversifying potential source points, business can greatly reduce the deleterious impacts of supply chain mishaps, he says.

The very fact that many 3PLs are truly global and operating in many markets overseas similarly affords their customers greater flexibility in finding alternative places to source product.

"Our customers expect us to be a global player in the logistics arena, to be able to quickly react to disruptive events in business continuity," says Chiarello. "So if tomorrow they say they want to stop sourcing in China and start sourcing in Central America or Africa or Eastern Europe for that same product mix, we need to be able to do that."

Another trend growing more common in newer markets is pre-distribution at point of origin, says Chiarello.

"This is a direct result of an attempt by publicly-held companies in North America and elsewhere to either reduce, or hold stagnant, their cost of infrastructure improvements at distribution centers.

This way, if they can effectively pre-distribute and pre-load freight at origin and have a static network at destination—rather than having the infrastructure expand with the growth of product flow—then they have a big opportunity for cost savings without sacrificing supply chain scalability," he says.

Ideally, this is an appropriate strategy for businesses looking to tap new markets, but hesitant about investing the necessary capital in infrastructure. It also gives the logistics provider and customer the flexibility to float with market demands and enter new markets with less risk. From a business continuity perspective, pre-distributing cargo at point of origin conceivably allows shippers to avoid costly transshipment delays at the ports.

"Globalization is also driving another trend: logistics managers are more interested in offshore consolidation services so that when product gets to North America it is distributed more seamlessly," says Escott.

Chiarello agrees, but also sees potential difficulties with growing stateside consolidation. "There have been pre-existing efforts and success at reducing infrastructure at the destination side by, for example, moving from 11 DCs to three," he says.

"But how do you grow your product flow by 10 percent a year without adding infrastructure to support that growth? The focus is shifting toward origin and the question is: 'What can I do there to support continued growth without rebuilding destination infrastructure?'"

Two for the Road

In addition to the four areas Inbound Logistics flagged as hot topics in today's global supply chain, two other striking developments came to light through these discussions.

For one, mention of security and safety as a major priority was surprisingly absent. At the risk of sounding too reductionist, a logical explanation for this omission exists: simply, that safety and security initiatives are now common business practices built into supply chain activities. Demand-driven logistics, underpinned by technology advances such as RFID, fosters greater control and visibility of shipment movement, therefore mitigating the potential for criminal activity.

The continuing process of diversification is a second noteworthy trend. Supply chain service providers are extending their value proposition to customers while further qualifying that value to them in new and innovative ways.

The maturation of the supply chain in some verticals has pressed intermediaries to diversify from their core expertise to look elsewhere for new traction. Elements of self-preservation are involved, but logistics companies similarly perceive the importance of helping customers look beyond silos to create a more seamless supply chain—even if that means crossing silos themselves.

One potential downside to diversification: companies may dilute their value proposition by straying too far from their core expertise. They are also inviting new competition as they branch out. The upside is equally as compelling—it offers the opportunity to create a strategic foothold in a new expertise, as well as the potential for additional revenue streams.

Ultimately, customer interests will dictate whether this is a real concern for logistics service providers or merely a passing whim.

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