High Speed Pursuits: Moving Products Faster and Cheaper
A shift is taking place in expedited shipping. While air shipments once reigned supreme—and still do for import and export goods—for domestic expedited cargo, ground transport is catching up. To cut costs and still meet customer demand, savvy shippers incorporate expedited service into their overall transport strategy, making ground a viable expedited option.
When it comes to domestic expedited service, trucks are gaining ground. Companies increasingly are turning away from air and toward ground parcel carriers and "hot shot trucking"—chartered trucks—to move expedited shipments domestically.
Why the switch from domestic air to ground? Cost is the major factor, along with the availability of more time-definite ground service options. In addition, companies are incorporating expedited service into their overall transportation strategies, reducing the need for emergency use.
And, ground parcel growth reflects changing shipping patterns—today almost 70 percent of shipments in the United States move less than 700 miles as companies strive to maintain lean inventories. This makes ground a viable expedited option.
The decline in domestic air shipments can be traced back to Sept. 11, 2001.
"Sept. 11 changed the dynamics of the domestic expedited air business," says David Quin, global network plan group manager, UPS Supply Chain Solutions. "In the past, if a company needed a same-day air shipment, someone could run to the airport and get the package processed immediately.
"Today it's not as easy to move freight over the counter at the airport. The trend is toward using hot-shot trucking rather than air for same-day movements."
Domestic air shipments will continue to decline year over year, according to Atlanta-based research firm The Colography Group, while ground parcel is projected to grow, moving 175 million new shipments in 2005. And for the first time in years, FedEx expects to transport 50 percent of its shipments via ground parcel or less-than-truckload and only 49.9 percent via air.
Major expedited service providers are responding to this shift by making substantial capital investments in ground service.
"Shippers are demanding expedited ground transportation service options and all the expedited service providers have made major investments to improve full coverage," says Fred Beljaars, executive vice president, DHL operations. "Over the next few years, shippers will continue to lean toward using truck versus air, if their delivery schedule allows for it.
"If shippers can move products via truck they will, because it's less expensive than air," he says. "And if shippers can move expedited shipments via truck, they will."
"Choosing domestic expedited service is a matter of finances," agrees Mike Scally, vice president of TNT Freight Management, which provides global air, ocean, and logistics services.
"Expedited is a premium service, but the yield in domestic expedited air shipments has deteriorated over the years. Many shippers do not plan on using expedited freight, it is driven by circumstances. These shippers are looking for the advantages of expedited transportation at deferred costs."
But air hasn't totally fallen out of the mix. In addition to adding more ground options, service providers are creating additional air delivery options—such as next-day a.m. or next-day p.m.—at multiple price points.
"If a shipper is flexible about delivery times—a shipment can arrive at 3 p.m. rather than 10 a.m., or within two days rather than one day, the price point changes," Scally says. "The provider can offer premium air service at a reduced cost to the shipper."
One company that uses truck instead of air is Long Island, N.Y.-based ModuTank Inc., which has been providing modular containment tanks to the government and industrial manufacturers for more than 20 years.
The company uses air for its small package shipments, but rarely uses it to move tanks because "customers don't want to pay for it," says Reed Margulis, president of ModuTank. "It's too expensive."
The company occasionally receives emergency shipment requests from customers who require moving tanks to a site anywhere in the United States, so "we'll look for expedited solutions," he says, including both common carriers and chartered flatbeds.
For example, ModuTank recently received an emergency order from a manufacturer in Albany, N.Y., requesting that a containment tank be delivered within 48 hours. Rather than turn to air for rush delivery, ModuTank contracted with a motor freight carrier to provide flatbed service direct to Albany.
But expedited service by truck is no longer always low cost. "With gas at $3 per gallon, and trucks only getting four miles to the gallon, even truck service has become pricey," Margulis says.
ModuTank uses the contracted flatbed service in non-emergency situations too, because it is a more efficient way to ship its tanks.
"There's less chance of damage on flatbeds than if the tanks have to move through a common carrier's hub, where they could be offloaded or moved around," he notes.
"Expedited trucking has put a dent in domestic airfreight usage," says John Harold, president of Business Logistics, a California-based management and consulting firm. "And though it's a less costly alternative than air, expedited trucking is not cheap. With fuel costs going through the roof, companies are concerned about how to save money and control the use of premium service."
Another factor driving the drop in air expedited usage is that companies are optimizing their distribution networks, which reduces the need for costly expedited shipments.
"Shippers want to map and develop clear definitions of their service needs," Harold says. "If a company makes an assumption about its customers' service requirements, and doesn't understand the levels of service its competitors offer, it may pay for expedited service that is really not needed all the time."
Harold cites the example of a technology products manufacturer that was looking to reduce transportation costs, and asked Business Logistics to evaluate its use of expedited freight service. During an analysis of the company's contracts and services, Business Logistics worked to determine the actual—not perceived—service requirements of its customers.
The manufacturer discovered that many of its customers had lower service needs and expectations than what it was providing.
In addition, the manufacturer had no internal policy regarding the use of expedited services; expedited was being used 82 percent of the time, whether the customer needed it or not. Expedited materials often sat in warehouses for days after receipt.
After several surveys and data analysis, the manufacturer renegotiated its carrier contracts to obtain reduced shipment rates. It also developed an "Expedited Shipment Use" policy that resulted in a dramatic 18-percent reduction in its use of expedited air service.
In addition, by analyzing its entire expedited transportation strategy, the manufacturer incorporated a supplemental expedited plan—with designated carriers—into its budget, and now directs employees when and how to use expedited services.
Many shippers are starting to consider expedited transportation a supplemental delivery option. "Shippers are more aware of expedited services use, and factor it into their budgets as a supply chain solution that both the customer and vendor have agreed on," Harold says. "This keeps the leash on runaway expedited costs."
As companies continue to strive toward reduced inventory levels, they may find themselves forced to use expedited transportation. "Low inventory levels can become a double-edged sword, and companies can become their own worst enemies," says Quin.
"In the last six or seven years, companies have placed greater emphasis on keeping inventory levels low, particularly on high-value goods," he explains. "Companies in the aerospace, technology, and automotive industries—or any company in an environment that feeds production lines—are focused on reducing inventory."
There are many reasons to keep inventory levels low, such as shrinkage, obsolescence, and storage. "But when something unexpected happens, such as bad weather, or a vendor with a quality problem, a company needs expedited service," Quin says.
The West Coast port strike several years ago serves as an example. This "supply chain disaster" generated high traffic volumes for expedited carriers. Companies could not wait for freight being transported via ocean to feed assembly lines, nor could they wait to receive products destined for their customers.
The strike created a huge break in the supply chain. The result? Expedited service became imperative no matter what the cost. "If a break in a production line costs $16,000 per minute, the cost for shipping expedited is minimal in comparison," Quin notes.
While emergencies tend to drive the use of expedited service, some companies build it in as a cost of doing business. They use expedited as a way to get products to market quickly to gain a competitive edge.
"Video manufacturers, for instance, use expedited services to get a movie or computer game out to stores by a specific time simultaneously around the country," Quin says.
"Pharmaceutical companies releasing a new drug also need to get product out to the field quickly; so do retailers running massive ad campaigns and expecting huge sales for a particular item. These shippers utilize expedited air as way to keep their competitive edge," Quin says.
Internationally, Air is King
While domestic air shipments are expected to decline year over year, that's not the case for export air, which continues to grow steadily.
U.S. air export shipments in 2004 totaled $235.7 billion, up 12.3 percent from the year before, according to The Colography Group's International Air Cargo Trends report. FedEx Express, UPS, and DHL Express held a combined 68.6 percent of the share of U.S. air export shipments.
"Many multi-national companies regularly require international expedited service," notes TNT's Scally. "Pharmaceutical companies ship overseas regularly; so do project companies that build factories and turnkey operations abroad. Their need for expedited services drives the market."
The rebuilding of Afghanistan and Iraq has also boosted the need for international expedited shipments. TNT, for example, continually moves shipments—ranging from documents to spare parts to heavy freight—into both countries.
"This freight has a very high yield," Scally notes. "Companies refurbishing hospitals and medical centers receive a wide range of commodities that are shipped using premium service."
Armor-plated SUVs are also shipped into Iraq for use by security companies, VIPs, and the Iraqi ministry, at great expense. "These cars have to be expedited; they are needed in the country quickly," Scally says.
Getting into Iraq to deliver these cars securely requires money and know-how. The transportation costs are high because of stringent shipping and security requirements, says Scally.
While exports continue to grow, representing a huge part of the expedited market, imports have spiked. In 2004, import revenue surged 12.7 percent to $346 billion, and the need for expedited shipping from Asia to the United States shows no signs of abating.
With more companies entering the global trade arena, there is a growing need for service providers to become more efficient and provide total solutions, including import demand.
DHL, for example, has launched Import Express, a service that provides shippers with the ability to move goods from China to the United States, or from London to Hong Kong, and pay for delivery in the United States using one invoice and one currency.
The Right Partner
For shippers looking to expedite internationally, understanding the express providers and the costs built into their services is key. Current security costs, for example, are high because of the war in Iraq and the looming threat of terrorism.
Choosing a provider that truly understands the area of the globe you do business in is crucial. A carrier that understands the rules of the game, and has security buttoned up, can be the key to successful expediting.
No company wants to resort to using expensive shipping options to deal with emergencies. It's costly and can put a strain on the supply chain. The optimal situation is to develop a supply chain that meets customer needs and is reliable and cost-effective.
Some emergencies, however, mandate using higher-cost shipping options to ensure the delivery of products and continued customer satisfaction. When should you choose same-day delivery?
Here's some advice from David Quin, global network plan group manager, UPS Supply Chain Solutions.
1. When bad weather, mechanical-related problems, strikes, or other delays will affect the promised delivery of products. More companies are operating using low safety stock levels. The cost of paying a premium for shipping should be weighed against the costs of holding "just-in-case" inventory. The costs also should consider customer satisfaction and building long-term trust, such as return on investment that can lower customer churn, and increase repeat business and account growth over time.
2. When quality or production issues with vendors affect agreed-upon product manufacture. Service contracts often require vendors to keep equipment running. That means critical parts need to be on the manufacturing floor, or at the server site, within hours. Sometimes the only way to get the right part to the right place at the right time is to use a transportation mode that may be more expensive.
3. When you run the risk of penalties for non-compliance. Today large retailers have little patience for suppliers who can't meet delivery schedules, can't fill orders accurately, or send them damaged products. Consequently, many multinationals now levy hefty penalties that can actually exceed the value of the goods. It's worth using faster shipping methods to get goods to market to meet the compliance requirements.
4. When your inventory levels are low, putting you into a back-order position. Lean manufacturing can also be a mean situation for your customers. The result can be the creation of back orders, the inability to respond to unexpected market shifts, and slowed down manufacturing and distribution operations while waiting for components or goods.
Premium shipping costs can be miniscule compared to inventory carrying and lost opportunity costs. Make a customer happy with next-day or same-day shipment.
5. When your regular transportation mode doesn't ensure that the product will be delivered by a deadline. Despite the growth of the virtual world, we still have to move things physically from Point A to Point B. When you are truly under the gun, there are still choices: Hot shots (dedicated trucks that race across the United States), chartered planes, couriers on board commercial airliners, and other services are available.
6. To meet health needs caused by medical emergencies. Sometimes shipments truly are life-saving, such as when a patient is waiting for a surgical implant, a heart, or medicine. When a life is at stake, cost shouldn't be an issue.
7. To provide products needed for specific, time-defined product launches. In these days of red-hot videos or best-selling books, retailers compete by having the product available for sale the minute after midnight on the official release date.
In some cases, 80 percent of sales for a hot item might be in the first week of release. Speedy delivery of the product to the store is one way a retailer can claim a big share of sales.
8. For general necessities ranging from replacing lost passports to ensuring timely filing of tax returns. It's a terrible feeling to be stuck with an unusable ticket for a much-anticipated trip, or to be stranded at home during an overseas emergency. Sometimes emergency shipping is the only way to get what you need for your trip.
The same is true for the dreaded April 15 tax deadline—express shipping avoids those pesky penalties for late filing.
9. Unexpected delays with existing ocean, rail, or truck service while products are in transit. Remember the Los Angeles port strike, with hundreds of ships full of goods parked in the harbor? How about the blizzard that stopped all shipments on the roads and rails?
Despite all the delays, customers still expect to get their orders. Shipping by air instead means that you will meet the customers' expectations and you will more likely be regarded as a vendor worth keeping.
10. It's the right thing to do. Sometimes we humans make mistakes. Our teams drop the ball. We miss the deadline. So, it is better to pay the price and make the customer happy.